In the current difficult rate environment, credit unions are increasingly looking to non-interest income as a way to increase revenue and provide needed services to members. At mid-year 2008, non-interest income totaled $5.1B year to date, an increase of 7.0% over the same period last year.
Growing Focus on Non-Interest Income
While there are numerous products and services reported in the aggregate non-interest-income of the 5300 call report, including investment services and various lines of individual insurance (auto, homeowners and life insurance), the actual net income margins and member penetration rates for many of these products remain relatively low.
Callahan & Associates’ Non-interest Income Survey reported that income from insurance product sales comprised 4.3% of total non-interest income. Credit unions that offer insurance or investment products, on average, receive an annualized $139,807 in income alone from insurance product sales.
The 2007 Callahan/SCS Retail Investment Services Benchmarking Study reports that the average net income for credit union retail investment programs is 12.68%, with top performing programs having net income margins between 15% and 20%. On the insurance side, net income margins on auto and homeowners programs generally average between 15% and 25%.
In contrast to investment services, Loan Protection Products (LPP) provide a significant opportunity for credit unions to increase gross revenues and, more importantly, increase net income margins. The LPP channel encompasses a suite of products including Credit Insurance or Debt Protection Coverage, “MBI” (Mechanical Breakdown Insurance) or “GAP” (Guaranteed Auto Protection).
Identifying Opportunities to Increase Non-Interest-Income
In contrast to their bank counterparts stance, credit unions tend to focus on non-interest income opportunities that are non-punitive in nature, offering alternative products that benefit members more than other available products. For example, credit union GAP insurance alternatives tend to be more consumer-friendly and reasonably priced than options available at the dealership. Many credit unions have found that strategies related to increasing non-interest income typically have a shorter time to market development and execution timeline than other types of products.
Positive credit union loan growth trends illustrate an important opportunity for credit unions to increase sales of loan protection products and offer peace of mind to members, as they refinance and obtain new loans at the credit union. In this challenging economy, members have concerns about meeting their financial commitments and the impact on their families should they become disabled or out of work. Rising credit card loan balances provide another incentive for members to safeguard their financial position through the purchase of loan protection products.
Source: Callahan's Peer-to-Peer
Measuring LPP Performance: What Should Credit Unions be Monitoring?
Callahan and Associates and SCS Consulting are embarking on an industry-wide credit union initiative to monitor the overall productivity and performance of the Loan Protection Product market. This initiative will aid in the development of industry benchmarks and identify key ratios for credit unions to measure and improve their programs. Participating credit union data will be used to develop an LPP Scorecard for each product as well a Scorecard that aggregates all LPPs. Industry-wide data from leading providers will be used to create a global industry view to understand key trends such as the growing Debt Protection market.
There are a number of metrics that credit unions should use to measure and monitor their performance:
- Sales penetration rates for all coverage types across various loan types;
- The ratio of income to premium (or cost) for all products;
- The types of coverages purchased on both Credit Insurance and Debt Protection coverage;
- Expense-to-income ratios for sales incentives and other operational expenses paid by the credit union;
- Net income ratios for all LPPs;
- Ratio of LPP gross income to the non-interest income reported on the NCUA 5300 Call Report.