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Filene Research Highlights Member-Friendly Sources of Noninterest Income

Apr 18, 2013 by Lewis Wood

Credit unions striving to balance their need for non-interest income (NII) without relying on overly punitive fees can learn from a 2012 Filene Research Institute research brief, “In Search of Member-Friendly Noninterest Income.”

By Kathy Blumenfeld

Credit unions striving to balance their need for non-interest income (NII) without relying on overly punitive fees can learn from a 2012 Filene Research Institute research brief, “In Search of Member-Friendly Noninterest Income.” CUNA Mutual Group co-sponsored the research. Filene surveyed and interviewed leaders of credit unions that earned excellent NII results over four years.

These credit unions 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.

Filene Research Director Ben Rogers authored the report. He used 2012 CUNA Economics and Statistics data to quantify the critical impact of NII on the credit union industry’s bottom line: Overall ROA less fees and other NII have gone from 34 basis points in 1990 to 7 basis points in 2000, and all the way to– 63 basis points in 2011.

During that time, income from noninterest sources has risen steadily from 61 (1990) to 95 (2000) to 131 (2011) basis points. NII keeps credit unions afloat.

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.
Rogers indicated 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.

Most important source of NII: credit insurance and debt protection. 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

The least important NII sources in the survey, each at 20%, were credit card late fees and standard bill payments.
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

Freely chosen services are best, and most in line with credit union values

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.

The Value of a Service Freely Chosen

Filene’s research brief, “In Search of Member-Friendly Noninterest Income,” includes comments from some of the credit unions surveyed about what they consider “member friendly.” The following excerpt includes comments regarding insurance and investment services.

In some cases, especially related to direct sales of insurance and investment advisory services, credit unions perceive the NII value as a service freely chosen, much like a standard retail transaction. These fees are not penalty fees or periodic service fees; rather, they support coverage or advice actually chosen by the consumer.

...credit insurance, GAP coverage, and investment advisory services are the most likely to be important contributors to NII and are perceived as adding value to members.

Comments from survey respondents:

  • “Non-commissioned investment advisors [add value because they] don’t have a sell-only mentality.”
  • “Loan protection products . . . are all member friendly in the same way life insurance is member friendly. Term life is far more affordable than credit life, but the process to obtain it is far more difficult. Many of our members would never be protected by other policies.”
  • “All of these fees are member friendly because they are voluntary. The member has complete control to invest in these services or not.”

Kathy Blumenfeld is vice president of lending protection and compliance for CUNA Mutual Group.
Contact her at Kathy.Blumenfeld@cunamutual.com.

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