An uptick in lending may have credit unions thinking they can stop scavenging for more of the noninterest income that has helped so many of them survive a low interest rate environment. But a closer look at the data shows that noninterest income, which rose from 1.22% to 1.27% of average assets as of Q1 2015 versus Q1 2014, according to Callahan & Associates, is still critical for credit union survival.

During the first quarter of 2015, loan balances popped up 10.6% year over year to $731.2 billion, according to Callahan & Associates, and total income posted the highest growth (6.6%) of the last seven years. But loan growth is outpacing the growth in share balances, which rose 4.4% year over year, Callahan & Associates found, and because credit unions need shares to make loans, there's a growing need to attract deposits.

That means being competitive with things that happen to be the building blocks of noninterest income: Fees, value-added products and services. Though still below a six-year peak of 1.36%, noninterest income rose from 1.22% of average assets in Q1 2014 to 1.27% in Q1 2015. About half of that was fee income, Callahan reported.

There's a lot of opportunity but not much room for error, and credit unions are making plenty of those, according some experts in the area.

Ben Rogers, research director at Filene Research Institute in Madison, Wis., recalled one credit union he studied that introduced the idea of paying to talk to a teller, for example.

“They were doing something which, from the outside looking in seems diabolical, but from the inside looking out seems to make a lot of sense: It's more efficient for us to process transactions and queries electronically, so let's give people incentives to do that,” he said. “Now, on an economic basis that makes a lot of sense, but from a public relations basis it's not a good idea.”

Here are some other ways experts said credit unions sabotage their noninterest income potential:

They undercut the market too much

Some credit unions price fees and services extremely low in order to attract or placate members, but that can easily backfire on the bottom line, James This, a former credit union executive vice president and current president of James L. This & Associates, which he said has worked with about 100 credit unions, said.

“You don't have to be 25% or 50% below the marketplace, particularly if income is an issue for you,” he said. “Five percent or 10% under the market rate is a decent goal.”

Rogers said most credit unions shop around before setting fees.

“Some of them formally benchmark,” he said. “They'll actually take a survey, pay for one or do it themselves to figure out what all their competitors are doing. Others do it a little bit more casually. Most credit unions feel good if they're 10% or 20% below whatever the going rate is in their local market.”

They ignore business models outside the industry

Dozens of successful tech companies rely on a “freemium” model, which means customers are able to use some features for free but can pay to have a faster or better experience if they choose. The music-streaming site Pandora, for example, lets customers listen to music for free, but if they want to skip through lots of songs and avoid advertising, they pay a fee.

“Your members can still get a free product, but if you can convince them that there's some value in the additions, whether it's personal management software, or a safe deposit box or identity protection, people would be much more willing to pay for that,” Rogers said. “Now, your volumes are going to be smaller, because you have to convince them to pay for it, but that's where the cross-selling of your frontline staff and all of that stuff comes into play.”

They have low NSF fees and rely on them too much

Members push back least on overdraft fees, but credit unions often overlook that, This said.

“Stay at the high end of the market in your NSF policies,” he advised. “A lot of times credit unions will want to be maybe $10 under what their competitors are charging. I don't think you need to be there. I think you need to be, maybe $3 or $5 below where they are. Again, if you can afford it financially, and you want to take the position of being considerably less, that's fine. But many of the clients that I deal with, they're struggling for extra income.”

Overdraft fees are a major source of noninterest income, but potential new regulation could mean a decline in revenues from them, Rogers added, warning that diversifying revenue streams will become even more crucial.

They're ambivalent about debit

Many credit unions don't market signature-based transactions enough, said Patricia Graves, chief operations officer for The Paragon Consulting Group in Olympia, Wash. Members often resist per-transaction fees for debit use, but rewards for use such as gift cards or higher interest rates on checking are often welcomed, she said.

Credit unions also often make the mistake of waiting for new members to request debit cards instead of issuing them one automatically as part of the onboarding process, This added.

They don't sell packages

“The real opportunities are bundling checking and transaction products with services that people actually want,” Rogers said. “Identity theft protection I think is a good one because people are certainly aware of it now. Premium-type checking and transaction accounts where, in addition to having what's traditionally been a free account, it's offering additional services on top of that for a monthly fee, and so maybe it's bundling that identity protection in there. Maybe it's a safe deposit box. It's really relationship pricing by getting people to fold in a lot more products than they're traditionally used to.

They don't think about demographics

Hispanics are a valuable membership target and a valuable source of noninterest income, Miriam De Dios, CEO of Coopera, a consulting firm in Des Moines, Iowa, said, but credit unions sometimes make the mistake of assuming one size fits all.

Money transfer services hold huge untapped potential for credit unions, for example.

“It's one of those value-add products that can then lead to additional service usage by that member at the credit union,” she noted. “So, certainly, that's one that not a lot of credit unions think about and that there is a huge demand for.”

Prepaid, reloadable cards are also an opportunity, she said.

“The credit union can earn some of that fee income as well as interchange income,” she noted.

They think fees violate the credit union movement's principles

“Credit unions are understanding now that they're not going to be able to continue to just make net income or profit or increase their net worth based on interest income,” Graves said. “They absolutely get the fact that that has changed. I think now it's a matter of identifying opportunities and implementing those opportunities.”

This added, “It is a critical part of helping to make sure we get to a positive ROA. And it's not going to go away.”

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7 Ways Credit Unions Miss the Mark on Noninterest Income

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