The New Earnings Model

August 2016: Vol 39 No 8
by Eric Weikart and Sam Kilmer

While growing and offering the better deal to members, CUs still have lost market share to large banks. What's up with that?

lightbulb with cogsIt might be surprising just how much traction efficiency, sales and advanced marketing methods are gaining at credit unions, since they are non-profits. Recent research of CU chief executive officers conducted by Cornerstone Advisors found that the concerns that grew the most over the past year were 1) efficiency and 2) non-interest expense management. At the same time, CUs’ growth focus areas were improved sales and marketing methods, expanded online presence, and mergers and acquisitions.

For years, the CU earnings model has been based largely on compliance-safe cost management and lending margins supported by branch-generated deposits from accounts that also generate fee income. This model created natural loan concentrations (around areas of known strength) and, as delivery shifted to digital, an over-reliance on incidental branch traffic. It left CUs with the regulatory pinch of a compliance expense burden and (likely) soon-to-be-at-risk interchange income (Read more about the July 1 card settlement reversal at And then along came the margin squeeze brought on largely by competitive pressures.

CUs have rightly celebrated significant industry growth, but the brutal truth is, as the market grew over the past five years, large banks grew faster than CUs in both assets and deposits. And big banks accomplished stronger growth through a combination of prices less advantageous to customers, more convenient delivery and aggressive marketing. Reality check: Credit unions have grown, but they lost deposit market share to big banks that grew asset market at a much greater pace—all while CUs offered what amounts to a better deal. What’s up with that?

Out With the Old Model

In the “new earnings model,” sales, marketing and service converge around each delivery channel, and the traffic is increasingly remote for most. High performance is about revenue growth and scalable, engineered processes—from discovery and onboarding through experience and advocacy. It includes instilling accountability in all employees through the deployment of balanced scorecards that incorporate productivity, risk, member service and convenience. It’s about learning from the past and adopting industry best practices.

As any indirect lending manager can attest, engineering process for a member who is not present takes hard, advance design work and discipline. What is changing is that the discipline for indirect lending now has to be extended to other direct processes in the CU where there has traditionally been constant human intervention. For example, CUs will want to figure out how to automate decisioning and communication of a direct loan approval and next actions (such as loan fulfillment or cross-sell) in a web/mobile/automated voice format.

Risk Management vs. Elimination

As sales and service converge, it is critical that credit unions invest in efficient operational processes, while at the same time focusing on member engagement. Too many credit unions only look at internal processes or risk when implementing technology rather than designing processes around the member.

For example, releasing a new mobile remote deposit capture system that doesn’t provide real-time risk-based funds availability would probably never have happened if the functionality was assessed with the member in mind. Managing risk plays a factor, but too many credit unions start the conversation around eliminating risk versus managing it.

Recent research from Cornerstone found that the typical credit union overspends more on compliance than it allots to its entire marketing efforts. Competitive pressures no longer tolerate such risk over-allocations from the old earnings model. The new earnings model is about growth and engagement—not about eliminating risk.

Engineering Over Energy

Research and recent process work confirm significant systematic changes are under way. CUs’ growth focus is shifting from operational core and payments systems toward member-facing systems typically managed by individual lines of business. Origination, member relationship management and digital banking systems are being replaced at twice the rate of transactional core and payments systems. And a look behind the scenes of most mobile and online system selection processes reveals that the drivers of decision-making are increasingly about engagement and content management rather than anything transactional. In most cases, interactional systems are now being used across multiple functional areas and with an effort to harness analytics across the entire credit union. There may have been a time when “silo busting” was feel-good talk, but new system projects alone are knocking down remaining walls.

Designed Engagement

Three stresses are causing the old earnings model to break: 1) over-reliance on inbound branch traffic, 2) lack of overall revenue leadership, and 3) product ownership.

The inbound branch traffic decline is acute, often masked, and routinely talked down. While some credit union execs and industry pundits report unchanged or only lightly diminished branch traffic, the industry has been rocking a 3 to 4 percent member growth rate. Many large credit unions have much higher growth rates. So, branch traffic can seem the same, but the incidental walk-in opportunities generated relative to the size of membership are actually declining. And, it will further erode as experience improvement efforts streamline processes.

Process experts are finding a certain amount of branch traffic has been forced onto members because some processes can only be fulfilled in the branch (and needlessly so). For the record, we didn’t say the branch is going away or has no value. But no matter how many outbound calls or digital apps set branch appointments, only a small number of people really need to go to the branch—and those visits are for a diminishing number of needs.

Engagement and dialogue are shifting to mobile, contact center and outreach in our banking lives just as they are in the rest of our commercial lives. The processes of discovery, onboarding, experience and advocacy need to be re-engineered—from the time a member searches for a house, a car, money management, a financial advisor or (yes) a bank, all the way through engaging to improve their lives after they’ve added four or five services over the years with the credit union.

Where and how do we meet members where they are and as they come to know what they need—or even before that? There are processes and systems to lead this, but the work is an in-the-trenches, process-intensive ground campaign, not a from-the-clouds, “omni-channel” air campaign.

Decentralized revenue and lacking product leadership in credit unions are increasingly stressful under the old earnings model because of the need for top-line growth and improved competitiveness. While enterprise cost ownership typically rests with the chief financial officer, and the chief lending officer naturally leads loan revenue and products, there is less clarity in areas like payments and deposits. Newer marketing methods and systems for revenue generation require accountability, discipline and new metrics across the shop. Either someone on the executive leadership team signs up for moving the needle on increasing overall product opportunities from the entire sales and marketing process, or it simply doesn’t get done.

Now Every Company is a Tech Company

Nike releases mobile apps to improve the value of its shoes. John Deere releases tablet apps to improve the value of its tractors. GM invests in Lyft because ride-sharing tech influences its cars. And say what you want about the big banks, but Chase and Wells Fargo have some impressive delivery technology. According to JD Power, mobile app development at the big behemoth banks led directly to their closing the customer satisfaction gap with smaller banks—all while having less attractive prices than credit unions.

In the old earnings model, cost and lower integration risk were the most common drivers of technology vendor usage for credit unions. With new top-line and competitiveness pressures, credit unions are pushing their vendors to new stress points. Many credit unions are deploying solutions outside of the banking vendor ecosystem, building their own apps internally or cobbling together vendor solutions with in-house built or underwritten apps in all new ways.

Meanwhile, the solutions are increasingly being used across the entire credit union. The new earnings model requires a different approach to vendor performance management, incorporating risk but factoring in cost and benefit assessments with organizational accountability and oversight. Risk, technology and compliance executives may be solid assessors of vendor risk, but CFOs and line-of-business leaders are the right assessors of vendor cost and vendor benefit, respectively.

Keeping Score

Some of the financial, member satisfaction and operating measures of the old earnings model still apply, but new measures are needed. Given the pressures of both competitors and consumer expectations, measures of online engagement and turnaround time are paramount. The delivery shift calls for measurements like branch revenue per square foot, web/mobile lead generation, interchange-per-card and resource redirects from reactive administrative and compliance costs toward delivery outreach investments.

Being efficient instead of busy will grow in urgency, and instilling accountability in managers to produce new results is an integral part of the new earnings model. The efficiency pressures will increase not only as a result of the continued regulatory onslaught, but because members increasingly demand fast (and digital) turnaround on product decisions and service fulfillment even more than they have come to expect attractive prices or courteous, in-person service.

Eric Weikart is a managing director and Sam Kilmer is a senior director with CUES Supplier member and strategic partner Cornerstone Advisors.