With the continued expectation of low spreads, fee income has become increasingly important to credit unions. It should now be viewed as an efficient and controllable way to achieve bottom-line results, John Lass, CUNA Mutual Group’s senior vice president, strategy and business development, told Online Discovery Conference attendees Tuesday.
However, credit unions’ reliance on fee income faces challenges from regulatory and market forces, he warned.
Lass said fee income accounts for 20% to 30% of a typical credit union’s revenue—nearly double 2000 levels. Last year, the credit union movement generated $13 billion in fee and other operating income, according to the CUNA Mutual white paper, “Let Member Value Drive Your Fee Strategy.”
“Today, without any fee or other operating income the credit union system could not, as a whole, generate a positive return on assets,” he said. “Like it or not, fee income has become increasingly important to our viability.”
Certain fees are coming under pressure due to regulatory scrutiny and changing market conditions. These developments could have a potential negative impact on interchange and fees tied to mortgages.
Plus, the new Consumer Financial Protection Bureau may impose additional caps on other fee income sources.
Lass urged attendees to review threats to their fee income strategies, citing surveys that indicate nearly 50% of credit unions’ fee income came from two sources: NSF/courtesy pay (28%) and debit card interchange fees (21%).
“We need to be nimble and alert to the possibility of caps,” Lass said.
Lass cited a J.D. Power & Associates study that shows an increasing number of consumers are switching their primary financial institutions (PFIs). In 2010, 7.7% of consumers switched PFIs, and 8.7% are expected to do so this year.
When reviewing fee income strategies, credit unions need to ask how changes will affect member behaviors and look at the value equation.
“Member value equals benefits, minus price,” Lass said. “A benefit is something that is both qualitative and quantitative. Two members may have completely different perceptions of the value a product brings.”
Fee strategy must also be weighed on how it will affect different segments of your membership. Different member segments will react differently to the fees you charge.
A credit union’s fee strategy should be consistent with and support its value proposition, Lass said. “If your value is being the price leader, then your fee structure needs to be consistent with that.”
When evaluating a change in fees, Lass said credit unions should consider several factors:
- The value of the product to members;
- A member’s cost to switch PFIs;
- Alignment with the credit union’s brand positioning;
- The availability of alternatives;
- Potential changes in regulations;
- Your competitors’ likely reaction; and
- Your credit union’s cost of providing a service.