The City of Boston Credit Union is studying data on its members' profitability in the hopes of moving to relationship-based pricing.
To accomplish this, the credit union is using a tool that ties together different sources of expense and revenue, and weights these sources of expense in an effort to produce a more precise profitability measurement.
Other credit unions are making more use of profitability tools. The City of Boston Credit Union is playing catch-up.
"I've been here for two years, and we didn't have any profitability measurements per se," says David Cox, vice president of finance for the credit union, whose 20,000 members include Boston city workers. Cox says the credit union kept records on deposits and loans at branches, but didn't use more complex profitability analysis.
"We didn't go deeper and ask 'Does that branch make money for the credit union?' "
To change that, the $300 million-asset credit union is subscribing to a tech suite called ProfitMagnifier, which was developed by Profit Resources of Lakeland, Fla. The credit union has started accumulating member transaction data and will gradually extend use of analysis and branch profitability measurements over the next few months.
Included in profitability measurements on the cost side are the general expenses of running branches and other channels, the delivering and maintenance of specific financial products and services, and the shared costs of general customer service. On the revenue side is the net interest income from credit and other financial products and the fees collected for services or transactions. When the data on both the revenue and cost side of the equation is combined, the credit union's goal is to produce granular, cross-referenced profitability reports on members, products and branches.
"We want to look at each branch as more of their own little business. If there are 5,000 members tied to a certain branch, those are the members we want you to work on, to get members on the lower profitability scale to use more profitable products," Cox says.
To use the new system, the credit union will export individual account data and general ledger data — such as assets, liabilities, revenue and expense — from its core system into ProfitMagnifier's cost accounting software, ProfitEntree. This software then uses calculators developed by the tech firm to analyze the net interest income of loans; the noninterest income from transactions; expenses for each account and product; and loan losses as calculated by credit score and delinquency data. Additional expenses are calculated based on a weighing system that computes the impact of disparate activities on profits differently.
The financial institution's costs are divided into variable but broadly shared services, or "weight factors," such as telecom expense, armored car deliveries, teller processing, check processing, and ATM expenses; "formula" services — or expenses for loan servicing or administration that can vary broadly based on a particular loan or member; and "product" specific expense — or the cost of delivering a product such as a savings account, loan or investment product directly to a member.
The result for users at the credit union is a dashboard of weighted expenses and profits across members, products or branches. The results of searches such as "locate the 1% most profitable members," or the most profitable loan products and members that don't have these products, or the projected ROI for a savings product might also be displayed in the dashboard. Standard reports include profitability reports on account holders, branches and products.
"We'll have a better idea when talking to our marketing folks as to what members to approach and with which products," Cox says.
Cox says the information can also be used to inform a strategy in which rates are based on other relationships a member has with the credit union. "It's something that we're just starting to look at. If the member has several profitable relationships already, you can give him them a little benefit as opposed to a member that's only using one product," Cox says.