For most credit unions, finding new sources of revenue growth has become more strategically important than ever. This need is highlighted by the fact that despite seeing economic growth on the rebound and loan demand improving, overall revenue growth continues to lag behind pre-recession levels. During the period from 2004 to 2008, SNL Financial reports that CU industry revenues grew at an average annual rate of 6.7 percent. Conversely, during the most recent four-year period ending in 2013, annual total revenues only grew at an average rate of 2.38 percent.
Put simply, a confluence of events has led the industry to the revenue-starved state in which we now find ourselves. Margin compression has become a way of life, and with net interest income accounting for 67 percent of industry revenues in 2013, there are only nominal prospects for relief in the next couple of years.
Additionally, the 33 percent of revenues from non-interest income comes primarily from overdraft protection program fees and debit card interchange, both of which are also at risk. Regulators continue to question the level of overdraft fees, and interchange is under attack from several non-regulated payment providers including Square, PayPal, Bluebird by American Express and Walmart, Amazon and Apple.
Lastly, member behavior is slowly migrating away from the branch, which has historically been the primary point of sale. While online sales options have proliferated, challenges still exist in credit unions’ ability to develop the same level of intimacy and cross-sell potential in remote relationships as they can in the branch.
Three Good Options
Credit unions have only three basic playbook options to grow revenue: organically, by attracting new members or selling more services to existing members; entering new businesses via CUSOs; and mergers. For sake of argument, and because I’m a big fan of hardball, let’s use baseball terms and call organic growth a “single” as it takes a lot of successful at-bats to generate results. CUSO opportunities can be thought of as “doubles” and “triples” that typically have larger per-play payoffs, but are harder to achieve and come with added risks. Mergers are the “home runs” and can have a significant, quick-hit impact if done properly.
Organic Growth. Due to its perceived simplicity, organic growth is in almost every institution’s playbook. This strategy seems straightforward to execute and is easy to understand, but it often fails to go deeper than cross-selling more services to existing and new members. Successful organic growth requires organizational alignment across products, channels, people, processes and technology.
Because most organizations are not good at all things, the batting average suffers. For example, on the product and channel front, checking accounts are typically not structured and priced based on today’s realities. Checking account revenues are predicated on two things: improving net interest margin by providing a lower cost of funds than certificates or other forms of borrowing that can be used to support loans, and members’ fees from overdrafts and debit card usage. These revenues are in turn subsidizing significant expense associated with online and mobile banking. Maybe it’s time to adjust our swing. Here are a couple of ideas:
1. View checking accounts as payments accounts and tie pricing to member behavior that corresponds to the actual cost associated with processing their transactions. One structure to consider:
Allow a limited number of transactions for a flat monthly fee, similar to data charges from a cell phone carrier.
- Vary usage fees by channel to incent desired behavior and align revenues to costs.
- Implement over-limit charges for excess transactions or activity, and enable members to choose the plan that’s best for them based on their behavior similar to the ability to change and manage their cell phone plan.
- Instead of paying interest, pay monthly dividends based on debit card
- usage so as the credit union earns revenue, the member benefits as well.
- Leave free checking alone and hope loan growth more than offsets the costs of increasing expenses associated with new channels. This is easy and low risk. But is it tied to long-term strategic value? You tell me.
2. Looking at earning assets, two organic options that hold significant untapped potential are credit cards and business loans. This is not meant to imply that mortgage and auto loans are not important, but the near-term growth prospects are relatively limited.
Credit cards, on the other hand, seem to have taken a seat at the end of the dugout—they’re ready to go to bat. With credit cards’ high relative rates, nearing commodity in terms of features and low switching costs, one could argue there is no reason every member household shouldn’t have a card.
With consumer confidence on the rise, put credit cards back in the starting line-up:
- Retrain the branch and contact center sales staff.
- Move credit card offers to prominent space within mobile and online channels.
Business loans are harder, but likewise should not be ignored. Despite the intense competition from national and community banks, credit unions can and should leverage their advantage. With a well-thought-out business loan strategy, credit unions can offset the challenges and open up a revenue stream that will support growth for years to come.
Focus on driving business loan growth:
- Leverage the pricing advantage.
- Bring on the right talent and structure proper credit risk management processes.
By aligning product, channel and pricing strategies with strategic revenue growth realities and investing in supportive marketing and sales programs, organic revenue may not be a home run, but it will definitely advance some runners. To make the singles add up, credit unions need to ensure marketing and member experience programs are tied to specific objectives and assessed in terms of revenue results.
Growth Through CUSOs. Credit union service organizations that enhance offerings beyond the core business pro-vide both growth and diversification opportunities. While there is a prevalence of CUSOs structured to reduce processing expenses and leverage shared resources, the revenue potential is often overlooked.
CUSO investments to support new income from such activities as insurance, wealth management and business services (e.g., payroll processing) can allow a credit union to buy or build new and deeper relationships. That said, the risk appetite of management and the board must be carefully considered to ensure market entry expectations are understood and challenges mitigated. Partnerships, compensation structures and referral relationships with the core credit union are all essential to success.
Wealth management and insurance, the most common revenue CUSOs, are similar in many ways. Both are fee income businesses with revenue driven by the volume of transactions and size of the relationships. Both require attracting and retaining the right talent and learning to manage a variable compensation salesforce in a largely fixed-compensation credit union environment. Both will require careful assessment of potential partnerships/vendors and decisions about what components are part of an in-house operation or some kind of third-party relationship.
