The Road Ahead For Credit Unions

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Bill Handel, vp of research at Raddon Financial Group, reviews the current regulatory environment and discusses the challenges and opportunities, identified at the recent CEO Strategies Group workshops, that lie ahead for credit unions.

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The Road Ahead For Credit Unions

  1. 1. The Road Ahead for Credit Unions A Review of Challenges/Opportunities Credit Unions May Face in the Current Environment Bill Handel Vice President of Research For Audio, Dial: 1 (866) 222-7056 Conference Code: 5245922 To mute your line, hit *6 on your phone To unmute your line, hit *7 on your phone
  2. 2. The RFG Solution <ul><li>RFG helps financial institutions gain a competitive advantage and improve performance with sustainable and measurable results through: </li></ul><ul><li>Research and Analysis </li></ul><ul><li>BI/CRM/MCIF Software </li></ul><ul><li>Data Solutions </li></ul><ul><li>Consulting </li></ul>Understanding the needs of the member Understanding the competencies of the organization Aligning products, systems, people, and processes Marketing, sales, and management tools
  3. 3. How Do Our Clients Work with Us? Strategy Results
  4. 4. <ul><ul><li>Industry & Economic Overview </li></ul></ul>
  5. 5. Third Consecutive Year of Historically Low Housing Starts Low home sales since 2005 have resulted in very low levels of housing starts in the US. Expect these levels to remain low for the next several years.
  6. 6. Vehicle Sales Lowest Since Early 1990s 2011 projection Vehicle sales have expanded since 2009, but are still far below levels seen in the mid 2000s. Source: Bureau of Economic Analysis
  7. 7. Household Debt Levels Are Declining But Still Historically High Source: Federal Reserve Debt levels per household expanded in the 1980s and 1990s, but this growth accelerated in the 2000s, leading to our current deleveraging.
  8. 8. Conclusion <ul><li>The economic environment is likely to continue to present challenges for the next several years. </li></ul><ul><li>Housing typically leads most recoveries – but not this one. </li></ul><ul><li>Consumers do not feel that the recession has ended, despite the proclamation of most economists. </li></ul><ul><ul><li>This may be a self-fulfilling prophecy. </li></ul></ul><ul><li>Major issue for credit unions will be continued weak loan demand. </li></ul><ul><li>Second issue: consumers will continue to seek a trusted financial advisor. </li></ul>
  9. 9. <ul><ul><li>The Importance of </li></ul></ul><ul><ul><li>Managed Growth </li></ul></ul>
  10. 10. Key Growth Questions <ul><li>Can the credit union afford to grow any faster than the rate of loan growth? </li></ul><ul><li>How important are membership and household growth goals? How important is the profitability? </li></ul><ul><li>Is the Board and Senior Management ok with shrinking deposits/assets if you can’t find loan volume? </li></ul><ul><li>How can the credit union effectively control or manage growth in the current environment? </li></ul>
  11. 11. Anticipated Loan Usage Has Declined Source: Raddon Financial Group, National Consumer Research RFG research shows that consumers have been looking to reduce their debt for many years; the most recent financial crisis has forced the issue.
  12. 12. 10 Are you retaining the right members? Overall member retention matters less. Retaining the right members matters more.
  13. 13. 13 Tools that improve cross-selling, via direct mail, the internet, the front line, or the call center, have increased enormously in importance. Cross-sales should be a organization-wide metric.
  14. 14. 38 The recent growth in loans has been experienced in the commercial (small business) sector. The indirect category has also seen growth for many credit unions, but price is the driving factor.
  15. 15. 40
  16. 16. 51 The often-forgotten growth opportunity: unfunded loan approvals. What programs have been put in place to track and follow-up on unfunded loan approvals. These potential loans could result in significant growth for the institution.
  17. 17. 52 How much loan business are you leaving on the table? This data show the projected loan dollars and financial impact of loans that are approved but unfunded.
  18. 18. <ul><li>The fundamental issue: </li></ul><ul><ul><li>In a low-growth environment, loan growth is dependent on increasing wallet share </li></ul></ul>
  19. 19. 363 The typical credit union is obtaining less than one in four of the loan dollars its membership has, and less than 30% of the members’ deposits.
  20. 20. 366 Where are your loan strengths and weaknesses by product type. Auto loans tend to be the strongest, and yet the typical institution still gets only 40% of the membership’s auto loan balances.
