Why Chasing After ‘Whippersnappers’ May Not Be The Answer To Boosting CU Growth
The credit union industry has not addressed the potential value of the elusive younger demographic in a long time. Instead, the discussion implicitly assumes the market is still attractive, skipping ahead to focus on market penetration. Industry analysts, journalists and outside experts reiterate the value of attracting younger members, providing anecdotal sound bites on the habits of young consumers as suggestions for ways to reach them. Credit union executives should reassess the return on investment (ROI) potential of the younger demographic for their specific market; the potential of this market diminished for the majority of the country over the past 20 years and will continue to decline modestly through 2015.
We examined the 18-to 31-year-old population in the U.S., because the average age of first-time homebuyers currently stands at 32. At the national level, the 18 to 31 population in the U.S. continues to decline as a share of the total population. The 18 to 31 population fell from 25% of the U.S. population in 1980 to 20% in 2007. Forecasts from Moody’s economy.com anticipate a further decline to less than 19% of the population by 2015.
CUs don’t operate at the national level; therefore, we examined the story at the state level. In the near future, forecast over the next eight years through 2015, almost every state will see its population of 18- to 31-year-olds decline as a share of the total population. Exceptions to this trend include California and a few states along the East coast. This forecast fits within a longer trend–over the period 1980-2015, the share of the 18 to 31 population declines in every state.
These state-level estimates can gloss over variations at the local level. Coupled with an analysis of financial product consumption by demographic group and a forecast of financial product consumption, it is possible to create specific market size forecasts for individual CUs.
Less than 20% of credit unions are located in states with a growing share of 18 to 31 year-olds relative to the total population. This poses a significant question for the remaining 80% of credit unions. States with small populations and no major cities will see the largest decline in the 18 to 31 market. For states with a high forecasted decline, the shrinking population alone may be reason enough to shift focus away from the younger market.
The size of the 18 to 31 population only paints part of the market opportunity. To complete our analysis of the 18 to 31 market as members for credit unions, we need to examine their consumption of financial services. We looked at the total debt of the 18 to 31 market from 1989 through 2004 using the Federal Reserve’s Survey of Consumer Finance. While the level of debt held by 18- to 24-year-olds increased substantially over the period, they still represent less than 20% of the debt held by combined 18 to 31 cohort.
Examined in isolation, this picture looks compelling. However, when we place it within the context of the entire population, growth in the 18 to 31 market appears less impressive.
Placed in this context, the 18 to 31 story fades to the background. The significant transition over the period is the declining share of debt held by 32- to 44-year-olds and its redistribution across older age groups. The 45 to 54 market increased their share of debt 9% over the period as the Baby Boomers transitioned into their peak earning and spending years. Given the average age of members, 47, credit unions are well-positioned to capture this growth within the Baby Boomer population over the next 10 years.
The decline in attractiveness for the 18 to 31 market is a function of the shrinking population and their propensity to accumulate debt relative to other age groups. Although the debt story may look interesting when examined in isolation, it is not significant relative to overall environment. CUs should examining shifting their investments away from younger demographics and toward their traditional older members.
Part of the industry’s focus on younger members emerges from the misguided assumption that CUs have completely tapped the potential of older age groups. Evidence from the Survey of Consumer Finance suggests that credit unions have an opportunity to capture a larger slice of these older customers’ financial pie. The chart below illustrates this opportunity. CUs made progress toward attracting more business from their existing customers through the mid-1990s; progress stalled in 1995.
Only 10% of credit union members with loans maintain their entire loan portfolio with a credit union. Credit unions should work toward understanding the reasons their older customers seek out additional financial institutions for loan products, especially given credit unions’ unique value propositions around products and services that resonate well with the older demographics. Answering this question would prove much more profitable for credit unions as we’ve seen from the perspectives of demographic change and debt levels.
We have found, for instance, we can serve credit unions–taking the challenge from facts, to broad and local market insights, and finally to value-added opportunities for a credit unions operating in their unique context. By refining strategies around product and marketing strategy, credit unions can prioritize based upon return on investment (ROI).
Today, demographic change, shifting lifecycles, and opportunities in other markets make the younger customer less attractive for executives looking for short-term ROI. In the meantime, the credit union industry has largely ignored its fortuitous position amongst older in their prime earning and spending years; credit unions would be better served by focusing on this market over the next ten years. Credit unions should address the reasons their older members look for other financial institutions to fill out their loan portfolio. Credit unions who crack this nut will receive more ROI on that investment relative to understanding younger customers, adding value to the bottom line, and most importantly–serving more members in the unique way that only credit unions can.
Matthew B. Klusas is managing director of Local Analytics, Watertown, Mass. To view the complete report www.localanalytics.com/current.html.