Guest Opinion: Peel Back Layers to Grow Income Streams
In January, we learned the Federal Reserve is unlikely to raise interest rates until late 2014. With recent declining net interest margins, regulatory reform eating away at our fee income, the NCUA’s assessments and other earnings pressures on the horizon, improving noninterest income is more important than ever.
When was the last time you measured the percentage of your credit union’s revenue attributed to noninterest fee and other operating income? If your credit union is like mine, it is about 40% more than it was before the recession and before rates began their downward plunge in late 2007.
Noninterest income now accounts for approximately 23% of all credit union income. It’s worth checking to see how you compare to your peers. While you are at it, how is your member opt-in percentage for debit overdraft looking? How about your active debit card penetration and loan protection insurance sales?
In today’s environment, it’s critical to diversify the credit union’s revenue streams, and these are just a few areas we have found that with a little hard work, will dramatically improve your bottom line. Admittedly and proudly, we are collecting fewer fees from our members today than we were at the beginning of the recession, but we have more than made up the difference by almost doubling our other income streams.
Here are some of the areas we have found worthy of some extra focus:
Debit Card Program
Even with the Durbin Amendment hanging over our head, credit union debit card programs can still be very profitable. Some credit unions may not know that the various pin and signature card networks will offer signing bonuses, additional basis points on incremental volumes and even marketing support if the credit union is willing to invest in their card programs and take an active role in increasing member spending.
If you have network contracts coming due, I would suggest making the call to find out if your credit union is eligible for any of these. Even if you aren’t, you should still take a deep dive into your card programs and look at the number of transactions per member per month, the percentage of active cards, and the average transaction amount. If any of these are below peer then you are leaving a lot of income on the table.
Through very focused efforts, we have been able to increase our members’ debit card spending on average, by over 20% each year over the last four years. The key for us here has been to understand the program’s potential and then actively manage it.
Another area we have seen some significant income growth is insurance sales to our members. The beauty of selling insurance to our members is the win/win aspect of it. For example, in the case of credit life and credit disability insurance, the credit union earns a small percentage on each sale, which we also share with the staff. Our loan is protected and so is the member. Last year, over $400,000 in claims were paid to our members who purchased the insurance.
For anyone who doesn’t believe in this product, just ask those members who didn’t have to worry about their loan payment when they went out on sick leave, or the family who didn’t have to worry about paying off the debt of a member who passed away unexpectedly. The key to our success here has been making this a goal component on our scorecards, sharing the revenue with our staff and sharing the stories we hear from our members. We also incent our team for selling guaranteed auto protection, mechanical breakdown, home and auto insurance. Other income generating insurance sales you should consider include long term care, health, accidental death and dismemberment and collateral protection insurance. While individually these don’t generate a large amount of income, together they do add up.
Retail Investment Services
Retail investment services not only provide income to the credit union, they help to keep the relationship of a member who isn’t willing to settle for the low deposit rates many credit unions are paying today. They supplement the credit union’s offerings with products and services like fixed and variable annuities, mutual funds, and estate and retirement planning. They also allow the credit union to be that one-stop-shop for financial services.
Initially, most credit unions have that fear they will lose deposits to the investment program, but over and over it has been shown that this simply doesn’t happen and in most cases, relationships with these members become stronger. The bottom line is if members are going to move their money into investments then they are going to do it with you or without you. Why not earn the income on those transactions and keep the member relationships?
Some additional income streams we have added over the last several years include shared branch networking, CUSO investments, convenience fees for pay-by-phone transactions, merchant services, foreign ATM fees at our own ATMs, and inactive account fees. The key for us has been to fully understand the potential we have in key areas and then do what we can to exceed it. This is a never-ending process but we can’t afford not to keep growing noninterest income.