Analyst Cites Threat From Asset-Management Plans

The days when a credit union executive could look out the front door and see most of the competition are over.

Insurance companies, mortgage brokers and others are using technology to establish themselves as often-invisible competitors- until the member leaves. According to David Koto, a speaker at the CUES Marketing, Operations & Technology Conference here, credit unions must recognize this threat, and use their own strengths to survive.

Koto is director of retail delivery for Jack Henry & Associates, a supplier of financial technology to the financial services industry and parent to San Diego-based Symitar.

"Ten years ago, the manager of a credit union could stand on the front doorstep and see 80% of the competition," Koto said in an educational session. "Today, that same manager can only see 40% of the competition, because 60% of it is virtual."

There has been incredible change in technology in recent years, and Koto said it has accomplished many good things. But he cautioned, "It also has disintermediated credit unions' members. The atmosphere is not as personal as it was a few years ago."

Koto said most CU mangers have heard the oft-repeated statistic that 20% of members produce 120% of profits, while the other 80 % either are net zero or lose money for the credit union.

"The key question is: what are credit unions doing to keep these high net worth members that are critical to their survival? In the current market, many investors have turned their stocks into cash, but that is only temporary," he said.

Brokerage firms are "eroding" the member base of CUs, Koto asserted. He said they have a lower regulatory burden than credit unions, a better sales culture, better technology, "and they make better use of technology."

"Long term, credit unions must stay committed to their niche-which is serving members," he continued. "They need to reduce deposit runoff, solidify relationships and constantly use their 'ace.' If money is going to go back into the market, let it do so in our financial services divisions."

Sizing Up the Competition

Koto asked attendees to name their main competitors. Several mentioned Washington Mutual, and others said car manufacturers' that offer 0% auto loans. Koto said CUs not only must keep an eye on large regional banks, community banks and brokerage firms, they also need to be aware of insurance companies, mortgage companies, virtual banks and digital cash vendors.

"Competitors are no longer geographically constrained," he assessed.

To be competitive in this crowded marketplace, Koto said CUs must know their competitors, know their members, choose the right technology and refine their sales culture.

"Actually," he said, "many credit unions have little or no sales culture. They say, 'We're at your service,' but expect members to come to them when they want something."

Another problem, according to Koto, is brokerage accounts at CUs have been unsuccessful because senior managers have been concerned about stealing the credit unions' core deposits.

Beware of Total Merrill

Merrill Lynch recently launched a wide-ranging product it calls "Total Merrill." Koto described it as an "all-in-one asset management account" that includes unlimited checking, Internet banking, a sweep account, a debit/ATM card, an investment account, free checks and an all-in-one statement.

"I've had credit union managers tell me Total Merrill scares the hell out of them," warned Koto.

Charles Schwab offers a similar package, known as the "Schwab One Account," he added.

"Having all statements in one envelope is a big selling point," he said. "The current statements at credit unions are not attractive, even though they are a credit union's monthly calling card."

A disparate statement, Koto asserted, says to the member that a CU cannot handle his or her needs. On the other hand, he said, a consolidated statement portrays a CU as the only financial institution the member needs.

Check Out the Other Guys

Koto challenged attendees to put themselves in their members' shoes by opening a Schwab One Account or a Total Merrill Account-even for as little as a month or two-to see what the competition is offering.

"Many investors are dissatisfied with their current advisors," he said. "It is not the advisors' fault, but the market's. However, it means there is vulnerability, and the time is now to move. Credit unions need to give the member what he or she wants."

"If you establish multiple relationships, it adds profitability," he reminded the audience.