BOSTON — Credit unions that want to improve their non-interest income numbers need to strike a balance between reversing all fees and taking a zero-tolerance approach, according to CEO Paul Muse of the $580 million 1st Advantage FCU.

The leader of the Yorktown, Va.-based institution discussed his credit union's non-interest income strategy during a Thursday breakout session at NAFCU's 46^th Annual Conference in Boston.

“Our approach had been to give it all back, which didn't help the credit union or encourage users of services like overdraft or courtesy pay to look for other solutions that would save them money,” Muse said.

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That willingness to work with members to understand their situation and what happened in their lives that caused them to generate the fee is an important part of the credit union difference, the Virginia CEO said, and one that credit unions should mention when talking to lawmakers.

However, as interest margins have compressed, credit unions have become increasingly reliant on non-interest income, and must maximize the performance of current products and services that generate fees, Muse said.

He suggested working with NAFCU preferred business partners who can recommend new income sources or ways to enhance current performance.

“You can't sit back and wait for things to return to the way they were in the past,” he said. “We are at a point in our industry where we need to take action and make changes.”

The Filene Research Institute's Brent Dixon, who along with PULSE President Dave Schneider joined Muse on the session panel, said non-interest income has increased from 61 basis points in 1990 to 131 basis points in 2011. At the same time, ROAA minus fee income has decreased from 34 basis points in 1990 to negative 63 basis points in 2011.

“Regardless of where you fall in the philosophic conversation, it's clear that credit unions have to rely upon non-interest income to survive,” Dixon said.

Financial institutions that irresponsibly fee customers not only create a public relations and regulatory nightmare for themselves, they affect the entire financial services industry, the Filene researcher said.

He referred to the results of a 2012 Filene study that explored how credit unions can bring in more non-interest income revenue while adding value for members.

Transparency of fees was a theme that came up frequently in the study, Dixon said. He noted that he discovered last year when researching predatory lenders that their customers know they are being taken advantage of, but they're OK with it because they knew the cost up front.

“And they said if I go to a bank or credit union, those fees might not be as transparent,” he said.

Augmented payment options like PayPal present a huge opportunity for credit unions to generate non-interest income, Dixon said.

“A lot of people are de-banking themselves to use these products because they are easier to use than some of the tools offered at financial institutions,” he said. “If you can partner with some of these groups, it provides another opportunity.”

Schneider agreed.

“There's a list a mile long of companies like Google, Isis and PayPal who are looking to expand their relationship with your members, and that can be at your expense if you're not in the game,” the PULSE president said. “So partnering with them is way to get into the game and meet that consumer where they want to interact with you, because that's critical.”

Mobile payments will be the “next big thing”, Schneider said, but the payments executive said it will happen more slowly than others predict.

“I remember when I got into payments in early 80s, the end of checks was right around the corner. Everybody was saying paper was going away,” he said. “But the reality was, things like that take a long time.”

Schneider said in addition to the time it takes to change consumer behavior, payments platform changes are slowed by the need for infrastructure to catch up. When it comes to mobile payments, he said there are still many different solutions and the industry hasn't yet settled on a universal model.

“But that doesn't mean you shouldn't be thinking about it, and doesn't mean there won't be early adopters,” he said. “So you should be trying some things out with members, and lining up partners.”

Instant Insights /

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