For the last few decades, credit unions have been relying on fees to supply the bulk of their noninterest income – but that era is likely coming to an end.
According to CUNA, fee income has been on the decline for the last seven years. As Americans begin to dig out of the recession, many are no longer incurring late payment and overdraft charges. The growth of online and mobile banking tools has also made it easier for consumers to keep track of their finances and avoid penalties whenever possible.
Fees have never been popular with credit union members. According to the 2015 Consumer Banking Insights Study, 25% of consumers feel scammed by the fees their bank charges. When it comes to choosing a financial institution, a full 93% say few or no fees on checking and savings accounts is an important factor.
However, credit unions need the income those fees provide. Low interest rates, increased competition, and consumer demand for more products and services have left many institutions struggling. More than 300 credit unions have closed in the last 12 months, according to CUNA, another 585 are expected to close this year and next.
Fortunately, there's a way credit unions can replace the noninterest income lost to declining fees while also improving their member experience: Rewards checking.
Rewards checking encourages behaviors that not only generate noninterest income, such as using a debit card, but also reduce expenses, such as requiring the adoption of e-statements. Credit unions are also better able to control the cost of funds using rewards checking accounts, as the promotional interest rate is only paid out if consumers meet necessary requirements.
Unlike fees, rewards checking is something consumers want. According to the CBI study, 51% of consumers say rewards, such as cash back or points, are important when it comes to choosing a bank, and 39% say better rewards would encourage them to leave their current institution. By contrast, 41% of consumers would switch financial institutions for lower fees.
There's also evidence that rewards checking can lead to more loyal, engaged – and profitable – members. Account holders of one national brand of rewards checking accounts are twice as likely to use their institution's debit card and take out a loan from their institution within the first year.
That's huge for credit unions that have struggled to attract members in recent years, especially smaller institutions. While CUNA expects membership to grow by roughly 5.8% for credit unions with more than $1 billion in assets in 2015 and 2016, credit unions with less than $20 million in assets will likely see membership decline by 1.6% both years.
Fees provide credit unions with a nice source of noninterest income, but that's about it. As fee revenue continues to decline, rewards checking offers credit unions not only a replacement for that missed income but also an upgrade. In addition to noninterest income, rewards accounts can also boost member satisfaction and engagement, and serve as a tool to attract new members. In today's uncertain environment, those are all things credit unions absolutely need.
Gabe Krajicek is CEO for BancVue. He can be reached at 877-342-2557 or [email protected].
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