Tough Lessons Learned, One CU Is Rolling Out 'Mutual Profitability'

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LAS VEGAS-After making the difficult decisions to close two branches and lay off 18% of its staff in 2009, Bay Federal Credit Union is embarking on an overhaul of how it prices its products according to the member who is using them.

Carrie Birkhofer, CEO of $600-million Bay Federal in Santa Cruz, Calif., said that after posting losses in 2008 and 2009, the CU has reported positive numbers for each of the past 13 months. It is now at the front end of an initiative it is calling "mutual profitability" in which it is identifying what each member brings to and takes away from the credit union, with a goal of rewarding the former and changing the behavior of the latter.

"Members who do not contribute to the cooperative will be asked to contribute, or they might leave, and we were OK with that outcome," Birkhofer said during BAI's Retail Delivery Show here. "We implemented profitability analysis to assist in future cost cutting and income enhancement decisions."

Using software from DMA, Bay Federal learned that just 28% of its members are profitable, and the top 10% contribute 314% of its bottom line. The bottom 10% take away 128% of the bottom line. As a result, Birkhofer said, BFCU is repricing accounts and moving to relationship pricing.

In the past, noted Birkhofer, the credit union would run lots of CD specials to generate liquidity, and would offer free checking to compete in its market with Washington Mutual. "I always wondered how are they making money? Everything is free. We tried to capture some of their volume."

Rapid Growth-Then, A Hit

Like many credit unions, Bay Federal grew rapidly, some years at a 15% to 20% clip. But its capital ratio declined to 8%, and then by year-end 2008 to 7%.

"We were hit from all sides, it was like a tsunami. We had negative income for '08 and '09 due the provision for loan losses, deposit insurance premiums, and corporate CU failures."

In 2009 the credit union focused on cutting expenses, including those stay lay-offs and branch closures. But Birkhofer had concerns over the bigger picture.

"One of the biggest challenges for me was wondering if we were making the right decisions," said Birkhofer. "Are we impacting profitable members who will leave and we'll have just unprofitable members. We didn't have the deep data we needed."

While the Santa Cruz community stood with the CU, said Birkhofer, "The whole process made me do a lot of soul-searching. In late 2009, after making it through this, I sat back and reviewed and contemplated what was the original mission of the CU. It felt as if things had gotten out of hand. I pulled out our original charter and bylaws and spent some time talking about how do we get refocused on what we should be doing in our community."

Birkhofer said the biggest strategic change by Bay Federal is a move toward what it calls "mutual profitability," using software provided by DMA, an analytics firm based in Beaverton, Ore.

The DMA analysis found that 28% of BFCU's members were profitable, and that 72% were not.

"The top 10%, or 6,200 members, contribute 314% of our bottom line. These members present profit risk to the credit union," explained Birkhofer. "The bottom 10%, 6,200 members, take away 128% of our bottom line. Multiple people throughout the organization can now drill down to find out who those members are."

Birkhofer said the data has been used to drive three decisions:

1. Opt in on overdrafts. "We were able to easily drill down and find members who are power-users of overdraft services to target market opt-in choices," she said. "In the first week, using Dynamic Messaging at the teller window and e-mail messages in online banking, we captured answers from 20% of this group." Birkhofer said Bay Federal had projected it would lose $30,000 per month in NSF fees, but instead it is doing a little more than breaking even. Some 78% of targeted members have opted in."

2. BFCU has repriced its checking accounts. It found members with direct deposit checking have an average profitability-per-account of $120. For free checking members that figure as $1-annually. Bay Federal will no longer advertise free checking in 2011, and will reprice its products while still offering members five different relationship scenarios that will allow for free checking.

"These five criteria will both add value and increase loyalty to the credit union," said Birkhofer. "They are part of a financial cooperative and they need to participate in order to reap some of the benefits of being in a financial cooperative."

3. Branch profitability. "We are using the data to analyze the effect of the repricing changes on the branch profitability and to determine our future footprint. Branch managers receive monthly reports of the top 10% of profitable members so they can send notes to members, invite feedback, and thank them for their business."

Up next for Bay Federal: relationship pricing.

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