What is the very simple difference between a high-performing credit union and its low-performing counterpart?
According to Robert Lawhead, president and CEO of Raddon Financial Group, it all comes down to member participation.
In keynote remarks before The Credit Union Journal's SEG & Business Development Conference, Lawhead said that understanding the key premise is also key to boosting profitability and growth.
Like several of the other speakers who would follow him, Lawhead stressed that every credit union needs to know what each member brings to and takes away from the credit union. The credit union must understand members act in their own self-interest, and often aren't to blame if they are a financial drag on the cooperative.
In the case of Raddon Financial Group, it stratifies member households into five levels, with the most profitable designated as "A" households, and the least profitable termed "E" households. And don't blame the "E" households for being what they are, he advised.
"Unprofitable members get that way because credit unions give them products," said Lawhead.
Small Group, Big Results
Using the Southwestern United States as an example, Lawhead said that Raddon data on credit unions in the region show that just 9% of credit union households are in the "A" (very profitable), segment, yet that small group of members generates 228% of their respective credit unions' retained earnings.
Only 32% of total credit union households in the Southwest are profitable- which means 68% lose money for their credit unions.
That figure is similar, he said, to his company's findings for credit unions as a whole: 33% generate money for the credit union, 67% are unprofitable.
"The 'A' households have the most services with the credit union," observed Lawhead. "They have more loans, and with higher balances. That is one key: balances."
One strategy Lawhead suggested credit union management pursue is to find every auto loan that has been on their books for 18 months and do a mailing or make a phone call to talk to those members. The mistake most credit unions make, he said, is to wait until there is just six months or less remaining on the loan's term.
The problem, he noted, is that by then most loans are long gone.
According to Lawhead, the average life span of an auto loan is 24 months. Acting 18 months after a loan has been closed means retaining the opportunity to get the refinance or a new car loan, he said.
Delivery is another issue. Users of PC banking and online bill payment are the most profitable to a credit union. Boards that object to investing in bill pay are mistaken, he suggested, claiming the income generated by members who use those services more than offsets the cost.
Lawhead also recommended that CUs work to drive more members to use the POS- debit channel, saying campaigns to do so are also worth the investment.
Another myth, according to Lawhead: members whose checks are returned for non-sufficient funds (NSF) are bad members. In fact, it's just the opposite, he said.
"They think they need to weed out those 'NSFers.' They think 'NSFers' are bad," Lawhead observed. "But you know what? We love the NSFers. You need to collect them, because they mean more profit." He urged credit unions to offer the "courtesy pay" or "overdraft" programs several vendors are offering.
Card Usage Is Key
Credit card penetration is not as important as credit card usage, Lawhead said. Inactive users cost the credit union money. Moderate users are a break- even group. "Balance rollers," who cannot pay off their balance each month, and heavy users are profitable. They are consumer loan borrowers.
"Find the heavy users in the credit card segment and work on them," he said. "Incent them by making them 'gold' or 'platinum' users who get a better rate ncourage them to roll over balances with your credit union instead of some other card."
* Ninety percent of the credit union member base has no insurance or investments through their credit union, even though they have approximately $7,700 in total household deposits. Households with investment services tend to have the highest deposit and loan profit.
* In addition to increasing debit card usage, Lawhead urged credit unions to identify dormant checking accounts and attempt to re-establish a relationship with those members.