Low interest rates are driving down interest income from loans and investments, causing many credit unions to rely more heavily on non-interest income. Rising credit and debit card payments, however, are countering the interest income trend and creating a significant source of non-interest income for credit unions.
Through June 30, year-to-date non-interest income totaled $6.7 billion for the nation’s 7,105 credit unions. This is up 14.0% from the $5.9 billion the industry brought in during the same time period in 2011. And interchange income, or the income a credit union receives from a business for each swipe of a member’s debit or credit card, comprises the largest portion of non-interest income, according to Callahan & Associates’ annual Credit Union Non-Interest Income Survey.
The 5300 Call Report divides non-interest income into two categories: fee income and other operating income. Fee income includes debit and credit card interchange income, ATM fees, and overdraft fees, among others. Other operating income includes components such as income from selling real estate loans on the secondary market and unconsolidated CUSO income. Through June 30, fee income totaled $3.6 billion — a 6.6% increase from the first half of 2011 — while other operating income totaled $3.1 billion — a 24.0% increase. Credit unions are participating in the country’s refinancing boom and as a result are selling a record number of first mortgages on the secondary market. Through June 30, credit unions sold 50.4% of the first mortgages originated year-to-date; last year they sold 44.3% during the same time period. Such activity is helping boost other operating income.
Growth in non-interest income has caused non-interest income as a percent of average assets and total income to increase over the past few years. As of June 30, non-interest income comprised 1.34% of credit unions’ average assets, up nine basis points from 1.25% in June 2011. As a percent of total income, non-interest income has increased from 23.2% one year prior to 26.6% through the end of June.
Although the 5300 Call Report does not break down the components of non-interest income beyond fee income and other operating income, Callahan & Associates conducts an annual year-end survey to determine what comprises this broad source of revenue. According to the 2011 year-end survey, combined debit and credit card interchange and fees was the largest portion of non-interest income, accounting for one-third of the total non-interest income portfolio. Debit card interchange and fees comprised 22.3% of non-interest income while credit card interchange and fees accounted for 10.9%. Credit or debit-related fee income from NSF and courtesy pay made up an additional 23.9% of total non-interest income at the end of 2011.
Faced with new non-interest income regulation, including the Durbin Amendment and the recent Visa/MasterCard settlement, credit unions have been preparing for potential drops in interchange income. Many credit unions have been trying to increase the number of card swipes to offset possible drops in income on a per swipe basis. One way credit unions are achieving this is by offering free checking accounts for members that use a debit card a certain amount of times per month — usually 10 or 12.
Faced with the lower returns on their main source of income — loans — credit unions are shifting their focus to other sources of income. Given that the low interest rate environment will continue for the foreseeable future and credit and debit cards will continue to increase in usage, the income stream from these payment sources should play a major part in credit unions’ bottom lines even in the face of regulation.