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6 Questions Credit Unions Should Answer to Strengthen Their Strategy

It is no secret that decisions are more complex and far-reaching, and margins are razor thin. Traditional and non-traditional opponents on the battlefield keep multiplying and plotting to get your members’ business, all while credit unions have to allocate their finite resources to the regulatory avalanches, such as NCUA’s NEV test, RBC, and CECL.

Below are six questions to answer in order to develop a relevant and sustainable business model:

  1. Do we have strategic clarity regarding our business model?

    2. Evaluating the business model includes an understanding of who is in the target market, as well as reaching clarity on the value proposition, competitive positioning, and internal core differentiators.

  2. Do we have enough of the right talent?

    3. Having the right amount of talent is critical. A good balance of critical and strategic thinkers, problem-solvers, who can motivate people to get the right things done and in the right order, will generate success within the ever-changing environment.

  3. Are we counting the right business every day and acting on it?

    4. As consumer adoption of technology continues to cause the competitive landscape to change, actionable business intelligence will be essential for credit unions going forward. There is often a treasure trove of data at the credit union’s disposal, but turning it into revenue and generating opportunities timely will be the challenge.

  4. Are our third parties doing what we want, when we want?

    5. The majority of credit unions have dozens of third parties that are essential for a wide range of services, and many of these third parties directly impact a credit union’s brand. Optimizing requires critical thinking and deliberate human resource allocation.

  5. Are we truly a learning organization?

    6. Often, decision-makers say they want their organizations to be innovative. Being innovative means trying new things and if appropriate, failing fast, learning, and applying the learnings to the next pilot program. However, many are truly afraid to make mistakes, and fear of mistakes is in direct conflict with being innovative. This is not to say that decision-makers should be reckless. Rather, to pilot new things on a smaller scale and then, if appropriate, roll them out. If the pilot does not meet stated objectives, then fail fast and move on.

  6. Are we an effective marketing organization?

    7. As consumer behaviors change and attention spans shrink, it is essential to adjust marketing efforts. Targeted and purposeful marketing is no longer an option. Consumers are inundated with marketing messages from just about every sector. Additionally, credit unions should ensure that their operations support their marketing efforts. It would be unfortunate if the marketing efforts generated a great amount of consumer interest, and the credit union was not operationally ready. It is not uncommon for us to see follow up on opportunities from digital channels inappropriately handled.

Answering these six questions can strengthen a credit union’s strategy. The best way to approach this is to begin and have fun as you explore the answers and evolve your strategic thinking.

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5,875 – The Number of Credit Unions with Assets Less Than What?

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Can you guess what this number represents?  You probably would not have guessed that this is the number of credit unions with assets less than the balances held on the Starbucks app and gift cards, which as of the first quarter 2016 totaled $1.2 billion (Source: marketwatch.com).  As a point of comparison, this is more than double the balances held on prepaid cards issued by Green Dot Corporation.  Perhaps even more surprising is that a whopping 41% of all Starbucks transactions are completed using a Starbucks card or their mobile app (Source: marketwatch.com).  Starbucks has announced plans to introduce a prepaid Visa rewards card through a partnership with Chase at the end of the year (the full article can be found here).

In the grand scheme of things, the $1.2 billion balances held by Starbucks, while impressive, is a small piece of the American deposit base, which totals more than $12 trillion (Source: bankregdata.com).  However, the continued disruption of traditional banking should be what gets the attention of credit union decision-makers, as these types of alternatives are growing quickly and are being offered by a more diverse group of companies that generally have had nothing to do with traditional financial services in the past.

It would be a good strategic thinking exercise to consider how these kinds of trends could impact the credit union’s financial structure, both over the shorter-term, but in particular over a longer period of time, such as 3-5 years.

  • How could this impact credit union deposits and liquidity?
  • How could this impact interchange income? Is your credit union’s card being used in the Starbucks app or to load gift cards?
  • Do these shifts continue to impact the way certain segments of the population view traditional financial institutions?
  • What might Starbucks do with the loads of cash they are acquiring?
  • What other questions should you be asking?

