ST. PETERSBURG, Fla.—Rates and yields? Credit unions have that down pat. Selling those depositors and borrowers on other products? Not so much.
Tom Davis, CSCU
But there are steps a credit union can take to improve its sales metrics, and even find a receptive audience in Millennials in the process, says Tom Davis, senior vice president, emerging payment technology with CSCU. Below Davis offers his thoughts as part of CUToday.info’s series “100 Million Members: Now What?”
CUToday.info: Why are credit unions so good at signing up new members, but then not capturing wallet share from those new members? Is there a flaw in the process? Training? Culture?
Davis: Credit unions are very good at attracting new members by offering traditionally higher yield on share deposits, money markets and CDs versus traditional banks. However, many credit unions lack a sales focus and cross-selling capabilities which limit a credit union’s ability to increase the number of services and revenue opportunities to their current member base.
The typical credit union member is more mature and at a life stage where savings is more important which makes the traditional credit union offerings attractive to this demographic group. For a credit union to capture wallet share with its members, targeting, attracting, and retaining Millennials becomes an important strategy for growth and sets the stage to successfully add and sell a portfolio of products.
However, targeting millennials presents a major challenge for credit unions. For example, a recent key industry study said that over 50% of Millennials do not know about credit unions. So, the acquisition cost to attract these potential younger members is a consideration. But, a trend to keep an eye on, that same study said nearly three out of four Millennials would consider using alternative financial services providers which opens the door to attract Millennials with the right products and services.
CUToday.info: In your experience, is the 80/20 rule still a rule (80% of members not profitable)? Do you have any insights into what the “80” is costing the average credit union?
Davis: Credit union profitability is impacted through a number of factors including membership growth; selling higher-return products; and by reducing operational expenses. The cost to acquire new members is expensive. A recent report from Callahan & Associates says the average cost of member acquisition is $442. This compares to $350 for the typical bank. Retaining a member and cross-selling is a cheaper alternative and therefore should be the focus. Once you have them, don’t lose them. Be innovative with new products like automation, mobile payments, and tokenization.
Credit unions need to cross sell more products with higher returns. For example, by increasing its credit card portfolio a credit union will help drive its ROA. Credit card loans have the highest average return yet represent only 6% on average of the total loan portfolio, according to recent industry data from Callahan’s). That data also shows credit unions with a high percentage of credit cards in their total loan portfolio see increased profitability. Credit unions with 7.07% of credit card loans to total loans earned an ROA of 0.93%, compared to those with just 4.66% of credit card loans to total loans earning just 0.46%.
Reducing expenses is another way to improve financial performance. A credit union could join a CUSO; outsource perceived operational inefficiencies; reduce branches; and convert more banking to mobile or Internet-based applications.
CUToday.info: Are credit unions capturing the data they need to have a full understanding of individual member profitability? Or do they have the data they need and it’s not either A) understood, or B) utilized?
Davis: Credit unions can use Big Data to their advantage better than they do today. In our experience at CSCU, we see that many credit unions are good at collecting data but they have not been able to figure out the best ways to utilize the information to the benefit of the organization. We recommend that credit unions align themselves with competent Big Data service providers and find opportunities to work cooperatively with other credit unions and non-traditional partners such as merchants, trade associations, social media, etc., with the goal of gathering more actionable data. Credit unions should collect and analyze data to gain an all-encompassing view of their membership.
CUToday.info: What can be done to better align marketing, IT and management to address this issue?
Davis: Today’s competitive environment for credit unions demands strategic focus, discipline and operational excellence. Senior leadership, marketing and IT must be in alignment to succeed. In some organizations this could require a cultural shift but the direction needs to start from the top and permeate the organization. There needs to be a clear vision and mission derived at providing member value in the products and services offered including a well-thought-out strategic and executional plan that provides well-defined responsibilities and goals. Once implemented, measure and assess the results as well as the process and course correct as needed. Communications is a key component to making sure everyone is in alignment. Groups should meet frequently and work cohesively. Make the results visible to the organization…create a dashboard. Overall, to succeed in today’s ever-changing payments landscape, credit union leadership needs to foster a discipline and cooperation among its employees.