Making Retention a Priority for 2010

Many of the economic, social, and cultural trends that played into the credit union advantage may be nearing an end, shifting the credit union growth strategy from member and deposit acquisition to retention.


As your credit union begins planning for 2010, and ideally several years beyond that, consider your credit union's retention strategy.  Much of the recession has played into the advantages inherent in the credit union model and culture, but this dynamic will change as the economy enters the stage of recovery.  It is inefficient and unrealistic to attempt to combat a high member turnover rate by simply attracting more and more members.  Instead, now is the time to examine why members have come to your credit union, and what your credit union can do to retain them as other opportunities in the market arise.

Credit Union Boom amidst Economic Bust

 The credit union industry's performance during this recession has been described as countercyclical; despite a limping economy, credit unions have grown at a significant pace. Credit unions are nearing, or even surpassing, many of the growth records set in 2002 on the tail end of a mild recession, again reinforcing claims of industry countercyclical behavior. The following data appears consistent with this claim:

Source: Peer-to-Peer Software, the Bureau of Economic Analysis

The first thing to note about this graph is that GDP growth is an annualized quarterly growth figure, as is the most common method of reporting GDP growth, while share growth is shown year over year; this is done to account for the strong seasonal trends.  After many quarters of sustained GDP growth, share growth slowly decelerated.  By contrast, as the economy approached recession, share growth began to rise.

There are several reasons why share balances have been increasing more quickly.  First, the stock market is down.  From the peak in October 2007 to valley in February 2009, the Dow Jones, New York Stock Exchange, NASDAQ, and S&P 500 each lost approximately half of their value, some even more.  Members are temporarily pulling their money out of stocks, and these funds are finding their way to share or money market accounts.  However, the stock markets have seen slow but steady to recover since the February valley.

Second, the personal savings rate is up.  Unemployment and underemployment remain looming threats, and Americans are working to build a cushion of savings at a rate of 6.9% (of disposable income as of May, 2009) in preparation for the worst.  Further, the possibility of short term deflation has many holding onto their money until deflationary concerns are resolved.  Once stimulus spending and increased credit availability at the Federal Reserve have permeated the market, concerns of inflation may encourage increases in spending and temper the growth in the personal savings rate.

Third, member growth is up.  Amidst bank failures, mergers, and panic, member growth at credit unions was up to 1.8% YOY growth in the first quarter of 2009, the highest growth rate since, you guessed it, 2002.  Conservative lending standards, matched with healthy capital reserves, allowed credit unions to serve as a financial sanctuary during the flight to safety.  It also did not hurt that credit unions were posting record high loan origination numbers while credit in the United States was tightening.  However, the stability of the financial system is no longer in grave danger.  Paired with the doubled limit for deposit insurance, the flight to safety might be nearing an end.

Gearing Up for Planning Season

Credit unions have not been impervious to the recession, nor will they be to the recovery.  Many of the economic, social, and cultural trends that played into the credit union advantage may be nearing an end, potentially shifting the credit union growth strategy from member, deposit, and loan acquisition to retention.

While attending the recent NAFCU Conference, I sat in a session hosted by Ron Parker.  Speaking to an audience nearly exclusively comprised of board members, he encouraged them to focus on three issues to raise with their credit union's management team upon returning from the conference.  I would like to reiterate these, particularly as they apply to member retention:

1. Does your credit union have a contingency plan if things change?

Is your credit union in survival mode?  If so, it's understandable.  Rising delinquency, an NCUSIF assessment, a low interest rate environment: these probably are not doing too many favors for your income statement.  Now is the time to reevaluate the efficiency of your growth strategy.  Imagine you are bringing in new members at 4% of the current membership, but letting 2% slip out the back door.  Would it cost your credit union more to increase new member acquisition to 5% or reduce member attrition to 1%?  Further, how will a high member turn-over rate influence the effectiveness of your cross-selling?

2. How is your credit union assessing risk?

Most likely, your credit union has models in place to determine the impact of changes in rates, delinquency, and charge-offs on income, expenses, ROA, etc.  In addition to assessing credit and rate risks, what other risks exist?  What if member attrition increases two percentage points?  Do you have sufficient capital in place if members reinvest a significant portion of their deposits external to the credit union?  What if new member acquisition decreases two percentage points?  What growth assumptions are inherent to your current credit and rate risk models?

3. What's next?

To completely answer this question, you must be able to predict the future.  Obviously, this is not possible; what is possible is determining what could be next.  You likely already have contingency plans in place if the recession continues to deepen, if more members become unemployed, go upside down in their mortgages, become bankrupt, etc.  More realistically, unless your main source for economic analysis is Nouriel Roubini (commonly known as the "Doctor Doom" of economists), you are probably expecting economic recovery to take place sometime over the next two years.  How to your credit union's various contingency plans meld into a comprehensive strategy?  Is this strategy based solely on projections using internal data, or do your contingency plans incorporate the various potential influences the shifting economic landscape will have on your members?

The best place to start would likely be looking at your two year plan.  Going into your upcoming planning sessions, define your assumptions regarding the changing economic environment and project how these changes will influence your growth strategy.   Retention may be the growth strategy to weather these changes.