By Ray Birch
LAKE FOREST, Ill.—At a time when credit unions are under fire for overdraft revenue, a new study also finds credit unions rely more on fee income than banks—and the author of the study is offering some ideas on what to do.
The new report from Moebs $ervices has found the ratio of bank fee revenue to assets is down from 14 basis points in 2022 to 13 bps in 2023. Credit unions, however, are at 43 basis points of fee revenue to assets in 2023.
“Or, over three times higher than banks,” said Mike Moebs. “Yes, (Sen.) Elizabeth (Warren), CUs collect more fee income to assets than banks.”
Moebs contends the fee revenue to assets ratio is the most accurate way to compare how much an FI relies on fee revenue with other financial institutions.
The finding follows some critical publicity recently related to credit unions in California and their OD revenue. As CUToday.info reported here, California’s state regulator recently released its first annual report showing how much state-chartered institutions are making from overdraft fees and NSFs, including the percentage of overall revenue the programs represent.
California’s state-chartered CUs are now required by a new law to annually report the amount of revenue earned from overdraft fees and nonsufficient funds fees.
While there was considerable news coverage of the report, one piece in particular drew the ire of many in CUs after it stated, “There’s a new predator making money off overdraft fees: credit unions.”
Negative Publicity Continues
And the critical publicity has not faded. As CUToday.info reported, in the last week the state’s credit unions were featured in reporting that also painted CUs in a negative light, including on KPBS News in San Diego, which headlined its coverage, “While leaning into ‘good guy’ image, credit unions charge millions in overdraft fees.”
Moebs noted some consumer groups have joined the banking industry in attacking credit unions’ white hat image and believes perceptions of credit unions “could be changing.”
He further noted the trendline isn’t new and that fees have been a bigger piece of the revenue piece of the balance sheet for credit unions for many years.
“CUs either put fees with ‘other revenue,’ and even netted fees with non-interest expenses, or did not talk about it,” he said.
Driven By Margin Pressure
Michael Moebs
Moebs said historically fees among all financial institutions were low because net interest margins between interest earned from loans and investments and interest paid on deposits were very high.
“However, in today’s competitive financial services environment, net interest margins have fallen so much that fees now represent a substantial component of net income,” said Moebs.
Moebs offered some advice to credit unions when it comes to charging fees, especially at a time when CU economists are forecasting that margins will be every bit as tight in 2024.
What Credit Unions Should Do
“Credit unions should embrace fees. How can this be done and yet maintain CU philosophy of being the financial services helping hand?” he asked. “First change the fee name. “Say, instead, ‘Our CU has transaction accounts with the lowest error charges. Do not call it an OD or overdraft. Call it a charge for an error.
“Secondly, drop the fee price to match Walmart’s $15 error fee or Bank of America’s $10 error fee,” continued Moebs. “But that will shrink net income! No, it has been proven over the years among financial institutions we have worked with that they make more revenue since volume offsets the lower price. Thirdly, CUs need to market that they still provide the best price and value in their loans since the combined price for a car loan or a mortgage is less than a bank, even with the fees and interest charge added together.”