By Ray Birch
LOMBARD, Ill.—Credit unions need much more than special herbs or clear auras to rid themselves of the Ghosts of Members Past–they need instead to do a much better job of promoting their brand and getting loans directly into members’ hands.
Those two steps will help prevent CUs from being haunted by the apparitions—but not the expense—of consumers who have joined credit unions as part of the huge influx of new members, many of whom, sadly, are then never seen again, according to Bill Handel, Raddon VP of research and product development.
If credit unions don’t make strides in improving the profitability of many of these new members coming aboard in record numbers, the long-term viability of the institution is at risk, Handel said.
As Christmas and year-end approach, CUToday.info has launched a series examining the question of how well credit unions are doing in turning all those new members into profitable participants who cooperate in the cooperative.
The issue has never been more relevant, with record credit union membership growth expected to end this year above 4%. Credit unions added more than 3.964 million memberships in the first nine months of 2017, the fastest pace in credit union history, and significantly above the 3.539 million added in the similar time period of 2016, according to CUNA Mutual Group’s Trends Report.
If the 80/20 rule continues to hold true, it means that of those 3.53 million members, 2.82 million are not contributing anything positive.
Indirect Auto
Like many credit union data reports show, the record membership growth can be attributed in part to credit unions’ rapidly increasing penetration in indirect lending. As CUToday.info reported here, CU Direct in August said CUs on its network are now the number-one auto lender in the nation.
“So much of the membership growth in the last seven years has been through the indirect channel,” said Handel. “The profitably from indirect members tends to be good at the early part of the credit cycle—the average balances are higher, losses are minimal and what the credit union pays car dealers for the business is potentially lower than what they might pay down the road.”
But that profitability dies, noted Handel, who said the real issue is the thin relationship between the credit union and the indirect member, who eventually leaves having taken few if any other products from the cooperative.
Bill Handel, Raddon
“There is concern the industry has built too much dependency on membership growth via the indirect channel,” Handel said. “Raddon is advising credit unions to focus more on their direct lending channel for auto and all other loans.”
CUToday.info recently profiled University of Wisconsin Credit Union’s successful outreach program to indirect members, which can be found here.
Greater Diversity
What credit unions need now is greater diversity in their growth strategies, Handel insisted.
“How do you grow in ways other than indirect?” We think this is a pretty important issue for credit unions in 2018,” Handel said.
Handel said an important study Raddon just completed offers some key insights on the impact of credit union reliance on the indirect channel post-recession to grow. He explained that when the recession hit and borrowers pulled back, credit unions began to turn much more to the indirect channel to keep portfolios afloat and to grow. What that has led to today is an overdependence on indirect, Handel said.
“Credit unions need to begin to balance this out with greater diversification,” he said.
What the Raddon study of 25 credit unions shows is that credit unions are not growing well organically within their communities, because many are failing to effectively promote their brand outside existing members.
“We found that while these credit unions’ brands were strong among their members, their brand in the local marketplace was average,” said Handel. “Credit unions feel good about how their brand is perceived by members, but that is not extending out to the marketplace. A big issue for 2018 and beyond is to begin to focus more on how CUs can get their message to the broader marketplace.”
Looming in 2018, and over the next few years, is likely a continuing decline in auto sales—another important reason for credit unions to begin not only promoting more direct auto loans but all other types of lending, Handel said.
If credit unions do not diversify their lending strategies, Handel believes many could eventually face profitability issues.
“That potentially could be the big issue here,” said Handel, saying he has seen many auto buying cycles come and go. “At some point credit unions will have lower average auto loan balances, higher charge-offs because they have had to dig deeper into credit scores, and the dealers will be asking for more money as lenders compete even more heavily for the business that is left. This is a perfect storm that is leading to lower profitability in the indirect portfolio. We are telling credit unions to get out ahead of this, all the warning signs are there.”
More Bundling
When it comes to new members who join just for a low-cost checking account, Handel said credit unions have to do a better job of bundling products to drive deeper relationships, especially when the account is opened.
“The checking account will not carry its own profitability anymore, not like it did ten years ago,” said Handel. “Overdraft income is down about 30% per account since then, and interchange revenue keeps falling.”
Handel said he has seen some credit unions effectively cross sell these new members through well-designed, systematic onboarding programs. But a key, he said, is getting the mobile app installed and a debit card in the new checking member’s hand at sign-up.
“Get that debit card in place with instant issue. Help the member install your mobile app right away. And, most important, give them incentives to use both of those things immediately,” Handel said. “Once they begin to use the mobile app and debit card we find that your chances of getting them engaged in other products and services dramatically increase.”