NAFCU Services Blog

Sounds like the beginning of a bad joke – what do you get when you cross a nearly flat yield curve, NCUA assessments, toxic legacy assets and burdensome new regulations with a limping economy that is impeding loan growth?

Answer – today’s credit union business environment.

So where does a credit union look for long-term growth today? The answer lies in non-interest income.

Historically, many credit unions have relied on lending as a primary source of income, which has built strong member relationships. There is a tremendous untapped opportunity to leverage those existing member relationships to offer solutions that members are purchasing elsewhere.  Growing your percentage of non-interest income also diversifies sources of revenue.

Most important, expanding non-interest income programs can also meet member needs, creating a win-win for members and the credit union.

Non-interest income opportunities can be classified into five categories:

1. Opportunities from existing credit union solutions. Some examples include guaranteed auto protection, mechanical breakdown protection, debt protection, credit insurance, and creditor placed insurance. In each case, the solution is an add-on to something the credit union is already offering to its members, which makes the sales process that much easier.
2. Solutions members are purchasing elsewhere. For example, a credit union can offer foreign currency for members who are traveling, AD&D insurance, identity theft protection, insurance solutions, financial planning and wealth management services, IRAs and Health Savings Accounts, and merchant card services for business members. Many of your members buy life or long-term care insurance every year. Why not leverage your access and position as a trusted advisor and offer them insurance?
3. Wringing income from improved operations. Many credit unions have charged-off debt sitting on their balance sheets that can be sold to generate cash from a liability. Others are using sophisticated predictive analytics to generate better results from marketing to retention.
4. Adding value to convert existing free services to fee services. The interchange amendment touched off the debate about ‘free versus fee’ checking accounts. There are opportunities to add solutions to a basic share draft account and charge a fee to provide better overall value to members – and in the process generate revenue for the credit union. In fact, we did a whole webinar on this very topic.
5. New offerings to generate buzz and provide different value drivers. Income-generating solutions can get stale if you achieve a certain level of market presence and then growth stops—or worse, members turn to other providers. Credit cards are a great example—market (or wallet) penetration is the first part of the challenge, and getting members to use their cards is another part. It is difficult for any one card to meet all needs, and offering an alternative card with different value drivers (like rewards) can often generate significant growth.

Embarking on a non-interest income diversification program must be strategic. Credit unions must understand how a proposed solution will fit into their long-term plan and what they need to ensure success for the future growth and health of the credit union.

For example, look at Desert Schools Federal Credit Union. Prior to 2008, Desert Schools’ main revenue source was interest income generated by its traditional lending products. The credit union had a fully operational credit union service organization (CUSO) specializing in non-lending products. The CUSO was originally created to offer a range of investment products, but Desert Schools saw a lot of untapped potential.

The CUSO added a 401(k) rollover product and adopted an educational component to its marketing. Demand for these products soared. Average 401(k) rollovers went from $35,000 per transaction to $80,000.

Another success story is GTE Federal Credit Union is deepening its connection with local realtors and expanding its mortgage loan portfolio. GTE cleverly capitalized on improving housing conditions in its community. It hosted a reception with local realtors and almost 300 members to grow GTE’s mortgage portfolio.

Naturally, part of the strategic process is identifying which options are the best fit for your credit union. If you do large amounts of car loans, perhaps related solutions make the most sense. If you have a large student, business traveler or international membership, then perhaps foreign exchange will work well.

Resources are also a concern. Do you need to expand your staff? Are investments required to create the program? Should you do all this in-house, or are there outsourced solutions?

Finally, marketing and sales are essential. It is vital for you to promote the value of non-interest income solutions to your members through a variety of channels—direct mail and email, Web, face-to-face, statement inserts and newsletter articles. Without a robust marketing effort, even the best solutions have a difficult time gaining adoption.

Whether it is for diversification, financial goals or to meet member needs, a well-designed non-interest income program has the potential to meet everyone’s needs.

Written by Dave Frankil, President, NAFCU Services Corp.

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Original article appeared in Credit Union Times, September 5, 2011.

Related posts and resources:

• 3 strategies for redesigning your credit union checking accounts
• Dealing with Interchange: Over the Horizon or Over The Rainbow
• It’s time to give your credit products a face lift.
• NAFCU Services Preferred Partners (for the mentioned solutions and many others).