Consider not only what the impacts could be to your financial structure, but how could this impact your strategy, and how might your credit union respond to these types of threats?

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Raging Payment Battle Requires Purposeful Strategic Thinking

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Today, July 12, is Amazon’s Prime Day.  As part of the event, they are encouraging their members to apply for their Amazon Prime Store Card, which, among other features, offers 5% back on eligible Amazon purchases.

The raging battle for payments continues to escalate.  Amazon is just one more threat to interchange income.  If you want interchange income to continue to be a primary source of revenue, then you must fight this constant battle with constant strategic thinking.  The right business questions need to be asked – and answered – in order to turn strategic thinking into strategic action.  Specific to Amazon, business questions that can be asked could include:

  • How much interchange income are we earning from members’ transactions with Amazon?
  • What would it cost us if we lost 25% or 50% of the Amazon-related interchange income to Amazon?
  • Which members of ours use our card with Amazon and carry a balance?
  • What actions can we take now to protect, and maybe increase, this interchange income?
  • If payments are a critical component of our strategy, how does our strategic thinking need to change so that we are proactive instead of reactive in this arena?

Regarding the questions above, considerations include:

  • Embrace the brutal fact that providing various payment options to your members increases costs and does not guarantee member usage and engagement.  You must be deliberate about creating and monitoring initiatives that promote valuable member engagement
  • Decide if interchange income is going to be a major and/or permanent source of income for you.  If it is, you can’t always be reacting to what traditional and non-traditional competitors do.  You may consider creating a position of CPO (Chief Payments Officer), who has the mandate to increase member usage of credit, debit, and prepaid cards
  • Take a critical look at your business model, with the intention of removing non-value add products, services, and back office processes, to free up resources for those things that do add value for your membership and potential members

You can read more about Amazon Prime and their credit card here.

In an upcoming blog, we’ll discuss the broader payments battlefield, and how purposeful strategic thinking can keep you in the battle.

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Brexit’s Effect On Your Business Model

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Except for those that have been on vacation in a very remote location, all of us have heard or read countless reports about how voters in The United Kingdom (UK) decided to leave the European Union (Brexit), and predictions about the impact to the global economy (Source). This decision will have long-term implications, as UK is the fifth largest economy in the world (Source), and the second largest in the European Union. Thinking strategically about how Brexit and other events that create uncertainty can impact the business model of their credit union is key. Below are brutal facts and a strategic scenario to consider.

Brutal Facts
Margins are squeezed and Brexit can cause more squeezing. On June 1, 2016, the US 10-year Treasury yield was about 1.85%, already very low by historical standards. On the day following the Brexit vote, due to a spike in uncertainty that Brexit created, the yield was down to 1.57%, a decline of 28 basis points (bps) from earlier in the month and nearly 17 bps from the day before. The 10-year Treasury influences the interest rate charged for longer-term loans, such as mortgages.

Germany is the fourth largest economy in the world, followed by UK as the fifth, as noted earlier. As 2014 got underway, Germany’s 10-year government bonds were trading at 1.94% and UK’s were trading at 3.03%. Both rates have been trending downward in order to “jolt lending, spur inflation, and reinvigorate the economy after other options have been exhausted” (Bloomberg, Negative Interest Rates, June 6, 2016). Of particular note, the day following the Brexit vote, Germany’s 10-year bond was trading at a negative interest rate of (0.05%) and UK’s at 1.09%. At that time, Japan, the world’s third largest economy, had a negative yield on its 10-year government bonds.

Strategic Thinking: Rehearse Tomorrow Today
Consider a process which you have regularly scheduled meetings with a team of key players, such as monthly or quarterly, during which the only thing on the agenda is rehearsing tomorrow today, discussed in a previous blog about strategic planning (http://www.cmyers.com/preparing-for-strategic-planning/).

