By Jeff Chesky
I speak to credit union executives across the country every week. The hot topics these days include growing new sources of fee income, the burdens of increased regulatory oversight, and the non-stop challenges of competitive incursions. Fee income is my specialty, and it is one of the most poorly understood topics in financial services today.
Simply put, fee income generation is an emerging science; more about identifying a consumer’s intentions rather than screaming for a consumer’s attention; more about adding value than extracting a penalty. All fee income is NOT the same.
Fee income can be segmented into two broad categories; dunning fees and value added fees. For generations credit unions have been experts at collecting dunning fees, late payments, NSF, wire transfers – the list is long. In this era of increased disclosure and transparency, politicians, regulators and consumer groups will continue to cap, reduce and eliminate these dunning fees.
Value-added fees are newer, where the credit union is paid a fee by a member for helping that member with something they want or need; loans to buy things, life insurance, investment products, and foreign ATM availability. The future of banking will require a serious commitment to the emerging science of building and deploying value added, fee income generating strategies.
What is ‘value added’ fee income?
It’s time we define this critical term. Value added fee income can be defined against five measurable variables.
- First, what percentage of your members need or want the product you are thinking of selling that will generate the fee income?
- Second, how often do your members need or want to buy these products – do your members need to purchase this product once, occasionally or annually?
- Third, do these products generate ‘one time’ or ‘recurring’ fee income i.e. a mortgage loan origination fee vs ongoing loan servicing fees?
- Fourth, do these products create any balance sheet risk i.e. repayment, claims or warranty risk?
- Finally, are these product purchases subject to changes in economic cycles i.e. does a change in fed funds rate or unemployment impact purchase activity?
An emerging number of CU CEOs are instructing their leadership teams to identify value added fee income ideas that meet as many of these components as possible. The emerging gold standard for product positioning is to meet all five. Is that possible?
A Gold Standard Emerges
In the words of Wells Fargo Chief Executive John Stumpf at an investor conference in 2012, “The bank is in the market to buy insurance companies. A key reason: Wells is one of the largest originators of mortgages and used-car loans and that those borrowers all need insurance.” Stumpf has led the entrance into one of the first product suites that meet the gold standard for value added fee income – auto and home insurance. Let’s run the test.
* 100% of bank customers purchase auto and/or home insurance.
* 100% of customers repurchase these products every year.
* These products generate recurring/annuitizing revenue – average duration over six years
* These products do not create balance sheet risk – the carriers pay any claims
* These products are not impacted by economic cycles – even at the height of the great recession, people paid their insurance premiums.
The pivot to understanding and embracing a new generation of value-added fee Income generating products in a credit union’s eco-system has started. It’s a true revolution for both the credit union and their members.
Jeff Chesky is president/CEO of Insuritas, East Windsor, Conn.. Mr. Chesky can be reached at jchesky@insuritas.com.