The Virtuous Circle Of Lower Fees And Higher Income

Interchange income at credit unions swaps places with punitive fees as a growing driver of industry revenue.

 
 

Top-Level Takeaways

  • The dependence on ATM, courtesy pay, and other checking fees among U.S. credit unions has tapered as fee income as a percentage of total assets has fallen sharply in the past decade.
  • A bump in two other measures of engagement — checking accounts and credit card accounts — suggests more members are making a credit union their primary financial institution.

The margin between interest rates for deposits and loans remains near historic lows, and the need for credit unions to develop alternative sources of income has not diminished.

What has tapered, however, is the dependence on the least consumer-friendly sources of revenue — items like ATM fees, courtesy pay, and other checking account fees that fall under the label of non-interest income (NII). 

To be sure, interest from loans remains by far the most important part of a credit union’s income stream. That’s not surprising considering credit unions exist to extend credit. That’s where credit unions build relationships and help members get to work, own a home, and educate themselves and their children.

 

 

Indeed, interest income, which includes the smaller component of income from investments, makes up approximately two-thirds of all credit union income, in this case $1.4 billion annualized in the first quarter of 2017 compared with $728.6 million for NII, according to data from Callahan & Associates.

That proportion hasn’t changed much. Nor has another key measure of the importance of NII. As a percentage of average assets, NII was 1.30% in the first quarter of 2008. At the same point this year, it was 1.26%, a drop of only 4 basis points. (Its largest spike was to 1.44% in second quarter 2009 as the loan portfolio contracted in the height of the financial crisis.)

However, and this a big “however,” fee income as a percentage of total credit union assets has fallen sharply in the past decade, from 0.83% in first quarter 2008 to 0.60% in first quarter 2017. That’s 23 basis points, but it’s also 25% less dependence on punitive fees.

Click the tabs below to examine industrywide financial performance. Click on the graphs to view them in Peer-to-Peer.

 

5-YEAR NET INTEREST INCOME CAGR LEADERS

FOR US CREDIT UNIONS | DATA AS OF 03.31.17
© Callahan & Associates | www.creditunions.com
Rank State Name $ Net Interest Income After Provision
1 NV Silver State Schools 61.83%
2 WI Connexus 39.37%
3 CO Premier Members 38.93%
4 OH Pathways Financial 29.21%
5 CA California Bear 28.62%
6 VT Vermont State Employees 27.35%
7 NC Latino Community 27.11%
8 WI Capital 24.60%
9 MI Members First 24.25%
10 NC Self-Help 23.74%
11 MI 4Front 23.52%
12 PA CACL 22.94%
13 CA Matadors Community 22.93%
14 AL New Horizons 22.11%
15 MD Educational Systems 22.02%
16 OH Telhio 21.18%
17 WI Verve 20.26%
18 MI Michigan Schools and Government 19.63%
19 NE Lincone 19.56%
20 WY Blue 19.55%

Source: Callahan & Associates.

2017 Callahan & Associates, Inc. All rights reserved

 

 

5-YEAR NON-INTEREST INCOME CAGR LEADERS

FOR US CREDIT UNIONS | DATA AS OF 03.31.17
© Callahan & Associates | www.creditunions.com
​ ​
Rank State Name $ Net Interest Income After Provision
1 TX Pioneer Mutual 75.47%
2 CO Denver Fire Department 63.20%
3 TX Santa Fe 51.50%
4 CA Schools 50.26%
5 NM Guadalupe 46.92%
6 WI Connexus 46.05%
7 MA Alden 39.03%
8 IN Evansville Teachers 38.97%
9 WI Capital 38.43%
10 OH Pathways Financial 36.52%
11 PA CACL 33.88%
12 NY Ukranian National 31.16%
13 MA Southern Mass 30.88%
14 OH General Electric 30.03%
15 NC Self-Help 29.71%
16 MN South Metro 28.93%
17 TX Texas Tech 28.78%
18 OR Trailhead 28.33%
19 KS Azura 27.74%
20 IL Partnership Financial 27.68%

Source: Callahan & Associates.

2017 Callahan & Associates, Inc. All rights reserved

 

Meanwhile, what has gone up sharply is “other income” — a category that includes such items as GAP insurance, gains from mortgage sales, loan participations, and debit and credit interchange income.

During the same decade that fee income fell by 23 basis points, other income rose 19 basis points, from 0.47% in first quarter 2008 to 0.66% in first quarter 2017 as a percentage of total assets, Callahan data shows.

American consumers attracted by lower fees and rates have increased their business with credit unions. In return, credit unions continue to offer even better fees and rates.

So, what do all these numbers mean? Credit unions have been enlarging a virtuous circle of growth. They offer lower fees. American consumers attracted by lower fees and rates have increased their business with credit unions by making financial cooperatives their primary financial institution (PFI). In return, credit unions continue to offer even better fees and rates. 

We see the bump in standing as a PFI in two other measures of engagement. Checking accounts are a prime indicator of an institution’s status as the PFI, and credit card accounts are a viable measure, too.

Share draft penetration went from 46.46% in first quarter 2008 to 56.49% in first quarter 2017. That’s a robust increase of 21.6%. Credit card penetration has risen from 14.58% a decade ago to 17.19% as of March 31, 2017 — a jump of 17.9%.

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Credit unions would do well to continue practicing the credit union difference. Also, market, advertise, and generally get the word out about what that difference means to members and potential members now and in the future. The more they use the credit union, the more the credit union can benefit them.

And the numbers show it works. The movement is doing more good for more people. Lately, the buzzword for that relationship is the “double bottom line.” But we can also just stick with “people helping people.” 

This article appeared originally on Credit Union Times in August 2017.

 

Sept. 18, 2017


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