LAS VEGAS-With net interest margin declining and competition increasing, many credit unions have been forced to turn to non-interest income to survive-a fact one consultant applauds.
"People say, 'Ooh, fees,' but in the last five years the only way credit unions can make money is non-interest income," said Rory Rowland of Independence, Mo.-based Rowland Consulting. "There is a rate squeeze at credit unions: the margin between earnings on loans and payment on savings is collapsing. This trend has no end in sight, making it more difficult for credit unions to make money."
The "traditional business model" for CUs relies on interest income that exceeds operational expenses, Rowland said. This tradition no longer is valid, as credit unions have become much more complex and offer many more products and services compared to a decade ago. These products and services have a cost, he added.
"Half of the credit unions in Colorado have an ROA of less than .50," Rowland said during an educational session at the recent California and Nevada CU Leagues' Annual Convention here. "That would have been unheard of a few years ago."
Unlike banks, CUs have only one way to raise capital, Rowland said. They cannot turn to investors or the stock market. While it is true credit unions are not for profit, they are not for charity, but for service, he continued. Not only must present costs be paid, some earnings must be generated to prepare for future needs. "Net income is for tomorrow's members, not today's."
So how can CUs increase profit without feeling guilty for charging members fees? Rowland said cutting costs is not enough in today's competitive marketplace. Instead, he recommends credit unions improve efficiency by shifting more members to online banking and, more importantly, increase the account relationships they have with members to enhance revenue.
Credit unions "typically don't ask enough of their members, especially checking accounts. Emphasize checking, which will build core deposits," he said.
Approximately 60% to 69% of CU members are unprofitable, Rowland declared. He counseled management to identify these members, get all members to share the load and reduce the numbers of the unprofitable. The member-to-service ratio typically is 2.4. Rowland said CUs should target 3 or 3.5 services-per-member as a minimum. "The best are at four or even five services per member."
To increase relationships, Rowland recommends turning members into borrowers "immediately." He said CUs should have an all-in-one membership application that includes a credit report and a loan application based on opportunity. Other tips: offer benefits for carrying balances, relationship pricing and bundled pricing.
"The CEOs of the top 100 performing credit unions do not reward negative behavior-they charge fees for members who are not profitable," he said. "The last thing they want is a member with a savings account and nothing else unless it is a kid's club account."
The task is not easy, Rowland said. The most profitable members are the hardest to retain because they have the most choices: every financial services provider wants their business and they are the most demanding when it comes to products and services. He said CUs must look for innovative ways to improve relationships, such as offering airline frequent flyer awards.
Another way to attract more profitable members is to offer a "courtesy pay" program, in which checks are paid rather than returned for insufficient funds. Amounts vary by the asset size of the CU, but Rowland said he has seen credit unions allow members to go to $500, or even $3,000, negative. Members usually are given 45 days to recover before the account is closed.
"Courtesy pay programs have a dramatic improvement on the bottom line. The credit union needs to have 30% or higher penetration in checking to make it work.
"Services cost money, so charge a fee to cover it," he added. "The fee can be priced under the market, but also know our difference has to be service and who we serve, not just that we charge less."
