Credit Unions as a whole are struggling with interest margins. In a recent Credit Union Journal article addressing margin squeeze (July 10, 2006), it was identified that without non-interest income credit unions would have a negative 40 basis point ROA. Banks, however, are earning record profits and achieving strong growth. What is the difference between banks and credit unions that are both competing for the same member/customer's financial wallet share? The answer: non-interest income.
Over the last 25 years credit unions and the credit union movement have evolved from simple financial institutions providing share and loan accounts to offering a full suite of services that can compete with the larger community, regional and even mega-banks. As a whole, credit unions are below market on fees, but are we keeping rates competitive? Consumer behavior has shown that members and potential members shop rates not fees.
While credit unions have considered low fees a competitive advantage over banks, banks have embraced fee income as a way to increase profits, stabilize a portion of their income stream, and protect themselves from the volatility of interest rates. Banks also have strategies to leverage non-interest income to either cover their non-interest expenses or achieve a 50/50 blend-50% non-interest income and 50% interest income.
I personally experienced a relevant example of banks beating CU's with rates while shopping for a home equity loan. I was surprised to find that my credit union was 60 to 80 basis points higher than the six banks I shopped. Four out of the six banks also offered a higher LTV on the loan. My CU only offered an 80% LTV and had $900 in closing fees. One bank had a $250 fee, but the rest offered the loan with no closing costs. These banks all had higher non-interest income from their retail banking customers and used that advantage to beat the loan my credit union offered. With the higher fees they could offer me a much more attractive loan rate. Yes, my credit union has low fees, but I would rather have a lower loan rate.
This may seem contrary to credit union philosophy, but non-interest income should be a major strategy focus, and a discussion point for all management teams and boards that are experiencing any of the following:
* ROA issues
* Declining or flat membership growth
* Flat or declining deposit and loan growth
* Issues with diluting member affinity
Most credit unions have pricing and product committees, but very few have profit committees. Profit Committees (dealing with revenue and costs) need to be at the executive and board of director level so strategies can be in line with their business model. We need to develop profit committees that can review:
* Costs of delivery channels
* How to motivate positive member behavior
* Whether the CU needs to lower/raise fees based on the current market
* The cost/benefit of developing rewards programs
These profit committees can develop strategies for their credit unions that accomplish the following:
Create and Implement Smart Fees
By having a strategy to leverage non-interest income (smart fees), credit unions can use their CU advantage and offer lower loan rates and higher dividends to their members, resulting in a more competitive offering than the banks. An example of a smart fee; one mega-bank that touts free services has an extensive list of fees tied to these accounts. One that I consider a smart fee is verification of deposits-VODs of $10. This is a smart fee because it can stimulate a conversation with our member, but we should always track VODs. Let's not let money move out of our institutions without a conversation with the member.
Drive And Reward Positive Member Behavior
Smart fees can also help drive positive member behavior to electronic channels. Members who use these channels find them very convenient and they cut costs for our organizations. But let's reward this positive behavior.
Reward Participating Members
Let's reward our good members who use us as their preferred financial institution (PFI) and have multiple financial relationships with us. Let's not treat members who use us as their a la carte "bank" (use our credit union for only services that are financially beneficial to them) the same as we treat our participative (true affinity) members? How many members have their PFI with a Mega Bank because they are required to do so to avoid fees? Banks reward customers for their loyalty. Let's reward our participative members.
Deliver a 100% Member Benefit
Higher non-interest income can transfer to lower rates on loans and higher dividends, which would benefit 100% of the membership of my credit union, while lower fees only impact a segment of my credit union's membership.
Since people shop rates not fees, make your fees smart fees that benefit (reward) participating members and cover the costs of non-participating members. I believe Credit Unions have a major advantage over Banks with our membership and not-for profit philosophies, but we need to make sure our strategies keep our institutions growing and viable for today and the future.
Mark Polando is a Senior Director at Profit Technologies, a profitability consulting firm based in Charlotte, N.C. He can be reached at 704- 473-5694 or at mpolando<at>profit-tech.com.