Imagine a group of financial institutions in the U.S. with this one thing in common: by charter or by practice they can serve only a small subset of the population, one that for the past several years has grown slower by far than the population as a whole.
Now think about what that means for growth prospects. Doesn't sound promising, does it? But somehow, since the middle of the last decade, three institutions in exactly that situation — USAA Federal Savings Bank, Navy Federal Credit Union, and Pentagon Federal Credit Union — have grown much faster than comparable institutions that cater to broader markets. They serve populations restricted by a connection to the U.S. military, and have all posted asset growth well above their peer groups .
How they have done so is an object lesson in identifying the particular needs of a niche market, and leveraging technology to meet those needs.
Though their circumstances are unique, their success in growing by many measures against long odds — and largely without making acquisitions — is a reminder to competitors that financial institutions can flourish even in weak economic conditions by thinking creatively and providing impeccable service, industry observers say.
"If you look at the financials of those three institutions and witness the kind of marketing that they are doing, you aren't surprised to see how successful they have been," said Peter Duffy, a managing director with the investment banking firm Sandler O'Neill & Partners LP.
"What you see from a financial reporting standpoint is really good results managed over time, not just over a year or two. Their performance seems to indicate that they focus on delivering the best value possible to their members," he added. "Everybody talks about doing that, but these guys really deliver."
Their growth has come in part at the expense of mainstream banks. Pentagon Federal, said executive vice president James R. Schenck, regularly sees customers transferring their accounts from other banks that have failed to meet their needs.
"They felt they weren't respected — that their service wasn't respected," he said. Whether "they feel they were gouged on fees because they were deployed and they missed a payment" or because they tired of paying extra fees for card transactions made during a deployment overseas, Schenck said, members of the military are frequently dissatisfied with traditional banking relationships.
Products and policies at the military banks reflect an acute sensitivity to the issues facing active-duty troops. At Pentagon Federal, said Schenck, line tellers have the authority to waive fees. At USAA, when service members are deployed overseas, the terms of their loans are automatically adjusted.
"We don't design products for the general public. We design products for members of the military and their families, with their needs in mind," said David Bohne, president of USAA Federal Savings Bank. "Their geographic concentration is the whole world — they are an extremely mobile group of men and women and they come from all demographic walks of life."
USAA Bank is a San Antonio subsidiary of the United States Automobile Association. Since the end of 2004 its assets have grown by 192%, to $48.8 billion at June 30.
Navy Federal's assets, meanwhile, have increased 92%, to $44.1 billion, making it far and away the largest federal credit union in the country.
Pentagon Federal is the smallest of the three, but its growth has been similarly impressive. It ended 2004 with assets of $7 billion; that figure has since grown by 115%, to $15.1 billion.
The three have done this despite the service restrictions. USAA is privately held, and limits membership to current and former members of the U.S. military and their families. Navy Federal's charter allows it to serve members of all branches of the armed forces as well as civilian employees of the Department of Defense. Pentagon Federal has a charter similar to Navy Federal's, though it specifically includes employees of defense-related companies and members of the Veterans of Foreign Wars.
If nothing else, bankers can count on simple population growth, which currently runs at just under 1% per year, to keep increasing the size of the pie. But for military-focused banks and credit unions, general population growth does not translate into growth in the military. Between the end of 2004 and the first quarter of 2011, the number of active-duty military personnel grew just 1.7%, to 1.44 million. On a percentage basis, that represents less than two years' worth of growth for the population at large.
Of course, within the military there is a certain amount of churn — with new recruits joining every year, while veterans retire and move on to civilian life. But the larger point stands — when USAA, Navy Federal or Pentagon Federal want to expand their collective customer base, they can't go looking for brand-new markets. Their only real option is to serve their existing markets better in the hope of capturing a greater percentage of its business. According to Steve Reider, founder of the consulting firm Bancography in Birmingham, Ala., they have done this by leveraging technology to present predictable and consistent services to a population that is globally mobile.
