The first quarter of 2001 brought a dose of reality to the economy and a sense of relief to credit unions. The dot.com meltdown has led a precipitous decline in market values for all stocks. Consumers are more cautious. Shares are flowing into credit unions at double-digit growth rates and CDs are back. The real estate refinancing pipeline is full. Employment markets are less frenetic. At last a sense of “normalcy” is replacing the go-go era of Internet-driven euphoria.
The Traditional Business
At the beginning of the Internet era, this new channel was viewed as capable of supporting stand-alone businesses. Today the strategy is integration. Traditional branches and the Internet provide a common member service experience.
If loans can be approved in 60 seconds on the Net, then credit unions are installing those same processes in call centers and branches. If the Internet can offer a combined view of all accounts and pull up old statements, then, likewise, that information should be at the fingertips of each customer service representative.
The process improvements brought by the Internet are filtering across all channels. Moreover, instead of reducing the dependence on brick and mortar, data suggests that the focus on branches is increasing. In a survey late last year, 200 credit union respondents said that they planned to increase the rate of their branch openings by 47% in the next two years. There was a similar increase planned in the rate of ATM deployments.
Clearly a lot of the old business requirements still exist. Members are not changing their financial use patterns overnight. As credit unions seek to open new markets, especially in community charters, a physical presence is a necessity. I was reminded of the importance of brick and mortar when the original Washington, D.C. book discounter, Crown Books, declared bankruptcy. Several of its local stores were bought by Books a Million-the Internet discount bookseller.
The Inevitability of Change
At the same time, several of the trends that have caused credit unions to reassess their strategies have not veered. Credit unions are better positioned than ever to serve their members’ real estate needs. Yet the credit union market share of first mortgages still hovers between two and three percent. Based on a first quarter survey, we estimate that credit unions’ servicing of off balance sheet mortgages is between $17 and $18 billion. When added to first mortgages still in portfolio, the total mortgage portfolio is less than $100 billion in a market that is approaching $5 trillion.
When we estimated the amount of assets under management, that is off balance sheet savings, the total came to just over $25 billion. Again credit unions have barely made a dent in the long-term retirement savings plans of members.
What is happening is that consumers are amending their financial habits, not completely shedding old patterns. Credit unions, like most other traditional financial service providers, have created service paths of how they believe members should behave. What members are most likely doing is creating new “value chains” by putting together serial relationships using the click-through power of the Internet. Instead of one Preferred Financial Institution, consumers are creating multiple PFIs.
The New Buzz: Relationship Management
Into this hybrid business world combining old and new is the latest tool that promises to give insight and results. Customer relationship management (CRM) is the “in” strategic topic. This process of using data to identify patterns of usage and to anticipate needs at each touch point is the latest technology nirvana.
There is no question that credit unions can use data more effectively. Combining usage patterns with pricing incentives (relationship pricing) can be an effective way to induce members to more economical transactions for the whole organization.
But new tools are rarely the answer. In addition to the cultural issues of how employees use the data and communicate the desired outcome-either a sale or the use of another channel-there is still a strategic challenge: how does the credit union provide enhanced value to the member?
The Challenge of Value
Recently a professor of journalism at the University of North Carolina provided an antidote to the euphoria some of his traditional newspaper colleagues were feeling about the failure of numerous Internet news outlets. He quoted long-term trends from the National Opinion Research Center that showed the percentage of Americans who were reading a newspaper daily had fallen from 73% in 1967 to 36.5% in 2000. The trend was continuing down. The reason wasn’t that people don’t like to read or don’t want news or even because of competition from new news sources such as CNN. The primary driver was that people don’t have time to read a newspaper anymore. He did not see that factor changing.
Credit unions have a similar challenge. Certainly insured savings and consumer loans are important services, but less so as the financial future evolves. Physical proximity in the form of branches helps in opening accounts but is less important in supporting the majority of routine transactions.
How can the credit union model transition to a new way of providing value? I’m not sure anyone knows the answer. But there may be one clue from the data on CUSOs. The total credit union investments and loans in CUSOs is $401 million and the net income as reported in call reports is a paltry $12 million. But this is primarily from wholly owned CUSOs. When one looks at the multi-owner CUSOs operating shared branches, share draft clearing, ATM deployment and mortgage processing, there is a much more dynamic picture.
There are numerous jointly sponsored organizations that are prosperous, growing and creating new levels of service for credit unions. Some of these are doing traditional back office functions. Others are working on innovative partnerships to bring new solutions to their owners.
Could it be that the challenge of the future is not an answer that a single credit union can provide, but rather a cooperative creation? Is it just possible that the message from the first wave of Internet business failures merely proves that stand-alone is not possible either for a dot.com or traditional firm? Can successful strategy, that is the delivery of meaningful value to the member, be accomplished without networked solutions as a foundation for virtually all future interactions?