Credit unions may be at a "tipping point" in recapturing some of the liquidity consumers have put into money market accounts in recent years. But to tip that balance in their favor they must evolve, make greater use of technology, become more efficient and reach out to the next generation.
That was the message from Chip Filson, the president of Callahan & Associates, in remarks before WesCorp's Future Forum.
Filson began his talk by quoting a statement from the American Bankers Association's "Operation Credit Union," in which the bankers state that CUs have "morphed" into full-service retail depository institutions that offer the same products as banks.
"Credit union membership has expanded to such an extent that many credit unions can no longer be considered 'niche' financial players," the ABA statement read in part.
Responded Filson: "The banks' complaints regarding credit union performance are not borne out by the facts. There is no question credit unions have achieved success, but it is hard to identify what, if any, part of the marketplace credit unions would be ahead. Credit unions do lead in 12-month asset growth, but banks have enjoyed three years of extraordinary growth."
What banks are concerned with, Filson said, is CUs achieving "significance." "The banks are worried people and businesses might look at credit unions as a financial alternative."
Before they can reach that point, credit unions have many problems to solve, he cautioned, as evidenced by several statistics compiled by Callahan & Associates. Key numbers include: revenue growth for credit unions was negative in 2003, but expenses rose 9.4%. As of Dec. 31, 2003, operating expenses totaled 52.1% of total income. As a result, the gap between net interest margin and operating expense ratio is closing.
"The only way out is to take more risks," said Filson. "Service revenue declined seven basis points in the fourth quarter of 2003. Service income is absolutely vital to the survival of credit unions today."
A Checklist of Challenges
Filson outlined several challenges CUs must overcome, including:
* Evolving With the Market: With many credit unions opening their charters to serve their local communities, they need to realize the move requires a new identity, he said. Instead of having new members come to them due to an affiliation with a sponsor company, CUs must offer value to consumers.
* If a credit union changes the definition of whom it serves, everything else changes. Finding that value statement is one of the major challenges credit unions face today. Evolution is inevitable," he added.
* Maintaining Distinctiveness: A byproduct of the switch to community charters is a blurring of the line between banks and CUs. According to Filson, CUs should not try to be "the same" as banks.
* Driving Productivity: "The efficient survive. In some cases, the market walks away from credit unions. Credit unions are going to have to innovate in order to be competitive."
* Developing New Revenue Sources: The shrinking gap between net interest margin and operating expense ratio shows the "old" business model is not sufficient for CUs to survive, said Filson.
* Developing Networked IT Solutions: Financial services are IT intensive, and managing a network is a big part of properly serving members. CUs must understand the core system has become just a node on an interconnected network. "There are approximately 100 to 150 applications running at large credit unions, and only one-third are running on the core," he said. "We are living in a networked world."
* Cooperation: The cooperative nature of CUs is their strategic advantage versus banks and thrifts, said Filson. This is evident in the shared ATM network, shared branching, Credit Union Direct Lending (CUDL) and credit union service organizations (CUSOs). "CUSOs today are one of the most important ways credit unions define who they are and what they do."
* Developing a Unique Member Experience: Many CUs have switched names, which Filson said is an example of a change from affiliation to value. Credit unions must remember they are but one of many financial institution relationships people have. CUs must become an advocate of and a trusted advisor to their members.
How To Attract Youth-And Why
Membership growth lags significantly behind potential membership. Callahan & Associates' figures show total membership for CUs is growing at just 1% to 2% per year. The "Build it and they will come" principle does not work any longer, Filson declared.
The long-term solution, he said, is to grow youth membership. He cited the example of State Employees' CU in North Carolina, which has a three-step program to involve young people in the credit union.
Step one is called "Fat Cat," which is for children age birth to 12 years. It is a single product -a share account-but it has several kid-friendly features, including a newsletter, birthday card and specific website.
Step two, known as "Zard" (the last four letters of the word "wizard"), is for ages 13 through 19. Zard offers teen-specific products, including loans. When a Fat Cat member turns 13, his or her account automatically transitions to a Zard account and he or she receives a letter. Zard members receive a case that holds CDs when he or she opens a "Z-Share" account.
Step three is the "Off to College/Off to Work" program, targeted at ages 18 through 25. When members join this program and open a checking account, they receive a planner. "It is very difficult to sign up 18- to 25-year olds if a credit union does not already have a relationship with them in their teen years," said Filson.
State Employees' Credit Union's program has been a success, he said, as it has attracted 70,000 share accounts with $36-million in balances. More importantly, the credit union has the person's name, birth date and the start of a relationship.