"Those institutions have been very innovative in terms of remote access," Reider said. "Through the remote channels, they have been very, very effective at retaining customers, and retention is the lifeblood of this business." Recognizing that their core demographic is typically relocating once every few years, frequently overseas and to hard-to-reach areas, all three institutions have grown up without the massive branch infrastructure typically associated with retail banks.
In many ways, USAA pioneered the idea of branchless banking, dealing with customers through the mail and over the telephone in the days before the Internet and mobile devices made remote access more instantaneous. "They were remote before remote was cool," Reider said. What they have demonstrated, he said, is that for this population at least, "It is not all about branch locations."
Similarly, despite the fact that it has more than two dozen branches, Pentagon Federal does not see itself as a brick-and-mortar institution. "We are basically an online firm," said Pentagon Federal's Schenck.
Even Navy Federal, which has the most extensive branch network of the three, doesn't approach the sort of saturation that a major retail bank would have in a significant market. Despite a constant drumbeat of branch openings over the past couple of years, Navy Federal has a total of 219 branches worldwide — well under half as many as a comparably sized bank holding company, such as Zions Bancorp., whose subsidiaries have well over 500 branches.
In military-heavy markets, Reider said, "Navy Federal may have one branch in an area, but they have been nonetheless very effective." Navy Federal declined to make an executive available for an interview for this story.
Interestingly, the most adamantly branchless of the three, USAA, has recently begun opening "financial centers" in key markets, such as northern Virginia near the Pentagon, in order to serve what Bohne describes as the changing needs of some of its clients. "For us, there was a realization that members are going to choose what channel they are going to do business is," he said. "There are some who want face to face, and that has traditionally not been our model. But when it comes to wealth management — you want to see someone face to face and eye to eye. That has really been the genesis of the financial centers." But rather than serving as a typical bank branch, he said, the financial centers are more about providing financial planning advice, access to loan officers, and other services.
But even these face-to-face interactions have a certain remote quality to them. Customers who visit a USAA financial center seeking advice on structuring retirement accounts will sit across from a monitor and discuss their savings with a USAA representative through a high-definition videoconferencing service.
"The vision is not that we are going to have thousands of financial centers, or even hundreds," Bohne said. "We're looking at places with a lot of active-duty personnel, like Fort Hood, San Diego, Washington, D.C., and Fort Bragg. We don't want to have all of our investments tied up in bricks and mortar."
For Pentagon Federal, the smallest of the big three military-focused institutions, competing on price is the key to attracting new customers and retaining existing accounts.
In the past decade, Schenck said, the credit union has tripled its assets while keeping head count steady and driving operating expenses down to 100 basis point from 187. Pentagon Federal is clearly the leanest in terms of product offerings, focusing on transaction accounts and credit cards, car loans and mortgages, or, as Schenck puts it, "cars, cards and castles."
Even within the military, the companies recognize different populations. According to Schenck, his company's target demographic is service members between 27 and 35 years of age — the time many are starting families — buying homes, and doing so with a few years' worth of financial experience under their belts.
Unlike its competitors, Schenck said, Pentagon Federal doesn't spend lots of money advertising itself as a cradle to grave financial services provider. "We're not out there running feel-good ads," he said. "The search engines have helped us, and we do very well through word of mouth," he said. "The bottom line is we support our military and our membership."
It's that final element — the idea of supporting, not just serving a customer base — that hits on what appears to be the greatest strength of all three institutions that serve the military. When bankers typically talk about their client bases, they are respectful. But at these institutions, discussions about the customer base verge on the reverential.
"For the last decade or so a lot military men and women have been away fighting, and they have a family left behind," USAA's Bohne said. "How do we make sure their families are safe and that things are simple for them? They need somebody to do that for them — to stand in the gap — and that's what we do."
Rob Garver is a freelance writer in Springfield, Va.