Looks like Wells Fargo and B of A are back with the same old song and dance, more fees. We’re witnessing more than “another round of banks sticking it to the consumer”. We’re witnessing a longer-term business model shift.
The economic shock of the past 5 years has damaged the age-old banking business model and is reshaping markets at a rapid rate. The heyday of robust mortgage and commercial business lending is gone, not to return any time soon. Fee income took a double hit from reduced real estate transactions and other fee income has been significantly limited by regulation. For banks, this translates into a new business model, no longer supporting free (their word not mine) checking. If continued, this transition will impact tens of millions of consumers.
What are the implications for credit unions if this trend continues?
My initial response to this question is to do the happy dance. My credit union friends describe me as a “glass is half full” kind of guy. But seriously, this opportunity does require that each credit union consider its unique business model to make sure it can “on board” these new members in a sustainable way.
Like the banks, the economic shock has impacted our cooperative business model. Our superior service, consumer friendly pricing and community outreach is funded in part by our ability to generate loan yield and, yes, fee income. Unlike the banks, our business model remains pretty simple:
(Yield on Assets + Fee and Other Income) – (Cost of Funds Expense + Operating Expenses + Provision for Loan Loss Expense) = ROA
If one of these areas is negatively impacted (increased operating expense) it has to be made up on the income side (Asset Yield or Fee Income).
Can Credit Unions afford to tag along for the ride?
There isn’t a case for selling transaction accounts at a loss and making it up in volume. Profitability remains a significant issue for credit unions. The future depends on our ability to grow with profitable member relationships, while maintaining our cooperative, consumer-focused service model.
There are many credit unions with appropriate business models that will be able to attract and accommodate the growth generated from the bank transfer movement. These are credit unions with;
- Strong loan growth cultures – they continue to grow loans even in the current economy
- Strong sales cultures – they consistently demonstrate the ability to convert new deposits to loans and increase products per member
- Stronger fee and other income – they have diverse products, services, or CUSOs that generate higher average fee income
- Lower overhead and expense structures – they have a lower profitability threshold.
Upgrade from Coach
Credit unions that can’t afford to migrate checking accounts need to consider adjusting their business model. A few high level considerations include;
Competitive and relevant loan products – this is more than having the lowest used auto loan rate. It also includes having loan products that are highest in demand, i.e. consolidation loans, microenterprise small business loans, payday alternative loans. Continuing with the transportation theme… used car transmission repair loans may be in higher demand than new RV loans.
Pricing strategies to increase average loan yield – average loan yield should adequately reflect the risk of the portfolio. Just like checking extra baggage, rate and fee assessments should always reflect the extra weight placed on our business model. There are a number of community development credit unions who are experts at pricing for risk. These credit unions frequently have average loan yields ranging from 8% – 10% and fee income that is significantly higher than their peers. Don’t confuse this with gouging members, because it’s not. It’s prudent business to price for the risk. This pricing allows the credit unions to serve a greater number of people in need and increase profitability.
Growth focused sales and service culture – we need front line teams capable of cross-selling products and services. Mining loan transfer opportunities during the checking account on boarding process is the best way to generate revenue to offset the operation expenses associated with the new product. There are a lot of fancy sales programs out there. But what we need is fairly simple… front-line people who can read a credit report, identify a loan that is financed elsewhere and can (and will) ask the member if the credit union can refinance the loan.
Increased other fee opportunities – We need to identify opportunities to increase fee and other income. I’m NOT talking about increasing safety deposit box rental fees. There are a host of opportunities to responsibly increase fee income. Examples range from increasing the number of active debit cards in the portfolio to fee based business checking accounts.
Like banks, our business model is fueled by loan yield and fee income. It’s true our missions are different and we’re in it for the little guy – but regardless of our cooperative mission, our business model must be sustainable or we will cease to thrive and will struggle to survive.