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.