PHOENIX — More than a year after Arizona Federal Credit Union decided to charge a controversial $3 monthly membership fee, the $1.2 billion-asset CU reports the dues have created their desired effect.
Last April. Steve Kelley, vice president of marketing at Arizona Federal, told Credit Union Journal the institution would measure the success or failure of the membership dues policy by participation metrics, including services per member, loan production, average balance and percentage of members with an active checking account.
After one year, all the metrics have increased, he said, as services per member ticked up 2%; loan production was up 44% year over year; average balances rose 13.8% for deposits and 7.5% for loans; and, percentage of members with an active checking account was up 5%.
"The numbers are all improved," Kelley said. "Our overall income situation remains strong. We are doing well on our loan portfolio, which is finally starting to grow again. It has increased every month since last August. Members are showing they find value in the credit union by their actions as they are borrowing more than in the last several years."
The CU started charging monthly dues on Jan. 1, 2013. Kelley said that the new policy "had nothing to do with revenue and had everything to do with membership and participation." "We made a dramatic, and probably unprecedented, change in how we interact with our members," Kelley said last spring. "It is a single piece of a much larger strategy. Certainly some members have expressed concern, and others have chosen to terminate membership. We take it upon ourselves to make membership worth far more than $3 per month, and we feel we are doing so."
Some Members Left
Kelly said the CU had roughly 30,000 fewer members at end of 2013, though he added it was impossible to know exactly how many left for what reason. Arizona Federal had 160,000 members before the dues charge was implemented. "One statistic that probably is the most important, our patronage dividend, is up," he said, noting at the end of 2012 Arizona Federal paid $3 million to 77,000 of its members, while at the end of 2013 it paid $5 million to 89,000 members. "The percentage of members who qualified for a payout increased significantly. To qualify for the dividend, we look at members who are using us as their primary financial institution. This means outbound activity from their checking account or credit card, at least 10 times per month."
Most of the members who left Arizona FCU only had deposits, according to Kelley. He said the credit union ended 2013 with a slight increase in assets, meaning "what went out was replaced by what came in."
"The folks we lost largely were not using our self-service products, and the majority were not using their checking account, and therefore not generating revenue," he said. "The majority of those who left were not borrowers. For those people who decided we were not the right choice, they largely were not providing a benefit for the rest of the membership."
Marketing consultant Paul J. Lucas said he loved the idea of membership dues when he first heard about Arizona FCU implementing the fee last year, and still loves it.
"You can become a stronger credit union by getting rid of unprofitable members, so if Arizona Federal shed 30,000 unprofitable members, good for them," he said. "You want people to be engaged in your credit union. People are used to paying for membership. If they pay a fee for Costco membership, they go there to shop."
When Lucas works with CUs, the first factor he examines is product and service penetration. He said credit unions should make sure they have members who have a checking account with a debit card and a car loan. "It sounds like Arizona Federal got rid of the rocks in the wagon, as Gary Raddon used to say."
Answering Critics
But not everyone is happy about the monthly membership dues. Last spring, Kelley acknowledged that none of the members "woke up in December [2013] and hoped their credit union would start charging them dues."
One
Part of the backlash came from those who questioned the need, considering Arizona Federal’s recovery in recent years. Before the financial crisis, in 2007 its net worth ratio was 10.96% ("well capitalized"). In 2008 it lost $115 million, and its net worth ratio plummeted to 4.75% ("undercapitalized").
Its woes continued in 2009, as it reported a net loss of $33.4 million and net worth dropped to 3.2% ("significantly undercapitalized"). In 2010 it had a net loss of $10.3 million, including $3.2 million in assessments, and a net worth ratio of 2.89% ("significantly undercapitalized").
The last three years, however, have brought a remarkable turnaround.
In 2011 it had net income of $45 million, with a net worth ratio of 6.42% ("adequately capitalized"). Net income for 2012 was $44.4 million, with a net worth ratio 9.72% ("well capitalized"). 2013 net income was $20.3 million after assessments, with net worth ratio 11.78%.
Last year's net worth ratio was its best in nearly a decade, Kelley pointed out, and was after returning $5 million to members.
"It is important to us to pay back. It is a cornerstone for us to return excess capital, so that number [net worth ratio] probably will not go a lot higher," he said.
Despite the naysayers, Kelley insisted management "absolutely believes" the move has "worked out for the best."
"The most important factor to us is how the members feel," he added. "Are they buying in? Our Net Promoter Score tells us how likely our members are to refer us. Our January score was the highest we have achieved in the eight years we have been recording it. To have come through this process, to have our financial status on solid ground, to have members using us, and to have members saying they would refer us, that tells us more and more members understand what it means to be part of a financial cooperative."
