Four tips for investing in credit union service organizations as a solid way to build your bottom line without increasing fees.
Credit unions are relying more on non-interest income to grow. Over the past 10 years, non-interest income as a percentage of gross income has risen from 19% in 2008 to 27% in 2018, according to the December 2008 and the December 2018 call report data from the National Credit Union Administration. One of the primary benefits of non-interest income is that it is not tied to the cyclicality of changes in the market and in interest rates.
Traditionally, financial institutions have derived much of their non-interest income through fees like credit card and account fees or monthly services charges. But, as regulations change and credit unions desire to provide value and a superior experience for members, more organizations are moving away from relying on fee-based income. In this article, we will explore opportunities for your credit union to augment non-interest income in a way that focuses on putting members first while also boosting the bottom line.
Invest in CUSOs to Boost the Bottom Line
Credit union service organizations have grown in popularity. Not only do they provide valuable services for members, they are also an excellent source of non-interest income for credit unions. According to NCUA, the top CUSO services are lending, member services, and payment and electronic transaction processing.
One service that has become more popular recently is insurance services. Your members are getting insurance from somewhere, so if you’re not offering this solution to them at your credit union through a CUSO, you may be missing out on an opportunity to both strengthen member relationships and generate non-interest income. Existing members already view your credit union as a trusted financial advisor, so purchasing auto, life, property and casualty insurance service from a the CU’s CUSO is no stretch.
A great example is the partnership of $1.6 billion Texans Credit Union with CUES Supplier member SWBC, San Antonio, to offer a credit life and credit disability program. Texans CU’s noninterest income has grown by 17.89% over the last five years! By understanding the needs of their members and training credit union employees, the credit union has diversified its noninterest income.
Go Digital Through Fintech Partnerships
Another area of focus to boost the bottom line without is fintech partnerships. Rather than viewing new technology as a threat to your credit union, view it as an asset. Although new technology does come with an upfront cost, a partnership can help spread these costs among collaborating organizations as well as bring your solution into the market more quickly. Fintechs bring expertise with technology while credit unions bring loyal members, which can be a successful combination for both organizations as well as for members in the long term.
Fintechs can help your credit union provide a superior experience for members who have grown accustomed to instantaneous feedback and on-demand services from their financial institutions. They can also boost efficiencies in the back office of your credit union. Fintech solutions help lower operating costs while enhancing such existing services as digital and mobile banking and even helping credit unions add on new services like automated lending, insurance, and P2P all of which provide additional resources to your organization.
Credit unions increasingly face competition from big banks, and leveraging fintech solutions through CUSOs is one way to stay relevant. One example is $1 billion Consumers Credit Union, Kalamazoo, Michigan, which partnered with CUES Supplier member PSCU, a CUSO based in St. Petersburg, Florida, through its Lumin Digital platform to enhance its digital offerings.
Consumers CU believes investing in new technologies like digital banking has helped it achieve an average growth of more than 18% for 35 consecutive years. After the Fiserv–First Data deal, more acquisitions and changes in the fintech space are likely. Credit unions will need to be proactive to take advantage of the opportunities available or even create their own. For example, CUESolutions provider CUNA Mutual Group, Madison, Wisconsin purchased Mirador, a fintech startup for its lending platform and also for its digital capabilities. More credit unions and CUSOs are likely to follow suit.
4 Tips for Credit Unions
If you are thinking of new ways to boost your noninterest income, through CUSO investment or fintech partnerships, here are a few tips to get you started:
- Consider your goal. Before jumping into any new venture, it’s important to have a vision for what you wish to achieve. Think about your organization’s long-term goals. Perhaps you are missing specific products/services, or you wish to enhance due to member demand? If no solution exists in the marketplace, you may need to build on your own. If a solution does exist already, it will probably much faster to add on these solutions or capabilities through an investment, partnership or acquisition.
- Develop criteria for your ideal. Paint of picture of your ideal partner or CUSO and develop specific and measurable criteria. This will help increase your chances for finding the right CUSO or fintech to partner with, collaborate with or acquire.
- Have many options. Don’t be afraid to explore multiple options at once. This will help you compare and contrast and, as you learn more, you may discover one partner may be right for you while another may not. On the other hand, the other party may, at any time in the process decide you are not the right fit for them. Having multiple options means you don’t have to return to the beginning of your search and start over from scratch.
- Remember varying perspectives. It’s not about investing more—It’s about relationships, people helping people at the end of the day. It’s important to remember this human aspect when exploring investments in CUSOs and fintechs. Remember these organizations are made up of people with different motivators and drivers. What motivates a credit union CEO may be very different than what motivates a fintech entrepreneur. Keep these perspectives in mind as you seek to put together the right deal.
The bottom line is this: Credit unions can’t afford to do nothing. The credit union world is changing and, in today’s environment, interest income is shrinking. Organizations that remain static will only see their bottom lines decline while battling tougher competition from big banks and financial institution substitutes. Proactive credit unions that leverage CUSOs can provide innovative services for members that increase engagement, attract new members and, ultimately, increase the bottom line. cues icon
John Dearing is a managing director at Capstone Strategic Inc., McLean, Virginia, a leading advisory firm focused on helping credit unions and CUSOs grow through proactive strategic growth programs and mergers and acquisitions. Reach Dearing at 703.854.1910.