Identify a trend that is happening, such as negative interest rates in other large economies. Create a future scenario in which those trends continue or expand. Ask your team to discuss what that future could look like and list out all areas of the credit union that could be impacted, and be sure to estimate and simulate the financial implications of the scenario, as well as actions the team would consider. Remember, nothing happens in isolation, so combine events.

An example of a scenario about negative interest rates follows. Imagine it is 2018 and the US has slipped into a modest recession, which was triggered, in part, by the uncertainty created in Europe from the passage of Brexit. Loan demand declines and delinquencies increase. The value of the dollar continued to rise as the value of the Euro and British Pound dropped, making US products even more expensive to the rest of the world. Also, increasing uncertainty caused a flight to safety worldwide. The safest investment is US Treasury debt. As a result, the US 10-year Treasury yield is 0.75%, half of what it was at in June 2016, and shorter-term rates, such as the 3-month and 1-year Treasury bills, are paying negative yields. Current 30-year mortgage rates are 2.50% and competitive rates for auto loans to quality borrowers hover around 0.40%. You are being charged 0.10% to hold cash in an overnight account.

  • What is happening with home sales in your area?
  • What is happening with auto sales?
  • Are your savers saving more or less money?
  • How are you pricing your loans?
  • How are you pricing deposits?
  • Are you charging fees on some deposit accounts?
  • Is there an impact to non-interest income?
  • Because the margin is squeezed further, what are alternative sources of income you can leverage?

Resilient organizations are that way for a number of reasons. One is because they rehearse tomorrow today. Leaders of these organizations are deliberate about preparing their organizations for thriving during disruptions. Negative interest rates may not be the next big disruption, but your preparation for it may help you to thrive during other disruptions.

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Grow or Die – A Strategic View of Growth

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Grow or die. We hear this quite often. But what does it really mean? The game has changed. Credit unions are no longer just competing against other financial institutions. Non-traditional competitors are taking away non-interest income, especially sources such as interchange income. At the same time, non-traditional competitors, such as Lending Club and Sofi, are attacking margins by changing consumers’ definition of banking from a “one-stop-shop” of financial services to de-bundled boutique product offerings.

With serious threats to relevancy, the “grow or die” statement needs to be deeply considered. It is critically important for decision-makers to have clarity on what they mean by growth. What gets measured gets attention – meaning strategic focus and financial resources.

Growth comes in many forms:  Growth in assets, deposits, loans, membership, revenue, etc.

Growth in assets, deposits or membership does not necessarily translate into growth in revenue, income, or growth in members that contribute, or are highly likely to contribute, to the cooperative.

Consider just a few of the many options available to measure success for membership growth. Should the measure of success be:

  • Membership growth?
  • Growth in contributing members?
  • Growth in products and services per member?

In this limited example, a credit union’s strategy, initiatives, and allocation of brain power and financial resources would be different depending on what is determined to be important.

If the measure of success is membership growth, then the type of membership growth should be a topic of strategic discussions. A credit union can quickly grow its membership through youth campaigns, targeting 20-somethings, offering incentives, and of course indirect autos or CD shoppers.

Digging deeper, let’s use the 20-somethings to address just a few of the many questions that come to mind:

  • How long will it take for the youth and 20-somethings (often called pipeline members) to become contributing members to the cooperative?
  • It is not uncommon to see 30%-50% of the new membership growth come from those less than 30 years old. In light of this:
    • Does the credit union have enough contributing members to offset the net cost of the youth and 20-somethings until they become contributing members?
    • How should asset growth goals be adjusted since this group does not yet have a ton of money to save?
  • Does the credit union’s appetite for risk align with the needs of the 20-somethings? If not, what brand damage might be created by inviting them in and saying “no” to their needs?

The above provides just a sliver of the critical and strategic thinking that should be done with respect to measuring growth.

The next time someone says, we need to grow or die, consider asking, what exactly do you mean?