Align With Members, Not Markets

Credit unions’ overarching focus on creating and delivering value to members provides a solid foundation for steady performance while markets whipsaw in the face of uncertainties.

 
 

The beginning of 2016 brought with it a return of volatility to stock and bond markets. Interest rates on the short end of the yield curve fluctuated as mixed economic data shifted expectations of when the Federal Reserve would make its next interest rate move. And just as the economy seemed to be gaining traction, the Bureau of Labor Statistics’ weak May jobs report put the timing of the Fed’s next move into question again.

In contrast to the markets’ gyrations, credit unions kicked off 2016 with a wave of momentum. The industry’s more than $100 billion in originations through the first quarter puts lending at a record pace, the number of checking and credit card accounts continues to rise, and credit unions’ financial fundamentals remain strong with capital topping $141 billion.

So why are credit union results rising quarter-to-quarter while markets whipsaw in the face of uncertainties? Although credit unions are no doubt affected by economic conditions in the markets they serve, their overarching focus on creating and delivering value to members provides a solid foundation for steady performance.

A Model Turned Upside Down

As cooperatives, credit unions must be competitive in the marketplace and earn a reasonable return for the institution as well as provide value for members. If a credit union does not meet these three elements, it will fail. Although other businesses can say they also focus on these components, the balance credit unions must strike is what makes their model unique.

Credit unions must always demonstrate the advantage of being a member rather than merely a customer. As a result, credit unions think about products and services differently from for-profit or non-profit entities. Often, that means turning traditional approaches upside down.

A number of credit unions, for example, review member credit scores or loan payment histories on a periodic basis with the intention of lowering loan rates. It is unlikely a for-profit institution would take that approach because the need to generate a positive return often outweighs the need to deliver customer value.

Credit unions’ long-term view of member relationships creates better outcomes for both the institution and the member. It is a mindset that reduces the likelihood of up-and-down cycles and shows the power of the cooperative model.

Jay Johnson, Partner, Callahan & Associates

For more than 10 years, BECU ($15.0B, Tukwila, WA) has conducted an annual review of credit reports and automatically lowered the rate members were paying on their credit cards and lines of credit. In the short term, this strategy means the credit union earns a lower return on those loans. But, it underscores the value of BECU membership.

BECU earns a return on its strategy when current members use more services to gain additional benefits and new members join the credit union because of its different approach to financial services. If that sounds like a long shot, consider this: At BECU, credit card balances have more than doubled since it launched the program and active card users have increased by 25%.

Source: Peer-to-Peer Analytics by Callahan & Associates.

What would strike a for-profit institution as almost unthinkable — proactively reducing its return — is so important at BECU that in 2015 it expanded the program to car loans. That year, BECU repriced a total of 22,000 credit cards, 9,000 lines of credit, and 5,000 auto loans. That’s $100 million in loans for which members are paying less interest in 2016.

Help For Small Savers

But it isn’t just borrowers who benefit from a different way of thinking.

To improve members’ financial well-being and engage them in meaningful conversation, the front-line staff at Patelco Credit Union ($5.1B, Pleasanton, CA) talks to members about short-term, mid-term, and long-term savings needs and plans. In 2015, Patelco launched products designed specifically for each of these three savings buckets, and employees discuss how the products can help members meet their savings objectives.

For short-term savings, the credit union offers a reverse-tier money market account that pays a 3.0% APY on the first $2,000, 2.0% on the next $3,000, and 1.0% on the next $5,000. These are amazing rates in today’s environment, particularly for small-balance savers, and members recognize the value. In the first quarter of 2016, members directed more than $100 million in net new balances to Patelco’s money market account.

Source: Peer-to-Peer Analytics by Callahan & Associates.

For mid-term savers, Patelco offers a rising rate certificate with a two- and three-year maturity that guarantees a rate increase regardless of market conditions. And to attract longer-term savers, the credit union prices a five-year certificate at 2.5%

The certificates require a minimum balance of $1,000, yet members still moved over $135 million in net new money to certificates in the first quarter.

People, Not Profits

BECU and Patelco are two of the many credit unions that constantly think about how to deliver better value that will support sustainable financials for both the credit union and the member. Credit unions’ long-term view of member relationships creates better outcomes for both the institution and the member. It is a mindset that reduces the likelihood of up-and-down cycles and shows the power of the cooperative model.

There will no doubt be unexpected moves in the markets in 2016, but the first quarter indicates credit unions are maintaining their focus on members and posting the outstanding results that follow.

 
 

July 4, 2016


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