Nearly every credit union is struggling to find new ways to earn income today. With the yield curve offering just 12 basis points of spread between the 2-year and 10-year Treasuries, credit unions are turning to non-interest income to boost revenue.
To see how much more dependent credit unions are on non-interest income, let’s take a look at the first quarter of 2002, when credit unions over $100 million in assets had quarterly ROA of 0.27%. If non-interest income were removed from the ROA calculation in 2002, quarterly ROA would have been 0.02%. Non-interest income was 93% of net income, so credit unions were still making a little money from core spread management activities
By the first quarter of 2006, it was a different story. Credit unions over $100 million in assets generated quarterly ROA of 0.21%. If these credit unions had no non-interest income, ROA would have been –0.09%, meaning that non-interest income was 143% of net income. In absolute dollar terms, credit unions generated $712 million more in non-interest income in the first quarter of 2006 than in the first quarter of 2002. Additionally, credit unions saw a $1.09 billion decrease in net income minus net interest income.
Part of the increase in non-interest income has come from the increased member penetration and usage of debit and credit cards, which generates interchange income. Merchant groups are lobbying Congress hard to lower interchange fees paid to issuers such as VISA. The lowered income would have a negative impact on credit unions.
Courtesy pay is a more controversial source of non-interest income. Traditional share draft accounts are the most profitable product at many credit unions because of the fees associated with courtesy pay. Some in and outside the industry are morally opposed to courtesy pay, questioning whether we are actually serving the members’ best interests when we offer courtesy pay? Could this be the bankers’ next attack point?
It’s clear that the credit union business model is changing, and it is time for credit unions to focus on developing additional member-friendly sources of income beyond those that are transaction-based. For example, an increasing number of credit unions are having success offering investment and insurance programs to their members. These programs are a win-win—the credit union gains income while the member gains additional financial service options and security.
To discuss this topic in greater detail and learn how some credit unions are expanding their non-interest income options, join us for a webinar titled: Member-Friendly Non-interest Income Sources .