There exists a debate in the credit union industry regarding the “ethics” of relationship-based pricing (RBP). On the one hand credit unions assert that all members are valuable and that prioritizing balances or activities leads to unfairly favoring certain members. On the other, having 20 percent of your member base support the other 80 percent doesn’t seem fair either. Therefore, to create more equity, some credit unions seek to reward those members whose behaviors are appreciated and – dare I say it – profitable.
Credit unions don’t like to openly use the word profitable. It suggests betraying the nature of the cooperative movement and the focus on member service. However, a cooperative, at its core, rewards participants in proportion to their contribution. The more the members use their credit union, the more the credit union can do for its members. The more a member puts in to the organization, the more it can expect to get back.
Relationship-based pricing is essentially about fairly allocating resources. There are however two ways to go about this. One serves to “punish” unprofitable participants. This is achieved through greater service charges for those not deemed lucrative or valuable. The other acts to reward and encourage certain behavior.
Credit unions justifiably should take issue with the former – excessive fees are not the credit union way. But member appreciation is not incompatible with the credit union ethos. The difference is in how members are rewarded.
Only within the last few months have banks started to offer customer incentives linked to their bank accounts, similar to credit card points. Citibank’s ThankYou Points and Wachovia’s Honors rewards program allow customers to earn points based on their banking relationship that are redeemable for travel, accommodation and merchandise.
It is significant that banks are now venturing into reward programs linked to a customer’s relationship. However the program benefits highlight the functional difference between bank and credit union RBP programs.
Relationship-based pricing the credit union way gives members real financial benefits like better loan rates and/or higher dividend rates. Moreover, the rewards aren’t always linked to the amount of money you spend. Digital Federal Credit Union (DCU; $2.7 billion; Marlborough, MA) decided to develop a program after they revised their mission statement ten years ago.
In the effort to become their members’ primary financial institution, DCU sought ways to offer members value and encourage desired behavior. The solution was a pricing system that rewards members with direct deposit. The benefits include free ATM transactions, surcharge reimbursement, higher dividend rates, and lower loan rates.
The e-channel saves the credit union money, yet comes at no cost to the member and ideally saves them time. Moreover, all members can avail of the service. Recognizing that not all employers offer direct deposit, DCU set up the monitored exception program where the member agrees to deposit each paycheck with the credit union. Social Security and pension benefits also qualify a member if they are distributed through direct deposit.
Digital demonstrates how relationship-based pricing – the credit union way – serves to create additional value for members without unfair segmentation or penalizing the less profitable members. Undoubtedly, the debate will continue, but now with banks entering the RBP game, this is not an issue credit unions should ignore.
More information is available in the webinar, Relationship-Based Pricing: A Strategy for Survival, sponsored by The Callahan Center for Credit Union Leadership.