Callahan Article Points to Protection Products as Means to Boost Income
WASHINGTON -- When looking for ways to increase noninterest income, Callahan and Associates suggested that credit unions look at loan protection products.
A recent article by Callahan, "Loan Protection Products a Critical Source of Noninterest Income While Helping Members," by SCS Consulting President Pete Snyder said that with members more concerned about protecting their finances, credit insurance, debt protection coverage, mechanical breakdown insurance and guaranteed auto protection are products that can help ease the minds of members while increasing revenues and net income margins for the credit union.
"Credit unions can keep doing what they are doing today and add 20%-30% to their noninterest income by better marketing their loan protection products," Snyder said. "It's relatively easy to increase noninterest income as long as you don't overlook the potential of loan protection products."
Data from Callahan showed that at mid-year 2008, noninterest income for all credit unions totaled $5.1 billion year to date, an increase of 7.0% over the same period last year. Despite the increase, the article states that actual net income margins and member penetration rates for investment services and lines of individual insurance remain relatively low.
Callahan Industry Analyst Lydia Cole, who worked on the article with Snyder, said that the growth of 7.0% is slower than previous years.
"Noninterest income growth has fluctuated significantly since 2001; in all previous years, however, growth has remained over 7.0%, peaking at 26.7% in 2003."
Cole also added that fee income, typically overdraft fees, ATM fees and credit card fees were the main drivers of the 7.0% growth.
In this tough economy, second-quarter 2008 data from Callahan shows that credit unions are experiencing loan growth over the second quarter of last year in some areas. In total loans, credit unions showed a 7.3% loan growth in second-quarter 2008 compared to a 6.2% growth in second-quarter 2007. In areas where credit unions are experiencing a decrease in the amount of loans they are selling, Snyder said credit unions can increase noninterest income by examining penetration rates on the loans they are selling.
"Especially during these times, guaranteed auto protection is a very inexpensive product, and customers should be reminded that if their car is lost, stolen or totaled insurance is not going to pay off their loan, but GAP will."
Debt protection is another loan product Snyder said that is easy to sell and not that expensive. Coverage is available for family loss, military leave and unemployment. If the credit union staff is given a good tool to quote correct costs to the members Snyder said they can increase the penetration rate.
"If credit unions focus on training, noninterest income can grow considerable with little effort," Snyder said. "Debt protection for unemployment is something needed in this economy with layoffs."
When looking at investment services versus loan protection products, Snyder said there is more potential for credit unions to grow noninterest income with loan protection products than investments.
"I'm not criticizing the potential for investment services programs, but loan protection products are cheaper, and virtually all credit unions offer them, and so many more members are eligible for loan protection products than investment services," Snyder said.
Snyder pointed out that with investment services products, for every dollar put in credit unions get 15 to 20 cents back and for loan protection products, for every dollar put in credit unions get between 65 and 75 cents back.
"If credit unions have a choice between investment services and loan protection products, the product that will get you the most ROA is loan protection."
When it comes to benchmarks and surveys, Snyder said that no one study has been done to study loan protection products for credit unions to measure what they are doing compared to others. Callahan and SCS Consulting have partnered to conduct a loan protection product survey and will reveal the results at the end of the year.
Cole said that the study will survey responses from across the industry and will document program metrics and benchmarks for credit unions to help them improve their programs and provide case studies of well-run programs.
Credit unions can participate in the study at by going to a Web site, securesurvey.creditunions.com. For more information about the survey visit, www.creditunions.com/resources/store/research/loanprotection.aspx.