Strategies for Fading Fee Income

Don’t wait for the Fed’s final interchange rule or legislative action to prepare for lost fee income.

May 01, 2011
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Plan now

“Contingency planning” is the new mantra at $700 million asset USE Credit Union, which stands to lose $1 million per year in debit interchange fee revenue.

In preparation, the San Diego-based credit union is considering a variety of cost-saving and revenue-generating measures across all business lines rather than focusing solely on debit cards, says CEO Jim Harris.

Such measures include lowering dividends on share certificates, increasing interest rates on certain loans, and—reluctantly—increasing nonsufficient funds and courtesy pay fees. These measures are consistent with those credit unions nationwide plan to implement, according to CUNA’s 2010-2011 Credit Union Fees Survey Report ("Changes CUs would make to recover lost interchange income").

The problem is there’s little wiggle room in today’s low-rate, low-demand lending environment. Nationally, credit unions’ average share deposit rate was 0.36% and the average one-year certificate rate was 1.17% as of January, according to CUNA.

“How do we take them even lower?” Harris ponders. “That’s why it’s important not to rely on a single source, but to look at this very broadly.”

And on the lending side, he says, “demand is so low that increasing rates would be counterproductive. It might make things even worse when we’re trying to generate loan demand.”

On the expense-reduction side, USE has already eliminated obvious inefficiencies, and it will continue to examine its cost structure and cut costs wherever possible.

“At some point, however, you start to cut into the core of what it takes to really serve your members,” Harris says.

New sources of revenue

Another way to approach this issue is by seeking out new opportunities, says Doug Fecher, CEO of $2 billion asset Wright-Patt Credit Union, Fairborn, Ohio.

Based on its current cardholder and transaction volume, it stands to lose $5 million per year in debit interchange fees—roughly 25% of its bottom line.

“We would prefer not to levy new fees on members because only members who are unable to maintain compensating balances would pay such fees,” Fecher says. “This means we need to look for new sources of revenue through loan growth, which is difficult in these days, or through other new business lines.”

Along this vein, SeaComm Federal Credit Union, Massena, N.Y., plans to introduce prepaid debit cards, which generate fee income and are exempt from the Fed’s proposal, says Scott Wilson, CEO of the $400 million asset institution.

In 2008, SeaComm Federal reorganized and examined every aspect of its operations as it looked for ways to streamline processes, diversify income streams, and add delivery channels and products to attract new members. This will continue in the interchange aftermath.

Wilson says he’ll leave “no rock unturned” as he prepares to replace a potential $500,000 in lost interchange revenue. “We’ll become even more prudent at diversifying our interest and noninterest income streams, improving on our cross-sales efforts, and putting more products into our members’ hands. As time goes on and we see how the loss of interchange income affects our net margin, we might have to look at other alternatives,” which could include adding a checking-account fee.

USE aims to increase checking account penetration among members by implementing a debit rewards program at a time when several megabanks, such as Chase, are pulling the plug on their rewards programs.

“Checking accounts open the door to a variety of cross-sales opportunities that build more profitable relationships with members,” Harris says. “Having a rewards program on your debit card helps you do that. And it gets back to a broader, relationship-based solution to the interchange issue.

“There are so many implications in making a few pricing changes,” he adds. “We don’t want to be an early adopter of fees or other significant changes because the market is watching closely. There will be opportunities to differentiate ourselves if we do it astutely and in a way that doesn’t damage our member relationships.”

Next: Avoid collateral damage

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