LAKE FOREST, Ill.—As credit unions continue to search for new revenue streams, a new report reveals that total non-interest income for banks, thrifts and credit unions continues to fall since its peak in 2006.
That same report also shows that credit unions depend on service charges more than twice as much as banks.
In the first quarter of 2017, non-interest income comprised 1.38% of assets, a 27.1% decrease since 2006 when it was 1.90% of assets, according to Michael Moebs, economist and CEO at Moebs $ervices.
The Moebs $ervices report of more than 11,600 FIs offers a conclusion on why non-interest income is declining.
“Non-interest income is divided into two major components: service charges on deposits and other fee income,” noted Moebs. “Service charges on deposit accounts include transaction fees—money orders, check cashing, maintenance fees, ATM fees, overdraft fees, and other overdraft related items. OD revenue is the major component of service charges, constituting about 77% of the total.”
Service Charges
For the first quarter of 2017, service charges make up $43.6 billion for all depositories. Banks represent the majority with 79.5%, credit unions represent 18.2%, and thrifts only represent 2.3% of total service charges, the study shows.
“Another important aspect of service charges is to examine a historical perspective. Since the peak of service charges in 2009, banks have lost 36.5% of their service charge revenue. Credit unions have also had a 26.3% reduction,” said Moebs. “Thrifts began at a low base with service charges only at 0.05% of assets. However, they have almost doubled service charge revenue since 2009 with an 80.0% increase.”
Moebs said a key comparison can be made when looking at the types of depositories. When comparing service charges to assets, credit unions have 2.7 more service charges than banks and almost seven times more than thrifts.
“A very meaningful comparison is to relate service charges to net income. Credit unions’ service charges represent 83.6% of total net income,” said Moebs. “However, for banks and thrifts this ratio’s percentage is much lower at 21.4% and 8.1%, respectively. There is no doubt service charges are vital to almost all credit unions. Strategies such as price and account design are essential to credit unions in determining what will generate the most service charge revenue, while staying consumer friendly.”
Consumers Hoarding Cash
Several crucial factors are causing service charges to fall, said Moebs.
“Due to the uncertainty in the marketplace, consumers and small business have been hoarding cash in their checking accounts. With the average checking balance steadily increasing since the Great Recession started in 2008, there is less need for overdraft related services. In addition, the excess balances held by consumers can be used to pay for financial services instead of fees, Moebs said.
To attract consumers, financial institutions have emphasized relationship pricing, bundling two or more services to increase overall profitability, according to Moebs.
“This strategy is great for gaining new consumers and small businesses, but the depository generally takes a direct hit from the reduction in fee income as well as an increase in expenses using relationship pricing,” explained Moebs.
The outlook for service charges is tied to the economy. “As the economy improves and the consumer becomes engaged again balances will decrease, causing more need for fee services, especially ODs,” offered Moebs.