The National Credit Union Administration (NCUA) now requires credit unions to report total income from overdraft protection services and non-sufficient funds (NSF) fee channels, prompting many in the industry to take a data-driven approach in how they discuss this topic.
In this week’s TrendWatch Deep Dive: NCUA’s New NSF and Overdraft Fee Reporting webinar, Callahan & Associates Director of Industry Analytics William Hunt gave an overview of the NCUA’s new fee reporting requirements. He discussed the rule’s significance, relevant credit union data, and spotlighted how banks compare to credit unions in a peer-to-peer overdraft/NSF fee analysis. You can view the presentation slides here.
NOTE: Some credit unions show a different picture than what the industry averages represent, as the data presented was from institutions with more than $1 billion in assets (and also completely excludes Navy FCU so the analysis is not skewed).
CU Overdraft/NSF Data and the Operating Environment
The latest U.S. credit union industry first-quarter 2024 data:
- Non-interest income (NII) as of March 31, 2024 was 1.13 percent of average assets (compared to 1.06 percent one year earlier). Within NII, overdraft/NSF fees were 0.19 percent.
- Overdraft/NSF fees comprised approximately one-third of industry net income.
- After taking away interest expenses and operation expenses from interest income, the industry’s net income breaks even (approximately). However, net income then goes negative (to -0.48 percent) when adding in provisions for loan losses.
- From this -0.48 percent, non-interest income (NII) brings net income back up to 0.46 percent.
- From this 0.46 percent, overdraft/NSF bumps net income to 0.66 percent — which is credit unions’ industry return on assets (ROA).
- These overdraft/NSF fee trends have transpired in an environment over the past couple years of asset yields and funding costs rising, net interest margin (NIM) tightening, liquidity borrowings rising, operating expenses increasing faster than asset growth (due to business/labor inflation), credit union margins just barely covering operating costs, loan loss provisions remaining historically high, non-interest income nearly flat (barely rising), and declining ROA.
- The industry’s total fee income has trended down from 2008 – 2024, from 0.75 percent to 0.37 percent. Competitive pressure in the financial services sector has impacted fee-charging for nearly 20 years. To make up for this, credit unions have diversified their revenue channels in interchange, loan sales, CUSO relationships (credit union service organizations), and other means.
In nearly all historical short-term periods, credit unions have needed non-interest income (NII) to maintain a positive return on assets (ROA) — which has been necessary to maintain stability and capitalization.
Drilling Down Deeper on CU Overdraft/NSF
U.S. credit union industry overdraft/NSF fee income as a percentage:
- Of gross income (before interest expense) is 3.19 percent. Other non-interest income (NII) is 15.94 percent.
- Of non-interest income (NII) is 16.69 percent, displaying how credit unions have significantly moved away from fees over the past 20 years.
- Of total fee income is 50.92 percent.
- Of net income is 28.66 percent.
The current average overdraft/NSF fee per member is $33 (non-average highest is $145). The current average overdraft/NSF fee per checking account is $58 (non-average highest is $231).
Earnings Model: Banks vs. Credit Unions
U.S. industry bank versus credit union trends:
- Credit unions stand out in the peer analysis to banks regarding overdraft/NSF fee income: 0.19 percent for credit unions versus 0.03 percent for smaller banks ($1 – $100 billion in assets) and 0.02 percent for larger banks (more than $100 billion in assets).
- Overdraft/NSF fee income as a percentage of non-interest income (NII) at credit unions over $1 billion in assets is 16.69 percent, while at banks (from $1 – $100 billion in assets) it is 8.48 percent (just overdraft). However, for banks, more than 50 percent of this income is coming from local regions that credit unions do not operate in.
Credit union leaders need to remember that:
- Banks make substantially more in interest income than credit unions. Bank investment portfolios are higher than credit unions’ investment portfolios, and banks are also more dominant in first-mortgages (versus auto loans for credit unions).
- Banks also have more interest expenses due to using more liquidity borrowings — which is expensive. Individually, some have higher deposit yields (meaning they pay more for customer deposits).
- Banks also have riskier loans in general.
- Overall, banks serve a different type of individual than credit unions.
- Credit unions make significantly less income than banks do.
- Overall, credit unions make more money in overdraft/NSF fee income than banks. This is because credit unions are substantially more dominate within individual transaction accounts on the balance sheet than banks (since banks serve large commercial/business and municipal/government deposit-holders, whereas credit unions have a much more consumer/member focus). If those individual transaction accounts are removed, credit unions stand much more on par with banks regarding overdraft/NSF fee income.
- From a bird’s-eye perspective: 1) credit unions’ return on assets (ROA) remains significantly lower than banks (even with greater reliance on fees and a federal corporate tax advantage); 2) personal demand-deposit accounts are far more dominant on credit union balance sheets; 3) it is credit unions’ mission to serve the underserved; 4) banks have far more diversified non-interest income channels (NII).
Credit unions are much more likely to serve individuals that will run into overdraft/NSF financial issues than banks.
Highlights of CU Overdraft/NSF Protection
U.S. credit union industry overview:
- About 70 percent of combined total credit union revenue of these two fees (overdraft and NSF) comes solely from overdraft protection (and 30 percent from NSF).
- In both cases, these fees are constructed to cover a credit union’s operational cost and commensurate risk.
- Overdraft is a valuable protection service. NSF is a useful disincentive/behavioral program to help members spend within their means and not overdraw on their accounts.
- If a credit union eliminated overdraft/NSF fees, the financial impact would most likely have to be distributed across an entire credit union’s membership in a variety of ways, depending on the credit union.
- In many cases, credit union members would have to use a payday lender for immediate funds if credit unions didn’t offer overdraft protection and use NSF programs.
- Although there are no standardized fee policies across the industry, all credit unions have a mission of balancing both the individual member and the entire membership when it comes to how their individual overdraft/NSF policies impact specific members and the entire institution.
Credit Unions’ Role and Risks
U.S. credit union industry and NCUA’s role:
- The NCUA is looking for more information to analyze exposure (how reliant credit unions are) to overdraft and NSF fee gross revenue/net income. Now that the NCUA has a peer-to-peer benchmark going forward through its new overdraft/NSF fee-reporting requirements, this has implications for credit unions.
- It’s possible that some credit unions will be expected to defend their fee policies to agency examiners, using the NCUA’s quarterly data as a baseline.
- The risks associated with overdraft/NSF programs include: 1) operational risk/strategic risk; 2) compliance risk; 3) reputation risk (this last one has always existed but is growing in scope, scale, and perception, exacerbating the first two risks).
- Benefits of the agency’s new overdraft/NSF fee reporting requirement: 1) it helps the industry understand the systemic reliance on overdraft/NSF fees; 2) individual credit unions can learn if they are “over reliant” versus their peer group; 3) it provides somewhat of an ability to compare fee policies with banks.
- Concerns regarding the agency’s new overdraft/NSF fee reporting requirement: 1) data is in the eye of the beholder (comparatively speaking); 2) absolute fee totals can overshadow differences in different credit unions’ memberships and models; 3) any fee reductions can hurt a credit unions’ overall membership in various ways.
It’s wise for credit union leaders to understand the data in relation to their individual business models so they can proactively make any changes to their policies as necessary.
In Summary
In conclusion, credit unions are working with regulators and policymakers to understand the entire picture.
If a credit union wants to pull away from overdraft/NSF fee income, it can improve operational efficiencies (reduce costs and maintain service), or generate non-interest income (NII) through other fee channels — or both.
