Improving Performance through Member-Friendly Sources of Noninterest Income 

By Mike Moyes
Vice President of Consulting Solutions
Credit unions nationwide have been balancing the need to improve their Return on Assets through noninterest income without relying on punitive fees and service charges. The Filene Institute recently completed a research study entitled “In Search of Member-Friendly Noninterest Income.” CUNA Mutual Group cosponsored the research.

Overall Return on Assets less fees and other noninterest Income has gone from 34 basis points in 1990 to 7 basis points in 2000, and all the way to negative 63 basis points in 2011. During that time, income from noninterest sources has risen steadily from 61 basis points (1990) to 95 basis points (2000) to 131 basis points (2011). Noninterest Income (NII) keeps credit unions afloat.

Filene Research Director Ben Rogers authored the report. Filene surveyed and interviewed leaders of credit unions that earned excellent NII results during a four-year period. To learn how credit unions manage NII effectively, Filene screened NCUA 5300 reports for credit unions between $50 million and $2.5 billion in assets that finished in the top third in NII earned from 2008 through 2011. Of those credit unions, Filene surveyed those that had earned more than 25 basis points of return on assets in three of those four years, and net capital higher than 7% in all four years.

The goal of this brief is to balance two important credit union imperatives: the need for NII that supports the operating costs of the credit union and the imperative that credit union leaders feel to charge fees that are fair and that support services that add value to members. The tension is real. Too many or ill-advised fees and credit unions run the risk of alienating members and losing their cooperative difference. Not enough NII and needed profitability and credit unions will not survive in today’s environment.

Credit unions with successful NII programs tended to focus on earning NII through optional services such as credit insurance, debt protection and GAP and through transparent, reasonable fees from checking accounts and mortgage transactions.

Rogers indicated that the survey excludes an important source of NII: overdraft and interchange fees. “Because [these fees] are well understood and heavily regulated, this report intentionally ignores them in search of NII sources that have more prospects to grow,” he wrote.

Two important things the research measured were how important specific sources of NII were to credit unions and which sources provided the best value for members.
Four sources of NII were cited by more – than half of the respondents as either “important” or “very important” to their credit unions:

  1. 66.7% – Credit insurance or debt protection
  2. 62.1% – Checking account fees
  3. 55.6% – Mortgage-related (e.g. closing costs)
  4. 52.8% – GAP

When asked which sources of NII added value for members, these four sources had the highest percentage of survey participants rank them as “important” or “very important”:

  1. 94.4% – GAP
  2. 92.1% – Credit insurance or debt protection
  3. 86.4% – Investment advisor, broker, dealer, financial advisor
  4. 84.4% – Mechanical repair coverage

A common trait among the most important and highest-value services is that they are freely chosen by members. Another advantage these sources share is that credit unions have more control over them than, for example, interest rate spreads, loss provisions and asset turnover.

It’s also a matter of public perception, Rogers pointed out. After bank fees and practices took a beating in the court of public opinion following the housing bubble crisis, “credit unions should be uniquely concerned about their fee practices because their mandate is to be sustainable and profitable but not to the detriment of their member-owners,” he wrote.

For more information regarding Income Improvement consulting, strategic planning, asset liability management, compliance consulting, human resources and training and education, contact Mike Moyes, vice president of Consulting Solutions at HRN Performance, a division of CU Solutions Group at (734) 793-1530, ext. 520.