Sliver-thin interest margins, reduced consumer demand for loans,the looming slash in interchange income and paltry returns on theirown investments have combined to make credit unions search fornoninterest income in serious earnest.

Strategies for doing that abound. For instance, the $500 million U.S. Senate FederalCredit Union in Alexandria, Va., began buying member business loansjust more than six months ago and has since added more than $10million at a return of more than 6%, said John Hayes, the32,000-member credit union's executive vice president and chiefoperations officer.

Credit unions, of course, have a 12.25% of assets cap to contendwith, so to spread the risk and the wealth, U.S. Senate FCU set upa CUSO called CUStrategic Services that now has four other credit unionsparticipating since it began operations last September.

“What's the definition of insanity? Doing the same thing overand over again and expecting different results. We had been tryingto figure out a way to increase our own lending with promotions forauto loans, home equity and mortgages but, especially after theeconomy turned, we knew we had to do something different,” Hayessaid.

Working with commercial borrowers–primarily small real estateinvestors whose needs weren't enough to interest bigger banks–andbuying and sharing participations and loan risk has generated notonly $10 million so far for his own credit union but $4 million forhis CUSO clients, Hayes said.

That hasn't come without challenges. Hayes noted, for instance,that core processing systems designed for the bread-and-butterbusiness of credit unions aren't necessarily equipped to handlecomplicated business cash management needs.

But there are also new opportunities for fees in that managementprocess, he added. “Banks charge businesses for a lot of things,like checks deposited and withdrawals made and analysis servicesand just a whole plethora of things,” Hayes said. “Why shouldn'tcredit unions charge for those, too? Just charge less than thebanks do and you can still make money on it.”

Individual consumers are also being targeted as potential payersof fees for high-value services, and technology vendors are gettinginto the fray by creating the tools to make that happen.

“Our game plan is to introduce new for-fee products that are notyet threatened by the economy, regulators or ubiquitous marketavailability,” said Robert Broadwell, general manager of PM Systemsin Chapin, S.C., a provider of online banking and securitysolutions to about 200 credit unions.

“Expedited payments are a good example of something for creditunions to offer to members who need a speedy way to make a paymentto a mortgage company or other creditor,” Broadwell said, notingthat some credit unions charge up to $15 a pop for thatservice.

He said person-to-person and institution-to-institutiontransfers are also potential fee generators.

“The success of any of these new revenue-generating productsdepends largely on product marketing,” Broadwell said. “We'reworking on launch-ready campaigns that credit unions can deploy inconjunction with these services.”

Value-added card and other affiliation products are seeingrenewed interest, according to the big providers as well.

Rewarding members for “profitable behaviors is nothing newreally,” said Todd Werner, group vice president at AffinionBenefits Group LLC, a provider of customer engagement andnoninterest income to more than 5,500 credit unions and banks.

“We've been doing that for 35 years,” Werner said. “Thedifference now is the changing landscape, especially on theregulatory side. And credit unions don't want to do what the largerbanks are doing today, just going out and requiring customers to docertain transactions and maintain certain balances to avoidfees.”

He said his company's FLEX Checking program is intended as analternative to that, by providing benefits to checking accountholders that offset or “earn down” fees, such as credits forsignature-based debit transactions, signing up for online bill pay,enrolling in direct deposit and maintaining certain dailybalances.

“We're now supplementing those with other services such asidentity theft protection, credit reports, retail savings andtravel discounts,” Werner said. “The model has been around for along time but what we're hearing from credit unions and banks todayis that the pressure is really on to make up the lost revenue nowbecause of the interest rate environment.”

Eric Hansing, director of product marketing for CUNA Mutual Group's MemberCONNECT insurance sales and supportprogram, said interest in his company's noninterest revenuechannels for credit unions also has been intensifying.

“I think that will continue,” he said, citing the value add ofdeeper member relationships and retention as well as incomeopportunities. He said programs like his tend to rank fifth orsixth in terms of how much noninterest products generate at thetypical credit union but that such income can be grown each year,especially now that debit interchange fees are set to be slashed byCongress.

The interchange change itself already has prompted some banks toconsider imposing fees on checking accounts and debit cards oreliminating rewards programs, and one industry analyst is advisingcredit unions and banks to consider using prepaid debit cards tomake up as much as 20% of that lost interchange revenue.

“Based on our analysis of consumers' use of payment cards, AiteGroup believes that banks can recoup a significant percentage ofanticipated lost debit interchange revenue by marketing prepaidcards (which carry a higher interchange rate than the proposedrules on debit cards will allow) and can do so without levying feeson checking accounts or debit card use,” the think firm's RonShevlin said in a new report.

Shevlin based his assumption on research that shows prepaid carduse growing among Gen Xers and Gen Yers and that the notion thatonly poorer consumers use the cards is outdated.

He said 30% to 40% of those middle and younger age groups usedsuch cards in the last quarter of 2010. “These aren't underbankedconsumers,” Shevlin said. Many use the cards to help balancebudgets, he said, and the cards have the added advantage ofcreating a relationship that might not otherwise exist withconsumers who “represent a disproportionately high percentage ofthe demand for new banking products.”

Speaking of new banking products, Fiserv Inc. said it now isseeing interest in deposit-based short-term loans that banks andcredit unions can provide consumers. The service allows theconsumer to borrow up to a predetermined limit–$300 to $500, forexample–by simply texting the request or making it online. Themoney then is paid back automatically through near-term futuredeposits, particularly paychecks.

Fees generally can be $7.50 to $10 per hundred, “which soundshigh but not compared to overdraft charges of $30 to $39,” saidBrian Boardman, consulting director for Fiserv's RevenueEnhancement Solutions Group.

Boardman said the FDIC conducted a recent call to provideguidance on this type of loan that he thinks the NCUA will followsuit. “It's very controlled. It's not based on credit ratings, butit's also not like a payday lender where the loans just go on andon,” he said.

“Only a handful of banks are currently doing these, but we atFiserv are in conversation with a number of banks and credit unionsabout it because managing it does take technology that we happen tohave,” Boardman said.

All these products and services, of course, don't rely on thetraditional interest spread between savings and loans for creditunions to make a buck, but if interest rates return to historicalnorms, so much the better, one industry participant said.