Is Your Credit Union Considering Changes to Fees? The Consumer Financial Protection Bureau (CFPB) has had a very firm eye on credit unions and bank fees. A Dec 2021 report found a 26.2 percent decline in overdraft/NSF fee revenues between 2019 and 2020, somewhat a result of the pandemic. A follow-up report in July 2022 indicated that in the first quarter of this year, overdraft/NSF fee revenues stopped declining but were still below 2019 levels.

With fee levels so low, what better time to look into alternative sources of revenue?

The CFPB reported in March 2022, “In 2019, banks and credit unions collected an estimated $15.5 billion from their customers through overdraft and non-sufficient funds fees.”  The report noted that the overdraft fees can take a heavy toll on those living paycheck-to-paycheck and can drive people out of banking altogether.

While fee amounts vary, it’s not uncommon to see a $10 fee for a low balance on a checking account or a $25 NSF fee not only from the credit union or bank but also from the merchant as well for insufficient funds to cover the payment. Credit unions typically offer lower fees than banks and a more hands-on personalized approach for members when they encounter the fees. But any way you slice it, these fees are controversial and impact a segment of the population already under financial pressure.

As credit unions and banks review their non-sufficient fund (NSF) fee structure, some have decided to decrease, but not eliminate the fees, keeping the behavioral aspect of the punitive charges alive, but on the other hand having a pragmatic understanding of the economic impact the charges have on people whose budgets are already stretched thin.

What are savvy credit unions doing? 

Credit unions that have reduced NSF fees are considering other asset income generators, alternatives that don’t cost members money to make up for the lost revenue. “They are utilizing benefit funding capacity to generate additional income,” said John Moreno, Newcleus Credit Union Advisors Managing Partner. “When structured properly, income flows through that component of the financial statement are considered with fee and other income,” he added.

So, what is the impact of reducing fees on your bottom line? What will your credit union need to make up to meet budget projections? Eliminating NSF fees and adding ways to generate income to offset the loss of the fee is doable if you:

• Understand the potential impact of changes you are making
• Track the actual impact of the changes
• Find other areas to generate additional non-interest income

The credit union operating income normally is its interest income, what it earns on loans it makes. The difference between the loans made and deposit interest paid is the operating margin. Fees and other income are contributing factors to the organization’s bottom line. When the credit union voluntarily eliminates some of those fees, it’s going to stress the bottom line.

It’s time to think strategically.

The  Federal Credit Union Act’s permissible investments section 701.19 allows credit unions to offset benefit obligations using financial products like credit union-owned life insurance which can have an immediate impact on the bottom line. CDA accounts, often considered the “best-kept secret,” offer credit unions an investment tool that not only allocates financial contributions to charity and philanthropic organizations but also generates a stream of income for the credit union.

As your board and financial leadership discuss strategic considerations for the coming year, questions will arise about how to run a leaner operation or expand the scope to who the credit union is willing to lend to. Different types of loans that generate more revenue can be added to the portfolio of services offered. These new revenue-generating programs will involve planning and longer implementation and could include revisions to the loan portfolio such as offering riskier loans, payday loans and commercial loans.

The credit union industry as a whole operates on a slim margin. Research has shown that after stripping out fee and other income, most are operating at a loss, Moreno said. So, the challenge is uncovering how more non-interest income can be generated.

What options have you explored to address new sources of income?

As your board and leadership team considers short and long-term strategies, contact Newcleus Credit Union Advisors’ John Moreno at jmoreno@newcleus.com to explore your options.