'Lack of Control, Info Over Expenses Hurting CUs'

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Credit unions are generating reasonable amounts of revenue, but rising expenses are eating away at margins.

That was the message from Robert Lawhead, president and CEO of Raddon Financial Group, who CUNA Operations Council conference here.

"Credit unions are spending 73 cents to generate $1 in revenue," he said. "The creeping up of expenses is an industry-wide problem."

In order to combat "expense creep," Lawhead recommends a thorough analysis of every member and every delivery channel, which should allow a CU's management team to discover which members and channels are profitable, and which need a different marketing strategy.

The first step, he said, is to compile all operational information onto one database. This includes the credit union's operational files or MCIF system, its investment and insurance activity, account activity, and credit card activity. All of that data, he said, will reveal meaningful trends for income sources and operating expenses.

Next, examine the members. Lawhead believes in segmenting member households into five profitability segments, with "A" households being the most profitable and "E" households the least profitable.

"There is lots of migration in these segments, so analysis of 'why' a member migrates is important," he said. "Credit unions must know why one member is more valuable than another."

According to Raddon's research, only 32% of an average CU's members are profitable-the "A," "B" and "C" households. Forty-one percent of an average CU's members are "D" households, which cost the credit union $1 to $99 per year. Twenty-eight percent are "E" households, which cost the CU more than $100 annually.

"Don't treat the 'A's' like 'E's,' because they don't do the same for the credit union," said Lawhead. "Your 'A' members want management to take care of the 'D' and 'E' members, because then the credit union could give the 'A's' better rates."

"If you participate in the co-op, you reap all the benefits," he continued. "Successful credit unions will match CD rates (from competitors) for the 'A' through 'C' members, but not for the 'D's' and 'E's.'"

Member and delivery channel segmentation reveal patterns that credit unions would be wise to heed, said Lawhead. For example, certain members generate revenue through fees, while others generate revenue by maintaining larger balances. "Don't waive the fees of the former group, but do waive the fees of the latter."

The Free Stuff

Meanwhile, Lawhead said, where credit unions really excel is in giving away "free stuff," including POS-debit cards and credit cards. However, these cards do the credit union no good unless they are used, especially given the recent proliferation of no-fee credit cards.

Credit card users also can be categorized into segments by their usage patterns. "Convenience users" pay their balance off each month, "balance rollers" do not, and "moderate users" fall somewhere in the middle.

Moderate Users

Raddon's research has found 42% of credit card holders are "moderate users." Card holders in this segment cost the average credit union $48 per year while generating $36 per year in cross-sale profit, for a net negative $12 annually.

Lawhead said further analysis shows 50% of "classic" credit card holders are moderate users. He said the best way to move this group to the profit side is to market based on usage-offer incentives and rewards such as airline miles to those who use the card as a convenience, but generally pay off the balance, and offer lower interest rates for those who frequently carry a balance.

"Be sure your marketing is targeted," he counseled. "If a member pays his balance every month, don't send him a 3.9% balance transfer offer. That doesn't do him any good."

To assist in this marketing effort, CUs should ask their credit card providers for specialized statistical reports. Lawhead recommends finding out which credit card holders have less than five total transactions in the past 12 months, and which never have rolled a balance.

Most people know credit unions are "fair," Lawhead said. "So why do they go across the street for a loan? Because someone asked them for their business."

One solution: target auto loans that have been on the books for 18 months. Send these members a letter telling them they are "pre-qualified" for their next auto loan. "And tell them you want their business," reminded Lawhead.

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