How to Survive in a Low-Margin Market
By Jared Cahill, JMFA National Director of National Alliances
A number of external financial factors are converging together in the market place that will impact the way your credit union does business and its ability to grow and remain financially sound. You know all too well that margins are tight and getting even tighter.
1. There is very little asset and liability pricing elasticity in the market. The current narrow spread between short-term interest rates and long-term rates will have a negative consequence for many credit unions’ earnings and capital levels. Liabilities typically reprice faster than asset yields when interest rates change making the institution liability sensitive thus reducing net interest margin.
2. Loan growth is expected to slow due to rising interest rates, high levels of consumer debt and higher oil prices. Higher interest rates are also expected to slow the origination of home mortgages and home equity lines of credit cutting into your origination fee income as well as interest income. Bankruptcy levels should be lower due to the new laws. However, higher delinquency rates are expected.
3. It is anticipated that higher interest rates will cause consumers to spend less and begin to save more. This normally would be great, but this dichotomy will cause increased competition. Credit unions will need to carefully monitor their rates and other benefits they offer members as competition for deposit accounts increases from banks and other financial institutions.
To compensate for all these negative market influences, credit unions have been cutting costs and setting aside less in reserves to cover bad loans, and reshaping their asset/liability portfolio to boost earnings. But that strategy could backfire if their members’ credit quality starts to deteriorate and the credit union’s reserve is not adequate.
An immediate way to increase your non-interest income and reduce your operating costs, thus positively impacting your bottom line is through overdraft privilege. Not only will it maximize your performance it will provide your members with a value-added service. Take a look at how your members and your credit union benefit.
Members can benefit because overdraft privilege will:
• Cover unintentional mistakes – Members can breathe easier because their car note or merchant item won’t be returned.
• Maintain credit worthiness – No more embarrassing visits to the retailer to “make good” on an item.
• Uphold privacy – Members’ friends and family are never involved if they overdraw their account.
• Provide a financial service – Members choose to use overdraft privilege to get them through tight situations; for others it is a safety net.
Credit unions can benefit from overdraft privilege by:
• Streamlining your processes – Freeing up your staff’s time because they don’t have to touch every overdrawn transaction.
• Increasing your non-interest income – In most cases an overdraft program can improve your non-interest income 50-300% without any major operational costs.
• Improving member satisfaction – Providing an added-value service like overdraft privilege can positively impact member loyalty.
In selecting an overdraft privilege provider make sure the provider stands out from the others with a solid reputation and track record. Areas to consider are:
• Guaranteed Compliance – All aspects of the program should meet both current state and federal regulations.
• Core Processor Integration – All processes are fully integrated with your current computer systems saving your credit union valuable time by generating financial notices, letters and reports. Plus, automates call tracking and charge-off events.
• Program Support –Provide recommendations for disclosure, notification, marketing materials and procedural changes that have been reviewed and approved by top regulatory attorneys.
• Comprehensive Training – Train all employees on-site, and on all aspects of the overdraft privilege program.
Already using an overdraft program?
Maximize your performance with a tune up!
The financial industry is constantly changing. It is important to have your program reviewed periodically to ensure you are reaping the full benefits of the program and that the program is compliant with all state and federal regulations.
A third party consultant can help with this periodic review. When selecting a consultant, ensure they will perform an objective and comprehensive evaluation of your current program including all aspects of compliance, including Regulations B, E, Z, DD, the FTC Act and Interagency Guidance. The provider should also perform a review of your policies, test your program’s consumer friendliness and review key performance indicators, such as income and charge-offs to make sure your institution reaches peak potential.
The real bottom line
Implementing an overdraft privilege program or performing a review of an already established program can be a great way to reduce your operating costs, thus positively impacting your bottom line. Not only will you maximize your institution’s performance, but also you will provide your members with a value-added service.
To maximize your credit union’s performance, while giving your members a much needed benefit consider JMFA OVERDRAFT PRIVILEGE® or JMFA Overdraft Privilege Compliance and Performance ReviewSM — both true win-win solutions. You simply can’t lose. For a free overdraft privilege analysis or for more information please visit www.JMFA.com.
JMFA, a leading provider of overdraft privilege programs and a CUANM endorsed partner, serves more than 2,000 financial institutions in 49 states and Central America. JMFA is also nationally recognized for training, account acquisition and earnings enhancement programs, as well as product, service, pricing and technology improvement consulting. To learn more about JMFA, visit www.JMFA.com or call 800-809-2307. You may also contact Jared Cahill, National Director of Alliances, at .