The more components are brought in-house, the greater the revenue, cost and risk. Hence, most effective revenue-driven CUSOs focus on the in-house elements of sales and relationship management, combined with leveraging other parties to gain processing efficiencies.
The ultimate key to success is to bring on highly motivated advisors and retain them long enough to benefit from an ever-growing book of business. Increasing revenue needs to be driven by leveraging the existing membership base to engage in relevant interactions. If we assume that 75 percent or more of members are comfortable or likely to stay with their existing provider (e.g., GEICO, Allstate, Edward Jones, Schwab), the opportunity is getting to the other 25 percent at the “right time” when they are open to moving or consolidating their relationships.
Here’s where credit unions have an opportunity. Mortgage originations allow the lender to see an applicant’s entire net worth picture including current investment relationships. Likewise direct car, mortgage and boat loans can be great triggers to explore the transfer of property and casualty insurance options. Each of these “at bats” provides an opportunity to be in the right place at the right time. To hone this swing, the credit union must:
- attract and retain enthusiastic and energetic advisors,
- tap into the existing membership base for referrals, and
- mine loan applications to identify target needs.
A good relationship between a credit union and a CUSO can result in literally hundreds of opportunities each year to cross-sell fee-based services. Add on incremental volume from well-targeted direct marketing focused on life events that could lead to new or changing needs, and the business has the potential to quickly add to the revenue bottom line.
From a risk point of view, not all members are good insurance risks and may get turned down. Existing business relationships with wealth managers or insurance agencies could be impaired as the credit union becomes a competitor. Swinging for a double or a triple may cause some strike-outs, but will up the revenue growth score if done well.
Growth Through Mergers. Mergers provide the fastest form of revenue growth, but they must be effectively integrated to enhance profit and net worth. In theory, regulatory pressure and costs would dictate scale, and scale should provide greater cross-sell and growth opportunities. So why aren’t there more?
The challenge comes in that home runs are difficult to hit. With more than 6,500 credit unions currently operating in the United States, the National Credit Union Administration only approved 39 mergers during December 2013 and January 2014. Of those, 23 were based on expanded services, with the remaining being due primarily to lack of growth or poor financial condition.
The reality is that everyone wants to merge and no one wants to be merged. True collaboration to offer members greater value takes an immense amount of time and effort. One can only hope that as compliance and regulatory costs increase and efficiency gains become more challenging, more credit unions will see the value of scale and scope of services that can be gained from merging. To drive revenue, capture scale, and cross home plate through a merger:
- Tackle leadership and governance issues head on.
- Look deeply at all facets of the business, including market overlaps, market growth potential, technology costs and investment needs, duplicative staff functions, product/service compatibility and, perhaps most importantly, cultural alignment.
- Develop a common view of relative competitive strengths and weaknesses.
- Use existing connections from shared branching or common CUSO services as a foundation for dialog. Having a similar mission and brand promise also can help realistic and productive merger discussions to occur.
- During implementation, ensure that:
- boards, management teams and employees are treated fairly;
- members are communicated with effectively; and
- integration of technology and processes is completed based on unbiased views of economic and capability realities.
While tangible member value in the form of lower operating costs and the ability to invest for the benefit of members seem obvious, the instinct for survival and organizational pride is sometimes difficult to overcome. To make decisions in the best interest of members, emotions need to be set aside.
When a merger is on the table, both boards must see the vision and agree on the benefit to members and the opportunity to add value through consolidation. Revenue growth strategies for the combined entity will typically take on an organic feel driven by the ability to cross sell more services and provide greater value to the membership base. Added value will be predicated based on improved operating expense structures that allow for better member pricing and the ability to leverage targeted marketing programs to the larger combined membership. The surviving management team must have patience and be willing to listen, assess and decide; arguments and objections to a merger may not be logical, but they need to be discussed. Only then will swinging for the fences up the score and increase revenue.
Choosing the Right Strategy
The best revenue generation option(s) for any credit union depends on its starting point. A frank and realistic view of internal competencies, market potential and competitive threats helps you decide whether the pitch is worth swinging at. Answering the following questions can help kick off the discussion:
- What is our strategy in terms of long-term vision, business model (how we go to market), brand and risk appetite?
- How well are we performing against our strategic growth objectives?
- How robust are our markets and competition, and will they provide the opportunity to achieve desired revenue growth?
- Do we have the products, channels, processes, people and technology to be effective?
- Can we afford the necessary investments?
- Do we have the discipline to execute and manage change?
- Are we willing to accept the risk associated with tapping new sources of revenue growth?
By asking and answering these questions, the viable playbook alternatives will begin to become clear. Credit unions in declining, mature and highly competitive markets may find the best option is a merger. Those in high growth markets may be willing to stick to organic strategies. Others with high existing services per member households may look to new CUSO-based offerings. And some will be in the position to pursue all three pages of the playbook.
The New York Yankees and Oakland Athletics have each been winners. The A’s play “money ball,” relying on singles, while the Yankees swing for the home run. Which strategy will you pursue?
Jim Burson is a senior director with Cornerstone Advisors, a CUES Supplier member and strategic provider based in Scottsdale, Ariz.