LOMBARD, Ill.—Seeking greater walletshare from new members? Then make it a strategic priority and measure it on strategic scorecards.
That’s the advice of Bill Handel, SVP-Research of Raddon Financial Group here, who shared insights into what credit unions can do grow walletshare as part of the CUToday.info series “100 Million Members: What Now?”
Bill Handel
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?
Handel: The strong growth of credit union membership is not surprising; our most recent national research suggests that the Net Promoter Score for credit unions is 59, while for the largest banks score a 12. And for the regional and community banks, the score ranges from 35 to 42. The reputation of credit unions is very strong and a lot of referral business results.
The challenge for the industry is wallet share. There are several reasons why credit unions have not been as successful in this area. First, credit unions tend to be reactive rather than proactive in regard to member interaction. This extends all the way down to branch and platform staff who wait for the member to ask for a product or service rather than probing for ways in which the member’s financial situation can be improved. Second, incentives are rarely used, or are not used effectively. Very few credit unions engage in relationship pricing to any significant degree. And while many credit unions have some level of incentives targeted towards staff, these are often ineffectively structured. The issue is one of culture and priority, and it has to begin at the very top of the organization. Training is essential as well, but we find that training tends to follow culture. The most effective organizations are the ones that put wallet share as a top strategic priority and measure it on their strategic scorecards.
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?
Handel: We have measured member household profitability for 20 years, and we consistently find that for the average credit union 30% of households are profitable, while 70% are unprofitable. In difficult times such as the recent financial crisis, that percentage may fall to 25% or so, but even in the very best of times the industry norm rarely rises above 35% profitable. In contrast, among our high-performing clients the percent profitable is consistently in the 45% to 50% range.
For a typical credit union the average profitable household will generate almost $700 in annual
profit, but the average unprofitable household generates over $200 in losses annually. Given that there are more than two times as many unprofitable households, the impact is significant. The issue is subsidization – profitable members are subsidizing unprofitable members.
Subsidization puts the credit union at risk because high-value members may decide to take their business elsewhere if they are asked to sacrifice too much. To effectively attack the issue of unprofitable members requires an examination of member behavior. There are three reasons a member household may be unprofitable. First, the member has never been engaged. Second, the member was engaged in the past but is not engaged now. Third, the member is engaged but the products and services in use are not effectively covering their own cost – account balances are too low or rates are set ineffectively. Each of these scenarios needs to be addressed, as all credit unions will have member households falling into these categories.
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?
Handel: This is an interesting question. A credit union with a strong MCIF has enough data to get to the 95% solution in terms of member and household profitability. What is necessary is a rigorous approach for allocating margin by account, since margin income is the most significant factor in profitability for almost all account types, the primary exception being checking accounts.
Where deriving member household profitability is more difficult is in the capture of transaction-based income and expense. For example, can you assign debit card or credit card interchange income to the individual account, or can you assign greater or lesser amounts of expense to an individual checking account because that account writes more checks or uses the ATM more often. But it’s important to recognize that even without activity-based costing, we can generate useful profit numbers at the member household level which can help the organization to address issues such as member subsidization.
In our experience the biggest issue in profitability is that finance wants the 100% solution – full activity-based costing as well as non-interest income assignments down to each individual account. While this level of detail is ideal, don’t let the lack of this detail preclude you from conducting a profitability analysis of your households. Profitability analysis should be an evolving process.
CUToday.info: What can be done to improve wallet share capture among new members? Existing members?
Handel: Our analysis of member behavior suggests that a very high proportion of account sales occurs within the first six months of the establishment of a member relationship. What this means is that formalized onboarding programs are critical to improving wallet share among new members. This is logical – when someone first joins they are most likely to be receptive to new offers that the credit union might make. These programs have to be formal, success goals have to be established and results have to be tracked and monitored by senior management. Incentives for the teams responsible for these programs also can be useful.
Onboarding programs should also be tailored to the demographic profile of the new member. The track that you follow for a new 25-year-old, low-income member – what products you emphasize and what channels you use to communicate – should be very different than those that apply to a new 55-year-old high-income member. Improving wallet share among existing members is similar in many regards. The conversation that you have with the member should be based on their expected or stated needs – again the demographic profile is critical. For both new and existing members, CRM tools can be useful in assisting the staff in understanding what the needs of the member are. But perhaps most importantly a change in culture at the credit union may be necessary. Staff (and management) can no longer consider themselves to be reactive order-takers. They need to proactively work to improve the financial well-being of the member.
CUToday.info: What can be done to better align marketing, IT and management to address this issue?
Handel: Each of these groups has a vital role to play in this area. Management needs to provide the forward impetus and shift the culture within the organization. If this effort is viewed by the staff as a marketing-driven effort, its chances of success diminish severely. This is not a knock on marketing, it’s just that staff is very busy with multiple priorities and this is not likely to make the top priority without senior management involvement and priority. Marketing needs to identify the path or paths needed to improve member engagement and profitability. And IT provides the tools, whether its CRM tools, tracking reports, relationship pricing, profitability reporting, or management dashboards that will allow all sides to know whether the efforts are meeting with success.