Navigating Deposit Competition: Leveraging Fee Income for Credit Union Growth

In today’s volatile financial landscape, credit unions face a series of challenges. Despite costly deposits weakening interest income, the competition to attract funds remains intense. While this may initially appear advantageous for credit unions, the reality is more complex. The necessity for higher deposit rates, while understandable, can adversely affect credit unions’ profitability and long-term sustainability.

Deposit competition, essential for maintaining liquidity and funding lending activities, presents challenges that can’t be ignored. As credit unions strive for a larger share of deposits, they often resort to offering increasingly high interest rates. Although this may attract funds in the short term, it initiates a cycle where credit unions must continually raise rates to remain competitive, eroding profit margins and undermining financial health.

Diversifying revenue with new, non-interest income

In such a competitive environment, diversifying revenue streams becomes imperative for credit unions to thrive. One key strategy involves leveraging non-interest fee income, which serves as a critical support beam amid deposit competition turbulence. Products such as private label trust services offered by Big Sky Trust, debt protection programs and insurance offered by TruStage or Allied Solutions, and wealth management services offer credit unions an opportunity to generate revenue beyond traditional interest income. This contrasts with fee income that is under scrutiny like from NSFs and return deposit fees.

These fee-generating offerings not only provide a diversified income source but also offer tangible benefits to members. For example, GAP coverage protects members from financial loss in total loss accidents or thefts by covering the “gap” between the insurance payout and the remaining loan balance. Similarly, mechanical repair coverage shields members from unexpected repair costs, while debt protection provides peace of mind by covering loan payments in case of disability, involuntary unemployment, or death.

Why do we only offer certain fee-based products at origination?

Members often receive numerous offers at origination based on their actions (like securing a loan for a vehicle purchase), such as GAP, debt protection, and mechanical repair insurance.

Many credit unions mainly focus on promoting these products at loan origination, missing out on engaging with members post-origination. This represents a significant untapped income potential, as ongoing member engagement provides avenues for cross-selling and upselling fee-based products. Despite the potential benefits of fee-based products, marketing and distribution efforts post-origination often fall short. But what’s the best way to do this?

How most financial institutions (FIs) market products

Typically, FIs offer new products to existing customers through “spray and pray” marketing where the same offers are sent to everyone and with a conversion rate of 1-3%. Alternatively, targeted or persona-based marketing to smaller groups with similar traits has a 5-15% conversion rate, depending on the quality of the messaging and offering. While targeted marketing conversion rates are solid, marketing new fee-based products using trigger marketing is worth the investment. FIs make multiple offers at origination because they have a captive audience: the borrower got approved for a loan to buy their new vehicle. Why not offer other products relevant to that event? Here’s how credit unions can extend this approach to post-origination engagement.

Triggered marketing can achieve conversion rates up to 30%

Unlike traditional approaches relying on spray-and-pray tactics or generic persona-based targeting, credit unions offering an immediate, relevant offer based on a member’s recent action (like offering GAP at origination) achieve higher conversion rates than other marketing strategies. Amazon excels at this by suggesting “Frequently Bought Together” product recommendations directly related to the purchased product.

Credit unions can take a page from Amazon. Here’s one example:

A member applies online for skip-a-pay. They qualify because they’re current on their payments and meet other eligibility requirements. This may be a good time to offer Debt Protection. When a member completes their payment skip request online (which should be automated), the next screen could say “Did you know that 7 in 10 consumers have one or more concerns about making their loan payments. Learn how Debt Protection can help.”

According to TruStage, six in 10 borrowers say they would elect one or more payment protection products along with their loan if offered the option. 58% of the same borrowers said they were either somewhat or very concerned that unexpected expenses may arise. 22% of personal loan borrowers said they obtained loan protection because they were concerned about potential financial difficulties.

Triggers don’t have to be a direct action taken by a member; it could be a relevant milestone achieved. Let’s say a member purchased a new car 12 months ago but didn’t elect to purchase an extended warranty or mechanical repair insurance. By accessing core data, a credit union could make an offer like this:

“Congrats! You just made your 12th car payment. By now 30-50% of new car owners have purchased mechanical repair insurance to avoid costly car repairs. Learn more here.”

There are a range of actions members take while digitally managing their loan that can lead to a relevant product offer and higher fee income for credit unions.

First-party data in the core system for the win

There’s intense focus on mining third-party data for upselling and cross-selling opportunities. Credit unions need only look to their core system which is constantly updated for actions members take (or don’t) and milestones they achieve.

Income Builder is a great example of how to leverage first-party data in the core to create member journeys that convert. The platform automates common loan servicing efforts – like securing a payment skip, changing a due date, securing a formal payoff quote, total loss reporting, and more. It then analyzes members’ actions in real-time, allowing credit unions to tailor personalized offers for fee-based products.

This ensures that the right offer is presented to the right member at the right time, maximizing conversion rates and revenue generation. This trigger marketing approach represents a paradigm shift in how credit unions engage with their members after origination.

Rather than inundating members with generic offers, credit unions can deliver targeted and relevant offers that resonate with members similar to when Amazon suggests products related to what you just bought. This enhances member satisfaction and strengthens the relationship between credit unions and their members. Members expect their credit union to know them.  Moreover, credit unions unlock new revenue streams and mitigate the adverse effects of deposit competition.

By diversifying income sources and optimizing member engagement, credit unions can achieve sustainable growth and resilience in an increasingly challenging market environment. Deposit competition poses significant challenges for credit unions, but it also presents opportunities for innovation and growth.

Leveraging non-interest fee income can serve as an essential pillar for credit unions while facing deposit competition. By embracing innovation and adapting to evolving market dynamics, credit unions can navigate the high-stakes game of deposit competition with confidence and resilience.

Written by
Lizeth George
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The League of Southeastern Credit Unions & Affiliates represents nearly 300 credit unions throughout Alabama, Florida, and Georgia. It has a combined total of almost $200 billion in assets and 12.4 million members. LSCU provides advocacy, compliance services, education and training, cooperative initiatives, and communications.

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