BEAVERTON, Ore.-The pressure on margins and multiple threats to non-interest income require that credit unions get better at understanding what each member brings to and takes away from the cooperative, according to one expert on data analysis.
Economists and CU CEOs readily recognize the increasing profitability stresses, sharing growing concern over what lies ahead (CU Journal, Feb. 11). But one analyst suggests it's time to do less worrying and take matters into hand, employing sophisticated profitability analytics that allow a credit union to prosper no matter the twists and turns of the competition, the economy, or even the CFPB.
Rich Weissman, president and CEO at DMA, a database analysis firm, pointed out during a webinar hosted by the company that the last five years illustrate that the approach of the past, focusing on the balance sheet and just growing the organization's way out of difficulty, is simply no longer sufficient. Community banks and credit unions must become better managers of the income statement, and to do that they must understand what each member or customer brings to the organization from revenue and cost perspectives.
Weissman said they key is understanding sophisticated funds transfer pricing-a method used to individually measure how much each source of funding is contributing to overall profitability.
Profitability Components
"There are distinct components of understanding profitability. We have to get into non-interest income and non-interest expense to the nth degree and understand what each transaction costs us-what fees are generated, get into the details of net interest income and fully understand what is behind each piece of margin. We do that through funds transfer pricing," said Weissman.
Watch Out For Wave Runners
A large number of financial institutions today are dominated by sales cultures, noted Weissman, who referred to such organizations "wave runners." In other words, the economy does well, they do well. The economy does poorly and their business suffers.
"Their job, as they see it, is to ride the waves up and down. They don't see beyond the waves of economic dependency. They don't see they can develop strategies for sustainability."
Savvy FIs follow funds transfer pricing, according to Weissman, and understand it's not about managing based on what competitors are doing or hoping and praying for a better external environment.
"It's about using analytics to understand profitability and sustainability, truly what does it take to sustain ourselves over different economic periods," he said. "They know it takes being smarter and focusing on the income statement and analytics and not the balance sheet."
The deployment of analytics, however, often fails to provide actionable information, according to Weissman, due to insufficient focus on smaller details and measures that are not in-depth.
"They use broad-brush strokes and often give up because it's too hard. This is the group that thinks in the end if I just do what everyone else does and hope for the best I will be OK. To those financial institutions we say 'no.'"
Weissman noted that most approaches to profitability analytics start at the top, the high-level income statement and work their way down.
"This approach needs to begin at the bottom, with each and every detail in each account. For example, what is the balance? When was the account opened? What is the rate? What fees are generated? Instead these approaches start at the top and force things down. It's bad to focus on non-interest income and not on truly understand each piece of margin. And often, this is not tied to ALM."
Income Statements Per Account
What sophisticated funds transfer pricing ultimately does, said Weissman, is come up with an income statement per account. "You can see the components of each account very quickly, down to what it costs for a particular account to the income it generates."
The result is the organization no longer works at a macro level, and is armed with the data and knowledge to set sound pricing, marketing and relationship-building strategies, said Weissman.
"Maybe you want to change the composition of your your portfolios, maybe increase or decrease dependency on the kinds of loans or deposits from your ALM strategy; possibly refine pricing better on new products or for some new campaign," Weissman told Credit Union Journal. "You want to know what the impact is to profitability by making these kinds of changes. These are the kinds of things you can do with a sophisticated funds transfer pricing-when you use information in a meaningful way."
