Using Our Fees As A Point Of Differentiation

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Building relationships founded on trust is the goal of Affinity Plus Federal Credit Union. At our organization we firmly believe that doing what's right for each and every member is the road to our success-philosophically, financially and otherwise. We believe that we must demonstrate the credit union difference with action rather than words, siding with the member when it's right to do so.

Yet, like other financial service providers, Affinity Plus recognizes the importance of fees-both in behavior modification and contribution to non-interest income. In short, there lies the strategic dilemma-not just for Affinity Plus, but the credit union industry.

A strategy for when, whether and how fees will be priced and assessed allows for grounded decision-making and alignment with the short and long-term goals and vision of an organization. Banks and credit unions have long been aware of the effectiveness of fees to encourage consumers to conduct business in a way that is efficient and produces revenue. From a balance sheet perspective, fee income provides an important source of stability that is less sensitive to the interest rate market.

The growth strategy for banks and their for-profit structure demands they continually look for new and different ways to generate income-including adding and assessing fees. Banks use fees as an effective tool for modifying consumer behavior, covering costs and generating revenue. Large banks, in particular, have expert analysts on staff to build pricing models that maximize profits and efficiency.

The Credit Union Industry's Philosophy on Fees

The credit union industry has long positioned itself as the "white hat" among financial service organizations, using lower fees as a key differentiator to their members, legislators and the market. Unfortunately, the message has primarily been about what credit unions don't do-charge fees-rather than communicating our strategic difference. Little, if anything, has been said about what our fee strategy and practice is as an industry-other than charging less than the banks.

More and more credit unions, under increased pressure to achieve short-term gains quickly and diversify their income sources, are recognizing the short-term advantages of fee income. Charging credit union members more fees has become acceptable among credit unions in recent years, undermining the industry's message. In short, many credit unions aren't walking the talk.

Worse, rather than developing their own fee strategy, most credit unions follow the banks' model by charging the same fees as the banks do, only priced lower.

While it sounds easy and effective in the short-term, operating without a clear strategy can be costly. Credit unions are finding it increasingly difficult to explain the credit union difference and are finding their strategy is being defined by others, sometimes in an unflattering light.

The Affinity Plus Fee Strategy

Affinity Plus, like most financial service organizations, understands the benefits and advantages of income diversification. Unlike nearly everyone else, our strategy of putting the member first requires us to find way other than charging our members more and higher fees. Nonetheless, we understand the benefits of diversifying income sources for both the short and long-term.

For Affinity Plus; however, alignment with our strategy required us to consider other options than following the bank model and charging fees simply because others are. Our goal in developing a fee strategy for both the short and long-term became increasing non-interest income for the balance sheet as we minimized fees to the member. Fortunately, as we have found in other situations, presenting a "strategic dilemma" to our senior team resulted in a unique opportunity. Ironically, we realized it was possible-as well as logical-to reduce the number of the fees we charge and increase non-interest income by building relationships with our members.

Using Fees To Help Our Members

If we are walking our talk and are sincere in putting our members at the forefront-even in fee assessment-we should be able to openly communicate our practice to our members. Using a "light of day" filter for adding and assessing fees will ensure that the fees we charge demonstrate our difference and our members understand the value of their relationship with Affinity Plus. In developing the new strategy, we discovered the following:

* Surprise fees create dissatisfaction, yet the goal of most financial organizations is to disclose fee changes because we have to-but do so quietly. The result is that most consumers don't know when and how they are charged fees and are surprised to find out a fee has been charged to their account.

* Our fee structure will ensure that financials will follow-but not by charging ever more and higher fees. Rather, non-fee, non-interest income will occur with increased activity and building strong relationships with our members, diversifying our sources of income over time.

* The most important difference in our new fee strategy is our use of fees-not simply as a source of revenue, but as a gauge of our member's financial condition. We will use fee assessment as a trigger to reach out and help members in need to help them proactively. While this may create less fee revenue in the short-term, it's better for the members and gives us an opportunity to demonstrate our difference.

Promoting vs. Disclosing Our Fees

In September, 2004, we began promoting a new fee structure to all 120,000 members as a key difference between having their relationship with us rather than another organization, based on the following beliefs:

* Consumers don't like fees; however, they are willing to pay for what they value, such as convenience.

* Consumers want to know the business rules of when and whether they will be charged a fee. That way they can participate in the decision of whether they will do something that causes them to be charged a fee.

* We charge fewer fees-only nine compared to 20-40 different fees charged by competitors. And, while they may not always be priced the lowest, they are priced competitively.


We believe that we can differentiate ourselves from the other financial services providers by our fee strategy. We know it is simple to communicate, simple to understand and passes the light of day test -and we will openly market our difference and ensure that all members are aware of our strategy and the impacts it may have on them as a consumer.

Once we dug deeper into our fee structure, it became very clear that we can create a new fee strategy that drives our strategy; provides member value; is aligned with belief systems; and gives us another checkpoint to proactively reach out to members who are in need.

We look forward to discussing our strategy with you and welcome any feedback you may have.

Kyle Markland is President/CEO of $960-million Affinity Plus FCU, St. Paul, Minn.

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