By Ed Cody
I read with great interest the May 13 article by Greg Hoeg, “The Most & Least Operationally Efficient and Effective CUs in 2019.” While I found the article timely and relevant, I disagree with the approach of his evaluation. The analysis that the author used, in my opinion, is more suitable to a bank than a credit union.
Ultimately, the credit union goal isn’t to make profits that can be returned to shareholders, but rather to give our members the best deals possible. Several credit unions that I know are making significant contributions to the financial wellness of many Americans were not ranked among the most efficient or effective on Mr. Hoeg’s list.
Mr. Hoeg’s review included 5,338 U.S. credit unions and measured their performance in terms of “operational efficiency” and “business effectiveness.” The problem is that his review used a method of analysis that is typically applied to banks and investors.
His review used “the value of the revenue those operations generate” and “the quality of the business portfolio each credit union has built in terms of its profit potential” to measure that performance. But efficiency and effectiveness in credit unions should not be about revenue and profit. Most credit unions are not in the business of maximizing profit potential – that’s the business of banks. Credit unions are in the business of benefiting their members.
Some Inherent Flaws
Mr. Hoeg did not specify what metrics were used, but his report seemed to imply that he used an efficiency ratio and return on assets (ROA) ratio, respectively. Using these metrics, if a credit union pays above-market rates on deposits, charges below-market rates on loans and collects low fee income, it scores lower on “business effectiveness.” In Mr. Hoeg’s own words, “Unsurprisingly, those credit unions that achieved the highest levels of operational efficiency tended to be much larger than the typical U.S. credit union in terms of assets and net income in 2019 … Unfortunately, these credit unions were well below the industry average for effectiveness in building and maintaining a quality business portfolio for profitability…”
It makes sense that, using this formula, larger credit unions would seem to be underperforming in business effectiveness, because the report calculates that effectiveness in terms of profitability. Profitability is good business from an investor perspective, but credit unions don’t have investors. Credit unions should be giving higher returns to savers, charging lower costs to borrowers, and spending money in their communities. Comparing credit unions to "industry best performers" has some inherent flaws if those best performers are not credit unions or not-for-profit financial institutions.
A Better Method
A better method would be to consider the value that credit unions are giving to the members. In 2019, for example, the Credit Union National Association conducted a study that measured the value credit unions provide consumers in terms of “higher savings yields, lower interest rates and fewer fees.” The study found that credit unions delivered an estimated $16.5 billion in direct and indirect financial benefits in 2018.
In a 2008 report for PenFed members on the credit union’s financial value, authored by University of Alabama Finance and Management Professor Dr. William E. Jackson III, he noted, “The amount of financial value that a credit union produces for its members is not directly related to the typical accounting measures of financial performance.”
He added that there are also “very substantial benefits” to the philanthropy programs initiated by a credit union, which “create value by investing in people’s lives.” For example, the economic value of new skills learned in a financial literacy program will be “much higher than direct savings from lower cost loans.”
Tips on Efficiency
The credit union business model is unique in that it is based on spending as little as possible on expenses and returning as much as possible to members. Here are some practical tips for credit unions working toward the goal of efficiency and effectiveness:
- Review all your major contracts. No expense is too small to question. When was the last time you looked for more competitive vendors or negotiated with current vendors? For example, some insurance companies will offer better rates with certain risk mitigation efforts. Or, it might be more cost-effective to hire someone full time to manage cybersecurity than it would be to hire an outside vendor.
- Consider your space needs. Now is the best time to calculate how much space you really need. Can some of your remote staff remain remote? Can you grow your team with the space you have, instead of expanding it? Smaller credit unions should consider downsizing their space.
- Invest in technology, especially mobile technology. To remain competitive in the financial industry, you need a solid digital platform now more than ever. It might seem counterintuitive to spend money to save money, but an investment in an online platform (both internally and customer-facing) will end up reducing your costs in the long run.
- Remain true to the ‘people helping people’ philosophy. Create a strategy that focuses on safety and soundness while remaining true to the principles of great rates and low fees. A management team that executes that strategy well will put members’ interests first.
In the current economic climate, I especially encourage larger credit unions to be a resource and support network for smaller credit unions, whether that means sharing best practices or new technology. As an industry, we need to support each other so that we can continue supporting America’s communities.
Ed Cody is chairman of the board of PenFed Credit Union and a board member of the PenFed Foundation. PenFed Credit Union is federally insured by NCUA.