Pushing Performance

May 2017: Vol. 40 No. 5
by Eric Weikart

7 habits of highly effective credit unions

people place bars on bar graph to show improvement

For all the uncertainty in the world, the short-term market outlook—with interest rates on the rise, a favorable business environment and possible deregulation—is all good for credit unions. In our recent CEO survey, 88 percent of credit union and bank executives said they were optimistic about a continued economic upswing and opportunities to build business and grow lending. That’s a five-year high on positivity.

On the downside, although credit unions are generating more income, they’re also less efficient on average than in the past. The 2016 Cornerstone Performance Report for Credit Unions finds that the industry overall is spending more for lower returns in comparison to 2014.

The most significant shifts have been in mortgage productivity, down 40 percent due to the added burdens imposed by the TILA-RESPA Integrated Disclosure requirements, and branch metrics, where transaction volume continues to decline faster than operating expenses. Considering these trends and compliance challenges, we’d expect to see more focus on efficiency by credit unions, especially now that there are more tools available than ever.

Traveling across the country in my work with financial institutions, I’ve seen firsthand the impact of the following practices typically embraced by high performers. With a tip of the hat to Stephen Covey, here are seven habits for highly effective credit unions.

1.  Embrace performance management.

As the income generation/efficiency divide illustrates, credit unions can grow without improving performance. A performance culture combined with an emphasis on accountability aims for sustainable growth and equips every business unit with the tools to achieve it rather than simply reacting to external forces.

We recommend the use of balanced scorecards to measure and manage risks, member service and efficiency specific to each department. Historically, credit unions have focused on a few metrics that provide a high-level view of performance across the organization, such as assets per employee, return on assets and the Net Promoter Score. In contrast, performance management using balanced scorecards on specific functions for each business line dives deeper.

For example, your credit union may set sales goals for mortgage loan officers to generate applications, but what about specific goals for underwriters and processors? Establishing expectations for loans originated per underwriter provides a benchmark to measure departmental efficiency and individual performance with the goal of improving turnaround times—and ultimately member service.

Metrics tied to individual performance can also be used as the basis for incentive pay, a sound strategy to reward high performers and improve recruitment and retention of talented employees in competitive job markets. (Also read “On Compliance: How to Avoid a Case Like Wells Fargo”.)

2.  Aim for constant quality improvement.

The mindset that there is always room for improvement should be shared and furthered by every credit union employee. To this end, some credit unions hire analysts and managers specifically to improve processes. Unfortunately, managers and staff whose business units come up short may point fingers at those charged with process improvement. Whatever their job titles, all staff should be focused on improving processes and outcomes—and be provided ways to pass along their observations and ideas. Every employee, not just IT specialists and analysts, should be thinking about automation and ways to leverage technology to improve back-office and member-facing operations. Credit unions that invest in technologies to streamline workflow, eliminate paper processing and automate sales procedures exemplify an “all in” commitment to quality improvement.

3.  Focus on profitability.

Profitability, not just growth, should be the overall goal of the entire organization. When a credit union knows which products, branches and members are profitable, it can make smart decisions about serving those members, incenting appropriate products and modifying business line processes. Data collected for the Cornerstone Performance Report shows that average total mortgages closed per originator per month declined from 10.61 in 2014 to 7.6 in 2016, mostly related to TRID requirements. This raises a fair question: Is mortgage lending profitable? The answer will vary, based on how well a credit union incorporated the new disclosure requirements into loan processing and how much it has automated its mortgage lending activities.

Indirect lending is another area where it may be worth careful analysis to discover whether your credit union is really turning a profit. Are you growing just to grow or growing profitably? A third example is fee income, where waivers and exceptions must be factored in. Analyzing profits and losses for each business line and comparing profitable member relationships to the return on serving all members can be eye-opening exercises. The executive team needs to regularly test assumptions about profitability.

4.  Standardize and centralize.

Investing in technology is only the first step on the road to building scalable processes. The second is to change processes to take full advantage of the efficiencies afforded by technology. Automated processes can simplify and ensure consistency. Focus on where you can streamline operations by:

1.  Simplifying products.  Too often, credit unions overcomplicate products and pricing with requirements and special terms to the point where administration and tracking are a nightmare.

2.  Centralizing where possible—with loan processing and underwriting, for example.  As credit unions grow, centralizing is usually the most efficient means of improving performance if you can hold the line on turnaround time for members and maintain or enhance service delivery. Centralizing also reduces the potential for processes that yield inconsistent results from branch to branch or across delivery channels.

3.  Maintaining the status quo for “one and done” service requests.  As the industry moves from emphasizing transactions to sales in branches, there may be a tendency to relieve frontline staff of mundane tasks like handling address changes. But from a member service perspective, it may be easier to handle these requests promptly in the branch rather than passing them on. 

5.  Zero in on scale.

More is generally better when it comes to delivering financial services. Larger organizations can operate more efficiently than smaller credit unions, especially when providing a full range of services and spreading out the fixed costs of complying with complex standards like the Bank Secrecy Act. But smaller credit unions can improve performance by focusing on one or two key product lines and delivering them well. For example, a smaller credit union could make its name in mortgage lending or as a partner in Small Business Administration loan programs by originating just as much volume in those areas as a larger asset size credit union. 

6.  Recognize the power of data.

On the whole, the industry earns a letter grade of C– for its use of data analytics to power dashboards that could help executive teams monitor and steer performance. Nobody is ever happy with the state of an organization’s data management; however, some credit unions are more committed than others to keeping pace with the potential of data analytics across business units. There is always room for improvement in working toward data-driven vs. gut-feel evaluation and decision-making.

Median spending on strategic systems—defined as systems that help a business unit achieve such strategic goals as loan origination, document imaging, business intelligence and asset/liability software—increased from 0.05 percent of assets in 2014 to 0.072 percent in 2016. Much of this increase was attributed to enhancing marketing data analytics. That increased investment is a good start to harness the power of data to boost performance.

7.  Understand risk management.

Credit unions want to manage risk, not eliminate it. For example, to counteract the high rate of fraud in debit card transactions, one executive team decided to turn off transactions at gas stations outside of the credit union’s home state. A byproduct of this action was a need for new manual processes to field inquiries and complaints about denied transactions. And then, when members found they couldn’t use their cards to gas up on family road trips, they stopped using or canceled their cards and/or credit union memberships.

Unbalanced risk management leads to inefficient processes and member service lapses, turning a credit union from a can-do financial services provider to an institution where “Sorry, this’ll take a few minutes” is a familiar refrain. Members expect seemingly simple requests, like address changes and ACH originations, to be handled simply. They don’t have time for complicated, inefficient processes that require additional checks—and neither does your staff.

We recommend taking a risk-based approach across the organization. In quality control, for example, credit unions should rate their organizational risks using historical errors data, eliminate unnecessary controls, improve staff training in areas where most errors occur, and apply automated solutions to reduce the incidence of human error. Also push back on regulatory findings that seem excessive.

In short, take a pragmatic approach to risk management. Not every branch or member poses the same level of risk. Conduct branch audits to assess variances that indicate higher levels of fraud or transactional errors in specific branches, and take steps to increase controls and staff training at those locations.

Remote deposit capture policies provide a ready example of the pitfalls of a one-size-fits-all approach to risk management. A credit union might decide to limit real-time availability of mobile deposits to the first $100 for all members. But does a long-term member with high balances in several accounts really pose the same risk of RDC fraud as a new member with a $75 checking account balance? The real risk in this scenario is losing profitable member relationships.

Developing these seven habits can help your credit union push performance to take advantage of opportunities when the market is on the upswing—and to navigate uncertainties in good times and bad.