A recent report from Moebs $ervices generated this unseemly headline: "One Big Perk of Using a Credit Card Just Disappeared." That was a Time.com/Money article about that research outfit's finding that the median overdraft fee for banks was $30 and that for credit unions it's now "a very bank-like $29."
Now, overdraft fees are considered "punitive fees," although the service certainly serves a purpose for the consumer and credit union alike. And members not only can opt out of the projection – some credit unions offer checking accounts for the unbanked and underbanked that don't include that option at all, as a way to help those members join the mainstream while boosting credit scores and budgeting skills.
Nevertheless, that headline spoke to an undercurrent of concern we hear in the industry about credit unions becoming too much like banks, and consequently, too profitable to deserve something like, say, a tax exemption. But have credit unions as a movement strayed that far from their mission?
Our analysis of the data at Callahan & Associates suggests otherwise. For one thing, annual fee income per member has dropped from $78.6 in 2012 to $73.2 last year. That's just a topline response to the NSF jab. Members are voting with their feet and their dollars, joining credit unions in record numbers and driving lending and shares totals to new heights. A deeper dive into the data helps paint a more complete picture of where the net profits are coming from.
For example, total revenue has been on the rise since bottoming out in 2013. But as the graph above titled "YTD Total Revenue and YOY Growth" illustrates, interest income rose in both those years while fee income actually dipped slightly in 2014 and then rose again last year. That was despite credit unions returning $78.6 million in loan interest to members in 2015. At the same time, "other operating income" grew at nearly three times the rate of fee income from 2014 to 2015, income primarily generated from sales into the secondary mortgage market, debit and credit interchange, and to a lesser extent, unconsolidated CUSO income.
Meanwhile, it's also worth noting that dependence on fee income generated by such things as NSF charges, ATM use and some credit card fees has been dropping for the past five years, while the aforementioned "other operating income" has been growing. (See the graphic titled "Fee and Other Operating Income as a Percentage of Average Assets.")
Credit unions, meanwhile, have built their share of first mortgage originations to record levels in the past few years, and, consequently, their income from moving those mortgages along into the secondary space also has been strong in five years of general housing market recovery. There were some dips in mortgage sales to the secondary market following the highs of 2012, but it's still a healthy endeavor, well worth the effort and creativity credit unions have shown in product development and underwriting flexibility in that space. Hardly punitive.
Meanwhile, as I mentioned, fee income as a bucket of money is up because the industry has grown, but as the graphic "Fee Income per Member" illustrates, less is coming from each member, and that's exactly what the movement wants and needs to see. And here's some more good news about credit unions acting like banks: According to Bankrate.com's heavily cited annual survey, the top 50 credit unions are twice as likely as banks to offer free checking. As in free.
That feature is pervasive in our industry, of course, and consumers seem to know it. (Remember what kicked off Bank Transfer Day in the first place? A big bank's decision to impose a $5 a month debit card fee.) Check out the graphic "Share Draft Penetration" and you'll see that measure of engagement – perhaps the single most major indicator of a credit union's role as primary financial institution to that member – has risen steadily for the past half decade, and now stands at 55%. That means that after crossing the halfway point a few years ago, credit unions are building on their impact, on their status as the trusted provider of choice and as the provider of the most sticky of products: The primary checking account.
That primary relationship means lots of debit swipes, of course, or "insert card now" in the case of EMV terminals. That means more credit card accounts, too, and all of that means more interchange income. That's why it pays to pay close attention to this big word: Disintermediation. Credit unions need to continue working hard to be the account consumers are uploading into their mobile wallets, and it was good to see the movement take the lead with Apple Pay.
Finally, when it comes to operating expense ratios versus net interest margins at credit unions, as long as the net interest margin remains below the operating expense ratio, the need for noninterest income will remain acute. As interest rates continue bouncing along at near-historic lows, credit unions' ability to make money off interest-bearing products will remain limited.
Altogether, this means the secret sauce to credit union success will remain building diversified income streams that strike that balance between profit and purpose. That promotes deeper member relationships built on trust and value. And what's punitive about that?
Sam Taft is director of industry analysis for Callahan & Associates. He can be reached at 202-223-3920 or [email protected]
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