LOMBARD, Ill. -
The goal of every financial institution is to have "advocates" in its member/customer base-people who recommend the CU or bank to their family and friends. Bill Handel, Raddon Financial Group's vice president of product development, told the Credit Union Journal the Loyalty Index measures how well a CU is developing its member relationships.
RFG first began developing the Loyalty Index last year. Handel said refinements were made for 2007 to create a consistent measure going forward.
"This originated from the zero-to-10 advocacy scale-from 'detractor' to 'advocate'-many financial institutions have adopted," he said. "We used a one-to-five scale, but it is the same essential concept: how likely is a member or customer to recommend the financial institution? It is a good predictor."
Decision Drivers
Handel said combining the Loyalty Index with three other factors-the likelihood of future loan business, the likelihood of future deposit business, and service quality-yields an indicator of a financial institution's share of wallet with a given household. He said the numbers were generated from 136,000 member/customer surveys from 100-plus financial institutions.
"We compiled a score for all four attributes, and graded a household on a combined score for all four to compute share of wallet," he explained. "If you look at the four factors in combination, the predictiveness for share of wallet is greater than any one of the four by themselves.
"You want to measure multi-dimensionality. Measuring one thing is not a measurement of loyalty," he added.
What Next?
On a 100-point scale, when a CU's Loyalty Index is 70 or higher, it tends to also have a strong score on the RFG Performance index, Handel said. The Performance Index measures profitability of households, the depth of the relationship an institution has with each household, the growth of the organization, how efficient the institution is, and the strength of its margins.
"The correlation is strong to the Loyalty Index, especially at the high end," he said.
So what does a CU do with this information? Handel said RFG breaks down service quality into 20 individual components in its research.
The member or customer is asked to rate a financial institution compared to other FIs he or she is familiar with, and the relative importance of each factor. The 20 attributes are plotted on a grid, cross-referencing score with importance.
Following A Map
"That map gives a good idea of a financial institution's strengths and weaknesses," he said. "Rating poorly on an attribute members find important allows the credit union to focus on that aspect. All of these ratings are perceptual, but they are important because as loyalty increases, members tend to being more of their balances to the credit union. It all translates into stronger financial performance."
So far, Raddon Financial Group has found credit unions tend to score higher in loyalty than banks. Handel pointed out two factors that might be skewing the numbers: first, RFG works with approximately 150 credit unions, but far fewer banks, so the sample size for the latter is smaller. Second, credit unions tend to have built-in loyalty in their member base.
However, he continued, loyalty in the future cannot be taken for granted in a changing CU landscape. "As more and more credit unions go to community charters, they might be losing some of that loyalty. How they are perceived is going to be very important."
HOW TO GET DETAILS
Bill Handel of Raddon Financial Group will be discussing member loyalty strategies and sharing other insights during the Credit Union Journal's Business Development Conference in Boston, April 12-13. For info: visit www.cujournal.com and click on the link.
