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Paying More and Strengthening the Credit Union
Jan. 5, 2003
Interesting. We have borrowers and depositors, and it seems to us that the two have differing views of the rates.
I read the article “Paying More and Strengthening the Credit Union” by Ed Callahan, published January 6th, 2003. While I can applaud Mr. Callahan’s altruism, I perceive current credit union reality somewhat differently.
Credit Unions are experiencing margin compression like never before and I do not believe paying even higher premiums fosters member loyalty. Ever-expanding FOM’s and SEG’s have numbed the sense of privilege and exclusivity that used to accompany credit union membership. Where I live, anyone who “lives, works or plays’ in the area can now join a county credit union. What’s special about that? Before I digress further, perhaps I should just bullet my thoughts:
1) When it comes to non-maturing deposit accounts (with the exception of the recent “hot” money parked by investors), most members are not rate sensitive. I strongly believe this, especially in today’s economy. Will they really move a $2,500 average balance savings account because of a 75 basis point reduction in dividend income? That means a sacrifice $1.56 per month, which might cover the fee of one foreign ATM transaction. I would much rather my Credit Union use that 75 basis points to increase profits so they can better serve my needs, such as expanding the free ATM network or introducing online banking and bill pay or minimizing fees. And further, why do I want my credit union rewarding new “hot” money deposits with higher-than-market rates that squeeze profitability and then leave when the investment markets turn bullish?
2) If the strategy is to reward members with premium deposit rates so they in-turn will be loyal when they need a loan, then I am skeptical at best. When it comes to loans, today’s better-informed members will take the best deal put in front of them, regardless of the source. As a case in point, research shows the credit union share of new auto loans is down dramatically in the past six months, but total auto loan originations are up. Apparently 0% APR’s can quickly overcome loyalty.
Credit union executives experiencing margin compression should not pay up to strengthen member relationships. Instead, they should remind members that they have a fiduciary responsibility to stabilize net interest margins. Not doing so affects the rates and fees that can be offered on loans. It affects the investment that can be made in infrastructure to make the credit union more convenient for members. It affects the ability to keep pace with technology. It may even affect the credit union’s ability to survive (I would leave this last point out of my shareholder newsletter).
The strategy should be to battle margin compression, not succumb to it. If rates stay flat another year, can you really afford to pay up and then play options to maintain margin? I hope you have a crystal ball.
Rather than paying up on deposit accounts why not measure non-maturity account behavior over time? You may be surprised to find (with the exception of the “hot” money parked by investors) these deposits are loyal regardless of rate and behave more like long-term fixed-rate money than short-term rate sensitive money. You may be able to confidently leverage these deposits beyond the three-year safe harbor guidelines to invest in mortgages or mortgage-backed securities. You can then reinvest the cash flows from these assets to hedge against future rate increases, thereby stabilizing margins now and maintaining acceptable spreads going forward. Of course, this strategy only makes sense if rates paid on shares are reduced below current borrowing rates! (Sorry, I got off-track again.)
I, for one, would remain much more loyal to an institution that looks after all my banking needs, not one that offers a token, unwarranted rate premium in a flat market. Tend to your margins and reinvest in the credit union, and I will reward you with loyalty based on the non-financial influencers (conve
This article sends the right message at the ideal time. Credit Unions have a unique opportunity to explain the difference in the relationship that exits between their credit union and its members and a typical bank and its customers. Bravo Ed!
I like the unity concept. Trying to sell it, can be a challenge.
I appreciate hearing something that reminds us how CUs are really different from banks and how we can put our money where our mouths are!
came across your excellent site whilst reaseaching credit unions in ireland - studying co-operative organisation at university college cork - congrats!
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