The traditional credit union business model has relied for decades on income generated via interest on loans and investments, known as interest income. Lately, however, this business model has been undergoing a substantial shift, and credit unions find themselves becoming more dependent on fee and operating income, like ATM surcharges or income from CUSOs, to remain profitable as well as competitive against other financial institutions.
This new dynamic creates multiple business opportunities for service providers, both those whose product offerings generate fee income, as well as those that stimulate the traditional loan and investment returns. That is because while credit unions are waking up to the necessity of generating revenue in non-traditional ways, their unique status as cooperatives (i.e., member-focused, not money driven) lead them to want to generate as high a return as possible from interest income.
In simple terms, the net interest margin is available for operating expenses. The net interest margin is the dollars remaining after interest expense has been removed from interest income. This means if you invest $100 with a 4% interest rate, you earn $4. If your interest expenses are $1, your net interest margin is $3. That $3 is now available to cover operating expenses. Whatever money remains once operating expenses have been accounted for is net income. (You have $3 available, but you only need $2. Your net income is then $1.)
However, across the industry operating expenses are growing faster than net interest margin, which means total income must be supplemented with non-interest income to maintain the same bottom line. Using the example above, this means that credit unions actually need $4 to cover operating expenses, but they've only generated $3 from interest income. Consequently, the deficit must come from other sources, like fee income, especially if credit unions want to turn a profit.
Figure 1 below shows that over the last six years, operating expenses (the green line) have grown at a faster rate than the net interest margin (the yellow line) at every point until 2002.