Debit Cards Still Revenue Builders for Cash-Strapped CUs
In their quest to comfortably cover operating expenses with help from noninterest income, several credit unions said this year, they’ll mostly rely on NSF fees and interchange income, followed by income from insurance products and monthly service fees.
While they have little control over their levels of NSF fee income, a noninterest income staple, they say boosting interchange income by encouraging the use of debit cards has become a priority.
At the $655.4 million Altura Credit Union in Riverside, Calif., enticing incentives have convinced members to swipe their debit cards more often. Three years ago, the credit union launched a debit card usage-based sweepstakes campaign, which featured prizes such as electronics, cash, member bill payments and concert tickets – the most popular prize being a meeting with Taylor Swift at her concert. During the Taylor Swift campaign, Altura experienced a debit transaction volume increase of 15.4% and an interchange income uptick of 11.8%, according to Jennifer Binkley, executive vice president/chief operating officer for Altura.
Two more of the credit union’s products have also helped increase debit card use: Reliance Checking, a temporary solution for members who would otherwise be denied a checking account, and iChecking, an account designed for members ages 18 to 24.
“In California’s Inland Empire, we’ve seen a lot of people using check cashing services,” Binkley said. “Reliance Checking gives them access to a debit card without prepaid card fees, and we’re seeing those account holders use the cards for purchases on sites like Amazon.com and iTunes, so we’re giving them an opportunity to access a market that they otherwise couldn’t.”
The $206 million, Temple, Texas-based Texell Credit Union has also enjoyed the benefits of an incentive program. Its debit interchange revenue doubled from $665,000 in 2008 to around $1.3 million in 2012 after implementing a debit rewards program that offers cash and merchandise prizes, said President/CEO Tony Hale. However, NSF fees still account for the majority of Texell’s noninterest income, he noted. Interchange income is the second largest source, and coming in third are loan protection products, which brought in $1.5 million in 2011 and $1.3 million in 2012 due to a loan volume drop-off.
Debit interchange income is the top noninterest income source at the $1.2 billion Local Government Federal Credit Union in Raleigh, N.C., according to President Maurice Smith. It produces 65% of the credit union’s noninterest income and generated $13 million in 2012. NSF fees count for 20% of its noninterest income and brought in $4 million in 2012. Trailing behind the two, Smith said, is the income derived from the $1 monthly fee attached to its only checking account.
Smith said he expects debit interchange and NSF fee income to be about the same in 2013, but noted debit interchange income is trending upward, while NSF fee revenue is trickling down. Local Government FCU earned $400,000 less in NSF fees in 2012 than it did in 2011, most likely because members are becoming smarter about their money and mobile transfer services have made it easier for them to cover payments, he said.
Service fees, while an important source of noninterest income, have the potential to cause member dissatisfaction, some experts have said. That’s why some credit unions say they only implement fee programs that are fair, such as ones that give members the opportunity to avoid a fee based on their behaviors.
“We think fees should be profitable, applicable to what we’re providing, but not top of market,” Binkley said. “We want to allow members to earn their way out of a fee, and we make the rules easy to understand, such as a $5 monthly checking fee that goes away if they use their debit card five times a month.”
Hale said Texell ensures fees are low and avoidable, and does not penalize members for the mistakes of others.
“Fees are not randomly imposed, they’re discussed up front, and if a member manages his account, he can avoid them,” Hale said. “Fees are imposed to offset an operating expense, such as an overdraft loss, and members who don’t overdraw their accounts shouldn’t be left to subsidize those who do.”
Transparency is key to getting members comfortable with the monthly $1 checking account fee at Local Government FCU. Smith said the credit union openly explains the reasoning behind the account fee, which, in exchange, lets members enjoy interest payments, no minimum balance requirements, free ATMs and a personal finance management tool.
“We talk to members about the approach we take to offering our services,” Smith said. “When we talk to them openly and honestly about it, they find it refreshing.”
Efforts to increase noninterest income result in more than just a boost in revenue for credit unions. Binkley said a proactive approach gives Altura a chance to offer services that will truly benefit members’ financial lives.
“It provides a strategic opportunity to help the member while increasing income,” Binkley said. “It also lets us drive products that build relationships with young members, and allows us to show we’re promoting the whole value of membership, not just getting them to sign up for a product.”
For Texell, a steady stream of noninterest income means the credit union can continue to afford expenses such as employee benefits.
“Noninterest income is pretty important, as it’s equal to 40-45% of our revenue,” Hale said. “It allows us to not be quite so dependent on our balance sheet and to weather the storm better than some. We also offer a lot of staff incentives here, for example, we absorb the majority of our health benefit costs, and we couldn’t do that without having solid earnings.”
Smith concluded that building noninterest income with a monthly service fee now helps Local Government FCU prepare for its future needs. He said while credit unions currently exist in a low interest rate environment, interest rates are expected to rise in 2015, the same year unemployment is expected to fall below 6.5% and at that point, noninterest income generation will be even more imperative.
“Credit unions live off of spreads, and our spreads will become tighter in a rising interest rate environment,” Smith said. “We want to shape member behavior now so that they will get accustomed to paying for what they get.”
Natasha Chilingerian now works for Xceed Financial CU. At the time of this story’s filing, she was a correspondent for Credit Union Times.