By Ray Birch
WASHINGTON—The credit unions that do one thing best tend to be the most successful, according to a new analysis. Get the formula right, and it varies for each credit union, and the organization will see growth numbers rise, CUCollaborate says.
To arrive at that formula, CUCollaborate is reporting it has developed software that calculates the “risk-based member benefit” for each member, according to Sam Brownell, CEO and founder of CUCollaborate.
“I believe this is the best way of quantifying how much value you are providing each member,” he said. “We are working on a performance ratio we are calling the Member Benefit Impact, which is a credit union’s average risk-based member benefit divided by the average income of a credit union’s members. I personally believe this is the best way to quantify a credit union’s average impact on their members’ lives and should be tracked for CEO performance, similar to ROA, growth, etc.”
Brownell pointed to Callahan & Associates’ Return of the Member data as being a good way to measure member benefits based on call report data. But he suggested that too much of the data available to CUs is overly performance-based, such as ROA, and not member-benefit based. He added that to gain a better understanding of the benefit CUs are providing members, cooperatives should compare their giveback to what members might get from a bank.
The Wrong Benchmark?
Sam Brownell
“Credit unions often benchmark themselves against their peers—other credit unions,” said Brownell. “But, ultimately, you want to know how much more money your members have in their pockets because of the credit union's pricing versus the average bank's pricing—which is essentially what the risk-based member benefit quantifies.”
Brownell said CUCollaborate’s formula looks at the financial products a member has and the interest rate they are receiving—and the person’s credit score when they applied for the products—and then benchmarks that against the average interest rate that individual would receive from a bank.
“Then we determine how much more money the person has in their pocket because of the credit union’s superior pricing,” said Brownell. “I feel it's a very interesting metric.”
An Additional Ratio
Brownell added that CUCollaborate has also developed another ratio that can be used to compare the credit union to other CUs.
“If you’re a bank, your focus is profit maximization,” said Brownell, noting that focus contrasts to credit unions’ goal of giving back to members. “Banks want to give back to their shareholders, so, they try to hold back as best as they can on giving back to their customers.”
Brownell suggested that as credit unions get larger, their interest in giving back can wane, which he believes slows growth.
“When they get to a certain size, they sometimes say, OK, we’ve grown to be the size that we wanted to achieve. However, you can’t sacrifice member benefit entirely for the sake of maximizing net income,” Brownell said. “The risk-based member benefit evaluates the benefit for the member—what they're getting in return from the credit union. This can be promoted to the member, which is a good thing to do to keep them away from banks.”
A Link to Growth
Added Luis G. Dopico, chief economist at CUCOllaborate, “Our data show that credit unions that provide more benefits to their members grow faster—basically, build it and they will come. While the member wins here, the credit union does as well. So, focus on providing the best benefits to your members that you can.”
But it is no simple equation, explained Dopico, and goes far deeper than simply deciding to return more and more to members. It’s finding how much the credit union can afford to give back without compromising capital positions, as well as needed projects and products, he said.
“You’ve got to figure out what you need to grow, and then what you can afford to give back,” Dopico said.
Dopico gave the example of a credit union being a market leader in its rates and pricing, but ignoring setting aside enough net income.
“The rates will get you a lot of growth, as a lot of people will bring money to you,” said Dopico. “But if you don’t set aside enough retained earnings, then your capital ratio plummets. What you need to do if you're very successful and you have great benefits, and you have great growth, you have to come up with a way to give back enough member benefit—maybe not 1%, so, maybe .8%—to make sure that your capital ratio remains strong and constant over time.”