As Noninterest Income Falls, You Need a Plan B
Everyone needs a Plan B in life–an exit strategy in case what you’re doing doesn’t pan out. Credit unions are no different in the need for alternatives.
Growing up, the emphasis in my family was school, school, school. When I was ready to graduate college, I panicked and then got depressed. I didn’t know what to do with myself. It took me several months after graduation to realize that school was a means, not an end.
I was great at going to school, but I didn’t know squat about finding my career path. I didn’t have an exit strategy for school.
As credit unions’ interest income has declined over time and especially with the stiff competition for good loan paper now, they have turned to noninterest income. In the last couple of years, those sources have been attacked too.
First, the government wanted to charge unrelated business income tax on certain credit-related insurance products. Credit unions fought that in the courts and won. And regulations reined in overdraft protection revenue.
Debit interchange is the one currently under heavy artillery. Despite credit unions’ and their lobbyists best efforts firing back, it’s likely to come to fruition without a delay from the July 21 implementation date.
In order for the legislation to even be delayed for further study, it would take 60 votes in the Senate, and it would have to reach the president prior to July 21. Don’t count on either, much less both.
Credit unions need a plan. Actually they needed a plan yesterday to operate under the new regulatory framework. Though financial institutions under $10 billion in assets are excluded, covering most credit unions, card networks are not required to permit dual interchange rates. Visa has said publicly that it would support dual interchange, which could force others’ hands.
Or not, and then the Fed’s rate set for financial institutions larger than $10 billion in assets could become the de facto rate for all.
According to a recent NAFCU Flash Report survey, debit interchange accounted for one-fifth of respondents’ noninterest income. The credit unions also responded that they expected a negative 35 basis point effect on their bottom lines given the fee cap currently under discussion (12 cents). The Fed’s study did not take into account all of the expenses interchange fees were designed to cover, such as fraud and data security.
The Flash showed that as a result, 75% of those surveyed were reconsidering business plans to make up for the loss. What’s scary is the 25% that have not. Maybe these credit unions have too much income or do not offer debit cards. Doubtful.
Nearly all plan to keep their debit card programs up and running, but nearly half said they were thinking about getting rid of free checking to make up the difference. Additionally, 46% were considering annual or monthly debit card fees. Forty-four percent said they were considering eliminating debit rewards.
Some people could lose their jobs because of the Durbin amendment, according to 9% of responding credit unions; this does not seem very consumer-friendly given that credit union employees are consumers and there will be fewer employees to serve members.
Some credit unions said there would be minimal effect on their bottom lines. Maybe. Others said the 12-cent fee may not even cover operating debit card programs, "forcing them to eliminate member services, charge new and/or higher fees and reduce dividends." In effect, the amendment is forcing credit unions to act like banks, negating their governing effect on fees and rates.
And make no mistake: the Consumer Financial Protection Bureau, also created under Dodd-Frank, will have a significant impact on credit union income even if only three credit unions fall under their direct purview.
Credit card interchange may have escaped the Dodd-Frank bill, but it will not likely elude the CFPB. NAFCU’s survey found that 8.2% of respondents’ noninterest income was derived from credit card interchange. Sixty percent have estimated their potential losses but less than 33% have stress tested their assumptions.
Noninterest income is nice to counter pinched net interest margins. At the same time, credit unions are in the business of lending.
During a panel I moderated at CU Direct’s recent Lending Conference, Redwood Credit Union CEO Brett Martinez made the observation that no one ever wants a loan; they want what it can do for them. So his credit union has taken a holistic approach to member service more focused on financial literacy and reframing loans, specifically when refinancing members’ loans with another lender, as a matter of "cash flow." Redwood teaches its employees about budgeting, so they in turn can pass that on to the members they’re in contact with every day.
The philosophy contributes to cross selling. Fellow panelist Mandy Jones, CEO of Oregon Community Credit Union, added that cross selling is crucial to developing deeper relationships with members. Her credit union’s refocus on a sales culture brought in 8% loan growth in 2010.
Barry Rose, vice president of consumer lending at Citadel FCU, said his credit union used tools such as borrowers' refreshed credit scores to not only mitigate risk but also drive conversations with members on their products.
Wise advice to those whose noninterest income is waning.