Credit Unions Need to Supplement Their Fee Income

Credit unions continued the performance trends of the last two years into the first quarter of 2003. And similar to other quarters' performances, credit unions increased their reliance on non-interest income. However, since the end of the first quarter there has been a settlement reached between retailers and the two major credit card associations on their interchange fees. Implications from this settlement will lead credit unions to look for other fee income revenue sources.

 
 

Credit unions continued the performance trends of the last two years into the first quarter of 2003. And similar to other quarters' performances, credit unions increased their reliance on non-interest income. However, since the end of the first quarter there has been a settlement reached between retailers and the two major credit card associations on their interchange fees. Implications from this settlement will lead credit unions to look for other fee income revenue sources.

As operating expenses continue to increase at a faster rate than credit unions can increase their ability to generate interest income through loans and investments, credit unions have had to grow the amount of revenue they earn via various fees to maintain a healthy bottom line. The table below outlines the credit union business model of income and expense as of March 31, 2003.

All of the numbers listed above are annualized as a percent of average assets. Important to note is that non-interest income is higher than net income: without that additional source of income credit unions would not be profitable.

This reliance on fee income has been steadily increasing over the last few years. Four years ago non-interest income made up 10% of total revenue versus over 16% today. But a portion of this income is in danger due to the recent settlement on interchange fees.

Visa and Mastercard have already announced that they will lower their interchange fees by at least one-third by August 1st. That means that credit unions will earn 33% less for the same number of interchange transactions. How much will this impact a credit union's bottom line?

Callahan & Associates surveyed 60 credit unions to better understand how they generated non-interest income. Those credit unions generated a combined $74 billion in non-interest income in the first quarter of this year. Over $13 billion of that, an 18% share, came from debit interchange fees.

If those interchange decreases had already taken place, than one-third of that interchange income would not have been earned. That would have reduced non-interest income by 6%. That 6% reduction is assuming the same volume of interchange transactions. However, with retailers now able to insist on PIN-based transactions, the number of interchange transactions could decrease as well, which means the actual drop in fee income could be even greater than 6%. If you apply the 6% decrease in fee income to the business model display above, that non-interest income number decreases from 1.08 to 1.02. Such a decrease would have lowered return on average assets below 1%.

Credit unions, for the most part, would like to see their ROA remain above that 1% threshold. In order to do this, they will need to make up for that 6% decline somewhere else. With operating expenses on the rise, and the current interest rate environment not the most friendly for large interest income increases, most credit unions will likely look for another non-interest source to compensate for the upcoming decline. As such, look for credit unions to be very receptive to products or services that could make up for this potential shortfall.

 

 

 

June 2, 2003


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