The net interest margin continues to shrink as the yield curve flattens and credit unions’ loan portfolio compositions shift. With the net interest margin at 3.26% as of June 2005, its lowest point on record, non-interest income remains a critical source of credit union revenue. In fact, over half of the credit unions in the United States now rely on non-interest income for positive ROA.
Total non-interest income for the industry grew 14.3% annually and reached $3.9 billion in June, up from $3.4 billion for the same period a year ago. According to a recent Callahan & Associates survey, credit unions derive their largest amounts of fee income from debit card interchange fees, followed by non-sufficient funds (NSF) fees, courtesy pay fees, and credit card interchange income.
Debit card interchange income became the largest stand-alone category in June, according to the survey results. This should continue to be an area of strong growth as members become more accustomed to using their debit cards and rewards programs become more effective.
Credit card interchange income also represents a major portion of fee income, and revolving consumer credit continues to rise. Interchange income for both debit and credit cards should continue to benefit from increased transaction volume as consumers reduce their number of cash purchases. According to the Credit Union Times, Visa signature debit sales volume increased by 14.4% to $148 billion in the second quarter, and the number of transactions for both debit and credit cards jumped 19.7% to 5.5 billion.
Courtesy pay programs in particular have experienced tremendous growth recently, up 5.7% since Callahan’s year-end 2004 survey. At the same time, NSF fees declined 4.5%, suggesting that income from courtesy pay programs is replacing income from NSF fees at many credit unions. Many credit unions view courtesy pay as a service that adds value for their members, as opposed to the traditional NSF model. Courtesy pay is clearly a high growth area for many credit unions, and is one way that these organizations are responding to the current interest rate pressures.
Many credit unions are able to maintain ROA without high levels of fee income because of efficiencies achieved through their business model or size. And some credit unions also choose to maintain lower levels of fee income for non-financial reasons. Non-interest income growth is only one means to support a credit union’s bottom line, but for many credit unions it has been an important measure to offset declining interest income in recent years.