Non-interest income is a key source of revenue for credit unions. As interest margins continue to drop, the need for credit unions to understand and enhance their non-interest income becomes essential to diversifying their sources of income. Net interest margin decreased slightly to 3.04% as of the first quarter of 2008, compared with 3.1% the previous year. Over the same period, non-interest income grew 12.6% from the previous year and represented 18.5% of total income. The ability to compare and analyze the sources of this revenue stream has become important for all credit unions.
The largest component of non-interest income is interchange income originating from debit and credit cards. As of the second quarter 2007, debit and credit interchange fees accounted for over 30% of all non-interest income. For many credit unions, that ratio is even higher. However, this percentage is smaller than the prior year, when interchange income accounted for 35% of non-interest income.
There are numerous reasons for this, one of which is competition from outside the credit union industry. CapitalOne has introduced its own debit card that is targeting banks and credit union competitors alike. It is a "decoupled" debit card, meaning consumers link it to their bank account and earn rewards similar to credit cards. As CapitalOne rolls this card out to a broader swath of consumers, it could cut into debit interchange income for credit unions.
One way for credit unions to counter such trends is to turn the current economic woes into an opportunity. For example, Pentagon Federal Credit Union ($12.1B in Alexandria, VA) offers a cash back credit card that takes advantage of high gas and food prices. When using the card, members receive 5% back on gas purchases, 2% on supermarket purchases, and 1.25% back on all other purchases. This offer increases the value given to members and creates incentives for them to use their card more often, helping make it "top of wallet".
An innovation that is picking up steam for many credit unions is debit card rewards programs. These drive card usage up because it provides motivation for members to use their debit card in much the same way credit card programs work, without the burden of increasing a member’s debt. A great example of a debit rewards program is from Texas Bay Area Credit Union ($200.1M in Pasadena, TX), where they integrated the same credit card points system into their debit card. Over a period of 12 months ending in March 2008, they experienced a 19% growth in interchange income. In addition, total accounts increased by 40% to about 12,000.
It is the ultimate objective of any credit union to ensure their card(s) is "top of wallet", thereby counteracting competition and environmental factors, including the tightening of the net interest margin. Credit unions must be as innovative as possible with their debit and credit card offerings. In today’s market, fee income is how many credit unions generate a positive bottom line. Ensuring the growth of this revenue source is an important part of credit unions’ long-term success.
The 2008 Non-Interest Income Survey may be completed here.