We believe that member retention is the key to the health of our credit union. That means delivering lasting value, which begins with delivering present value. This in turn depends on quality service and pricing.
We have seen from analysis of our MIF (member information files) that generally the longer a member has been with the credit union, the higher the savings balances, the higher the loan balances and the higher the revenue. We have also found that it is more effective to increase savings or loans by selling to existing members than by selling to new members.
We use several ratios to track retention. One is the “Member Add/Lost Ratio.” Another is “Average Years Retained” (Average Length in Membership). See the two charts for the years 1999 through 2006.
“Member Add/Lost” is the number of new members joining in a period divided by the number of members who have quit during the same period. “Average Years Retained” is the number of members at the beginning of a period divided by the number of members who quit during the period (annualized).
For both ratios, a higher number is better. The Add/Lost Ratio may be improved by increasing gross new members or by reducing quitting members. The Years Retained is improved by reducing quitting members.
We use a vendor who analyzes MIF information for over 550 credit unions nationally. From their summary information we see that for their average credit union (from the ones they analyze) the Add/Lost Ratio is 1.2 and the Average Years Retained is 12.5 years. Larger and better-performing credit unions tend to have better numbers, an Add/Lost ratio of 1.5 and an Average Years Retained of 15 years.
Reducing the number of quitting members means reviewing why members are leaving. Are they long-time members or are they new to the credit union? Are they quitting when they move, or are local members quitting?
We also believe that using retention ratios helps track quality under the theory of “people vote with their feet.”
We believe that retention leads to higher balances, which leads to a lower expense-to-assets ratio. This lower ratio allows us to pay a better savings rate, which in turn leads to higher balances. Thus arises a virtuous cycle of better rate, higher balances and lower expenses.
Keeping it Simple for the Members
We also believe in a strategy of Keep it Simple. Our product line is uncomplicated, without a bunch of gimmicks. We have only a Money Market Savings Account (this is our renamed regular savings account) rather than regular savings and a money market account. Our target is a rate better than the average money market mutual fund rate, generally Fed Funds less 50 basis points.
Keeping it simple also helps to hold down expenses. We do not have to spend money to educate members about various savings accounts, and we save money on staff training. Again, low expenses work back to the virtuous cycle.
Because member “loyalty” is an issue, we price to retain members. We try to price to our market targets. We do not run CD or account specials for “new money only.” We feel these send a message that new members’ money is more valuable than existing members’ money. We also feel these pricing strategies send a strong message to members that if they want the best deal they must shop around. We want members to feel that we offer the best rate we can all the time to all members.
Keen Eye on the Savings Rates
We believe the use of a long-term rate target allows us to control our mix of savings products. With market rates increasing over the past couple years we have had pressure on the net margin. Some credit unions responded by holding down the daily rates and offering market rates only on CDs. We think this causes members to shift the mix of their savings dollars permanently. Although it means a credit union does not have to price up its entire daily accounts, as the money moves from the daily account to the CD it becomes permanent in a lower spread product. This is trading current relief for long-term pain.
In addition, we believe that moving money to CDs makes it more volatile than in a daily account. This is a psychological effect. When I can move my money at any time, I can procrastinate and keep putting it off until later. When I have my money in a CD, I am forced to make decisions at each maturity date to price shop and either renew or move.
We do not negotiate on CD rates or try to match a competitor. We think the problems with this are: 1) it tells members to argue rate with us each time to get the best rate – this would increase our expenses; 2) it can lead to disparate rates and possible discrimination; and 3) it would let our competition set our rates.
We are able to allow our daily rates to adjust to the market because we have determined long-term goals for our capital. We currently have an equity ratio around 13%. Six years ago our board determined we can allow the ratio to reduce to 11% over 10 years. Then market rates dropped, our net margin and ROA increased greatly, and savings growth was high. As rates started to increase, the margins and ROA decreased.
We have decided that we can balance savings rates to incent or dis-incent growth and the effect on ROA. We have heard that “if your equity ratio is okay, and your shares are not growing, you do not need a positive ROA”. This is heresy to an ROA purist, but the key factor is the answer to this question: “Does your equity ratio meet your long-term goals?” Our long-term projections show that our ROA should recalibrate to its normal level of 1.00% to 1.20% as interest rates level out.
We have set up our systems and brand to deliver great rates and more. We are set up to increase the business that members have with us over time. We believe that member retention, better rates, higher usage, higher balances and lower expenses are all interrelated.