Analyst: More Disciplined Approach To Pricing Decisions Is Needed
Many credit unions would see a higher return on assets (ROA) by taking a more disciplined approach toward pricing decisions, according to one expert.
"Our position is that while a lot of pricing is imposed on credit unions by competitive pressure (the spread) we think it can be managed internally for much greater benefit that it usually is," said Gene Palm, president and COO of Profit Resources.
It isn't easy, of course, but Profit Resources, which started out by advising banks on how to increase profitability in marketing databases developed a proprietary software program called ProfitEntr?e to do just that. It works with a CU's existing profitability modeling or can be a turnkey solution.
"Most credit unions don't know how profitable their products and accounts are so they don't know how to make them more profitable," said Palm. Having the ability to look at a credit union's historic benchmarks of profitability on CD rates, for example, which might be 50 basis points, can help determine whether to set rates at or above it to achieve a set goal, he explained. It's one thing to only watch the local competitive marketplace and set a reactive price, added Palm, and quite another to chart your own course.
"I don't believe most credit union members decide to buy on just rates alone. They're more loyal to the credit union than that," Palm said. "The return has to be reasonable, of course, but members don't desert a CU strictly on that. There's a trust relationship there that doesn't exist in most banking environments."
"Net interest income is usually 70% to 80% of a credit union's income," he continued. "That's a major chunk of revenue. The other piece is non-interest income, usually from fees like courtesy pay. Some credit unions are now reporting that without it, they'd have no profit at all."
Banks are now earning roughly half their income from fees and credit unions are getting close to that, he added.
If a credit union uses historical funds transfer pricing (HSTP) it gains a better overall picture of how best to price products for profitability, Palm noted, adding that that allows for better overall management of ROA.