If there needed to be any reminder that inefficiencies will be discovered,
rooted out and replaced with better and less costly means, the Visa/Master
Card settlement over debit card fees is it. Wal-Mart, Target and
their allies discovered the inefficiencies (call them intentional
if you like) and forced the credit card giants to change. Such will
be the fate of all inefficiencies. Time and technology march on;
there is no changing them. Institutions that hang on to bloat, that
harbor inefficiencies will be found out and abandoned/punished by
their customers.
Visa and MasterCard were imposing a quasi-monopolistic system on
the retailers. They were making them accept the Visa/MasterCard
debit cards if they accepted the Visa/MasterCard credit cards. Then
they were forcing the retailers to process the Visa/MasterCard debit
cards with signatures from the customers. They were charging the
retailers high fees for both the credit card and the debit card
transactions.
But debit card transactions can be accomplished with much less
cost. Debit card issuers like Star, Most and Plus do not require
a signature, only a PIN, and can complete the transaction for about
one-third the cost of the signature method. Visa and MasterCard
ultimately had to acknowledge that they were forcing their own inefficiencies
on the retailers. And they are paying huge sums to the retailers
as recompense.
Inefficiencies are Often Hard to Find
Credit unions may end up losing money on account of the Visa/Master
Card settlement; they were also making money with debit card interchange
fees. But this should not be the focus of our attention, or the
lesson learned. The lesson learned has to be what should be obvious
to anyone in this modern business environment: inefficient processes
may create bloat for a while but they are going to be rooted out
and eliminated. Thus it is far better to discover and eliminate
your own inefficiencies early rather than hang onto them while your
rivals make leaner institutions that are going to attract your own
customers.
Inefficiencies are often difficult to detect. They lurk in operations
that we feel are already “efficient,” or at the least
are “the way we have always done things.” Middle management
and persons who have been around the longest are very often the
places where this sort of attitude abides. As has been said in this
column before, credit unions are very often places where employees
come in and do their work during regular business hours. But this
is generally inefficient, because members do not demand the services
of their credit union evenly throughout a normal day’s business
hours. Instead they demand services before work, during lunch breaks
and after work. Only the credit union that applies staff in proportion
to the demand is operating efficiently.
Inefficiencies may even grow out of efficiencies; these are especially
difficult to detect. At GTE Federal Credit Union, we thought we
were pretty good at attracting and writing auto loans. But over
the last two years we have increased our auto lending 300% while
increasing the staff handling the new volume by only 20%. This we
have done by a more adept means of using the Internet. Had we attempted
to triple our auto loan volume using our existing methods we would
have had to have increased our auto loan staff by three times. The
fact that we did it by increasing the handling staff by only one-fifth
demonstrates that inefficiencies lurked, ones we avoided as we moved
ahead.
There is talk of squeezing 40 to 50% out of the cost of refinancing
mortgages over the cost of writing mortgages when doing so was mainly
for home purchases and the volume was lower. Much more is going
to be done with technology, with speedier documentation and so forth.
A Critical Time
Now is the time to recognize and embrace new efficiencies. In a
low interest rate environment, spreads are narrower and pretty soon
debit card interaction fees are going to decline. In this kind of
environment, credit unions that retain inefficiencies are going
to suffer, but ones that can improve their productivities are going
to be the low-cost providers. It is to them that people will beat
a path for services.