Inefficiencies: Get Rid of Them, or They Will Get Rid of You

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.

 
 


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.

 

 

 

Sept. 22, 2003


Comments

 
 
 
  • The way we have always done things is the biggest obstacle to improvement
    Anonymous
     
     
     
  • The reduced interchange rates have cost us $85,000 in NET monthly revenue. New efficiency initiatives will recoup about $130,000 a year, but we can't stop there.
    Anonymous
     
     
     
  • Believing there is such a thing as "good enough" or "our members don't wany change is suicide.
    Anonymous
     
     
     
  • Fear of Change is the mind-set that leads to potential failure in the future
    Anonymous
     
     
     
  • Very timely article. Great summary of the salient facts. Good job.
    Anonymous
     
     
     
  • How did GTE do it?
    Anonymous