The Dividend Difference

Bonus dividends help credit unions stand out from banks and increase their member rosters.

 
 

Patronage dividends offer financial cooperatives a way to differentiate themselves from banks and help credit unions post higher rates of membership and loan growth than their nondividend-paying peers, according to a study by Callahan & Associates.

Callahan surveyed 49 dividend-paying credit unions during the fourth quarter of 2013 and compared their five-year rates for membership and loan growth with cooperatives in the same asset class that didn’t pay dividends. Across all asset categories, the dividend-paying credit unions outperformed their peers. And as the table below shows, the most pronounced difference occurs in cooperatives with assets of $250 million to $500 million and $1 billion to $5 billion. For the smaller asset class, dividend-paying credit unions had five-year membership growth rates that exceeded their peers by 2.3 percentage points and loan growth rates that were more than a full percentage point higher.

  Dividend-Paying CUs $250M-$500M Nondividend-Paying CUs $250M-$500M
Average Asset Size $333,920,597 $354,706,946
5-Year Member Growth 4.02% 1.72%
5-Year Loan Growth 4.54% 3.18%
Share & Loan Accts/Member 2.44 2.36

 

The number of share and loan accounts per member was also higher, although the differences amounted to less than 10 basis points for both asset categories. The numbers for average share balances and the average member relationship were virtually identical, except for the larger asset category where dividend-paying credit unions reported a slightly higher dollar value for the average member relationship — $19,313 versus $18,306 for nondividend-paying cooperatives.

  Dividend-Paying CUs $1B-$5B Nondividend-Paying CUs $1B-$5B
Average Asset Size $2,271,777,350 $1,857,521,524
5-Year Member Growth 3.90% 3.80%
5-Year Loan Growth 5.12% 3.82%
Share & Loan Accts/Member 2.64 2.55

 

Using Dividends To Stand Out

The differences in growth rates, however, indicate that sharing excess profits with members gives credit unions a competitive edge, particularly against banks.

And that advantage isn’t lost on for-profit financial services providers.

“They’ll pay the regular dividend, which is usually at least what we pay, and then every December they come out with an extra dividend, and they pay a fifth quarter," said one banker in a 2007 issue of American Banker. "It’s really tough to compete with this. Are we going to pay fifth-quarter dividends? I don't think so."

Credit unions aren’t shy about using dividends to attract members and generate more loans. Many, including Wright-Patt Credit Union ($2.84B, Beavercreek, OH), use dividends as a marketing tool.

“We can tout this as the credit union difference in action,” said Tom Miller, a former CEO of Affinity Group Credit Union ($160.2M, Pontiac, MI) in a 2007 Creditunions.com article about patronage refunds. “We don't need to talk about vague concepts. These are hard-dollar differences between credit unions and banks.”

Wright-Patt advertisement about $7M patronage dividend

But credit unions have to spell out the difference dividends make to members. When previous efforts to return excess profits to the members went largely unnoticed, Wright-Patt Credit Union launched a full-scale marketing campaign to ensure that members knew about the dividends. The marketing blitz conveyed the message in several ways at a mostly minimal cost. The credit union touted the dividend difference through internal communications such as its newsletter, website, ATMs, and in-branch posters and TV screens. It even created dividend messages for callers on hold.

But the credit union didn't stop with internal messaging.

“We have newspaper and radio ads that we use to build the excitement,” says Tracy Fors, vice president of marketing and business development at Wright-Patt Credit Union.

Still, the credit union says the best way to talk about dividends is to use employees. Every time members visit a branch, an employee informs them about the dividend amount, thanks them for their business, and explains why they received the special dividend, Fors says.

The Link With Performance

In addition to using dividends to increase membership rosters, credit unions can use dividends to encourage members to use the credit union's products and services. At Wright-Patt Credit Union, each member’s dividend payout depends on the amount of business they bring to the cooperative. As a result, one member might receive 50 cents while a more active user receives $500.

The credit union prefers to make the dividend a result of the institution’s performance and therefore doesn’t budget for it; however, the cooperative does emphasize that members play a key role in that performance. And when members more actively use of the institution, the credit union’s balance sheet improves and everyone benefits.

Employees also understand that meeting or exceeding performance goals directly affects the total dividend payout, Fors says. “So it becomes our motivator.”

That motivation has paid off for members. In January 2014, Wright-Patt Credit Union paid out $7 million in dividends to approximately 282,000 members. Over the years, the credit union has paid $28 million in patronage dividends to its membership.

Credit union leaders often debate whether end-of-year payouts have more of an impact than delivering the proceeds throughout the year in the form of better-priced products. But the two aren’t mutually exclusive.

For Fors, the lump sum distribution is a symbol of something much larger: the cooperative nature of credit unions, which pays off for Wright-Patt members in the form of better value and service every day compared to other financial institutions in the region.

“When people come together and pool their resources today, they are better off tomorrow,” she says.

 

 

 

Sept. 15, 2014


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