This isn’t the first year California has been in a serious drought. I got my first lesson in business sustainability from the Truckee River. The Truckee flows out of Lake Tahoe, through Reno, and into the desert, and during the late 1980s and early 1990s, a shortage of snow pushed the lake level down. In 1994 the Truckee, which is the lake’s only outlet, channeled only about 32 cubic feet of water per second, barely enough to keep its rocks wet.
The river recovered and today, pushes five to 10 times as much water on average as it pushed during that low point. But it recovered only because more snow eventually fell, raising the lake level and strengthening the flow. Credit unions have experienced a similar loss in snowmelt; as income from net interest margin has dried up, more has had to come from noninterest income. But rather than waiting on the clouds, many have been building enough NII to guarantee that the river of net income doesn’t run dry. As they look for additional sources, they need to be sure they’re giving members value, not just extracting it.
Filene recently conducted research seeking to balance two important credit union imperatives: the need for NII that supports the operating costs of the credit union, and the imperative that credit union leaders feel to charge fees that are fair and that support services that add value to members. The tension is real. Too many or ill-advised fees and credit unions run the risk of alienating members and losing their cooperative difference. Not enough NII and profitability, like the Truckee, will dissipate.
We started with call report data and limited the size of the field to credit unions with assets between $50 million and $2.5 billion. From that group, we narrowed the list to those that finished in the top third in NII between 2008 and 2011. They had to have more than 25 basis points of return on assets in three of those four years and net capital higher than 7% in all the years. We asked them to set aside interchange and overdraft/NSF income and share where they had focused their NII efforts in the previous years. We wanted to get below those two elephants to uncover emerging or creative NII sources. A ranking of important contributors to NII yields few surprises, with respondents pointing to checking account revenue, debt insurance and asset coverage, and lending fees such as closing costs.
Data source: Filene Research Institute
In search of price flexibility, respondents said while insurance and asset protection items were essential to overall NII, there wasn’t much room to play with pricing. Instead, they pointed to card replacement costs, expedited bill payment and cashier’s checks as least likely to bother members. Some are focusing on old faithfuls from skip-a-payment fees to aggressive collection fees and identity protection services. As the 2014 revenue drought continues, more approaches are needed to keep the river flowing.
Next Steps: Download the Filene report, "In Search of Member-Friendly Noninterest Income"