With the uncertainty of interest rates and a highly competitive marketplace, a growing number of financial institutions are exploring new strategies and initiatives in an effort to grow and stabilize their funding base. The question becomes what tactics should be used to accomplish these strategies?
Targeting the Right Market
Before we dive into a detailed, tactical discussion, it is important to step backward for a moment, and identify those credit union markets where fee building tactics should be applied to create the highest probability of success.
While credit unions have pursued a number of different services to increase fee income, an overwhelming percentage of the non-interest income stream is associated with share draft check processing. Checking accounts are the financial service most frequently used by credit union members. Statistics tell us that approximately 80% of a household’s designated primary institutions are also their main checking institution.
The Federal Reserve Board reports that almost all main checking accounts are located at local depository institutions. They also point out that households do not depend as much on local institutions for credit as they do for asset services. A surprise to no credit union executive.
Multiple financial service use is most often associated with checking accounts. In addition to checking, other products frequently used are usually liquid asset account related (savings, CD’s and money market accounts). However, as credit unions develop innovative new products, the checking account market clearly offers a very attractive location from which to link their service.
Given the above information, few would argue that the checking account market offers the optimum environment from which to generate consistent low-risk non-interest income and develop additional product relationships through cross selling.
Fee Income Success is Spelled SERVICE
In today’s highly competitive marketplace, it is essential that credit unions develop services that solidify and deepen those personal relationships long associated with local depository institutions. This represents both an offensive as well as a defensive tactic. Use your local depository institution status to your advantage. Provide member services that cannot be matched by non-depository or non-local institutions.
The right mix of services also plays a pivotal role in your credit union’s ability to encourage your current member base to utilize additional fee-based services as well as a means to attract new members. Members, non-members and your own staff must associate your fee-based services with benefits – not punitive assessments. When developing fee-based products, credit unions should favor authentic service income products that members believe offer them benefits versus “disincentive” fees that they believe punish them (such as charging members for using a particular service too frequently).
Perhaps one of the most important, yet often overlooked, initiatives required to attain fee income success is the commitment by credit union management to employee training in the area of consultative member service. Employees who have been fully trained to communicate the advantages of your credit union’s services cannot be underestimated.
Building Non-interest Service Income into Share Draft Checking
Discretionary Overdraft Payment Services
Given the challenges of today’s economy, many financial institutions are looking at discretionary overdraft payment services to generate a consistent low-risk income and compensate for decaying interest income revenue streams. Indeed, for many banks, non-interest income from programs such as discretionary overdraft payment services have become an essential source of income.
Taking a consistent, member-centric, service-oriented approach to discretionary overdraft situations is imperative. If abused, an overdraft protection service can damage member relations and possibly violate federal regulations. If implemented correctly, institutions and members both benefit.
When credit unions operate under a clear and consistent set of rules, fully train their employees to implement the service within established policies and keep their members’ interests first, they can remain compliant, meet member service objectives and achieve their non-interest income targets.
Already have a discretionary overdraft payment program service? If your credit has elected to self-manage your overdraft payment program, chances are it has likely experienced some degree of performance erosion in one or more key areas.
It may be time to consider a rigorous self-examination of your programs, policies and resources. This will allow you to determine those areas that may require legal, compliance and operational improvement initiatives to address changing regulatory dynamics to set a solid platform for growth, improved member service and meeting future compliance requirements.
An alternative to self-examination is to investigate a third party provider that will provide your institution with an improvement service upgrade package.
High Yield Share Draft Checking
When free checking was first introduced, it represented a truly effective marketing tool. Now it has become a commodity that offers little or no competitive differentiation and serves questionable value in developing profitable relationships with members and prospective members.
Unlike common free checking accounts, high yield share draft checking normally consists of a free checking with no minimum balance, high rate account. Interest rates are earned and maintained by meeting specific technology-based requirements.
Because these high yield checking accounts are tied to other required services, account holders are converted to the use of technology-based, cost saving services that strengthen the financial institution’s bottom line. Other benefits include opportunities to:
- Differentiate your checking account product from your competitors
- Generate revenue via new deposits
- Decrease costs by converting account holders to cost saving technologies
- Increase retention rates
- Increase earning as account holders participate in more fee-based institutional services
- Increase debit card transactions
High yield share draft checking satisfy sales approaches and business models that seek to attract and benefit affluent balance members that previously were attracted to interest rates provided by non-primary financial institutions.
Credit unions that offer online services such as high yield checking present the best of both worlds to their members – the personalized attention of a local depository institution and a wide selection of internet and technology-based products.
Many believe that success with non-interest, fee-based programs will be a game won by those credit unions that capitalize on multiple service opportunities that surface through member relationships. It will depend on financial institutions making sure they have a full complement of services to take full advantage of this “clustering of service demands” – multiple service demands most often associated with the share draft checking account.
The combination of a consistent revenue pattern associated with a discretionary overdraft payment program and the attractive cross selling environment afforded by a high yield checking product deserve serious consideration by your credit union.