  21. 21. 367 Share of loan wallet tends to be lowest among the credit driven households, which is the high income Gen Y segment. The industry is losing the loan relationships of the younger segments.
  22. 22. 414 Which branches are doing the best in terms of share of wallet?
  23. 23. <ul><li>Even in this current environment… </li></ul><ul><ul><li>SOME CREDIT UNIONS ARE FINDING WAYS TO GROW LOANS </li></ul></ul><ul><ul><li>A Few Examples… </li></ul></ul>
  24. 24. <ul><li>Product Offering: </li></ul><ul><li>Promoting rate rather than type (refinance – boat – auto – card payoff) </li></ul><ul><li>Starting at 1.99% (secured), 3.99% (unsecured) variable rates for tier 1 borrowers </li></ul><ul><li>Up to 72 month term, Max 1% rate increase per year </li></ul><ul><li>New loans only, automatic payment required (from anywhere) </li></ul><ul><li>Not applicable for real estate or business loans </li></ul><ul><li>No minimum amount for 60 month term, $20k minimum for 72 month term </li></ul><ul><li>$25 off origination fee if member was around prior to Oct 15th 2010 </li></ul><ul><li>Online origination fee $69, other origination $99 </li></ul>Case Study: Innovative Loan Product $160 Million Community CU in Central Region <ul><li>Results: </li></ul><ul><li>2.60% Average Loan Yield </li></ul><ul><li>$12,700 Average Balance </li></ul><ul><li>40% increase in loan volume year over year </li></ul><ul><li>Break-even balance: $4500 at 1.99%, $1,900 at 3.99% </li></ul>As shown at RFG’s Winter 2011 CEO Strategies Workshops, a relevant example of utilizing product design to achieve growth
  25. 25. Case Study: Member Development Solution Asking the Right People for the Business Response Rate 0.98% ROI 321% <ul><li>HOW? Targeted Marketing Campaign (RFG’s Member Development Solution) </li></ul><ul><ul><li>Who? Using RFG research, targeted members most likely to respond to the offer </li></ul></ul><ul><ul><li>When? Timed offers according to seasonal account opening trends based on RFG research </li></ul></ul>Results after 9 months… <ul><li>$800 Million Credit Union in economically depressed area </li></ul><ul><li>Conducted 34 separate campaigns for Auto, Equity, Checking, and Mortgages over course of 9 months (191k pieces mailed) </li></ul><ul><li>No Promotional Offers – repetitive offers asking the members for the business </li></ul>1,869 New Accounts (78% were Loans) Balance Growth $ 49,764,077 Total Interest Income $ 1,296,657 Total Cost $ 162,846 Profit $ 685,879
  26. 26. <ul><li>Outbound call center consists of 7 full-time and 1 part-time employee (including a manager and one processor) </li></ul><ul><ul><li>Dedicated to consumer loan recapture activities </li></ul></ul><ul><ul><li>Hire lenders with 2-3 years of experience who are charismatic and possess great phone skills </li></ul></ul><ul><li>Pull credit reports on 2,000 individuals per month </li></ul><ul><ul><li>New members, new loans, new joint account holders </li></ul></ul><ul><ul><li>Part-time employee sifts through reports and prioritizes leads </li></ul></ul><ul><ul><li>Looks for FICO scores over 680, resulting in 400 leads per month </li></ul></ul><ul><li>Outbound callers typically achieve contact with 150 of the 400 leads </li></ul><ul><ul><li>Convert 100 loans to the CU per month </li></ul></ul><ul><ul><li>Average loan balance of $19,000 </li></ul></ul><ul><li>Resulting Annual Net Contribution from program = $400,000 </li></ul>Case Study: Outbound Sales Program $2.8 Billion Credit Union in Western Region
  27. 27. Case Study: Successful Loan Generation Matrix Program <ul><li>In late 2005, a $217 Million Midwestern credit union with three branches in rural markets began a long-term direct marketing program that continues today. </li></ul><ul><li>Now in its sixth year, the loan generation matrix program – an automated, database-driven series of campaigns targeting members with a high-potential for specific loan products – has produced: </li></ul><ul><li>2,721 new loans from direct sales over five years of campaigns </li></ul><ul><li>$41.3 million in new loan balances in direct sales over five years of campaigns </li></ul><ul><li>$182 million in new loan and deposit balances gained from product sales other </li></ul><ul><li>than those featured during the campaign periods (indirect sales) </li></ul><ul><li>The average ROI for the entire program was 934.9%. </li></ul>
  28. 28. <ul><li>Response rates during the years also demonstrated success. </li></ul><ul><li>Direct response rates averaged 20.5% per year over five years of campaigns. </li></ul><ul><li>Indirect response rates averaged 50.8% per year during the same period. </li></ul>Case Study: Successful Loan Generation Matrix Program (Continued...)
  29. 29. <ul><ul><li>The Impact of Re-Regulation </li></ul></ul>
  30. 30. Critical Issues <ul><li>What threats do we anticipate to non-interest income? </li></ul><ul><ul><li>Consumer Financial Protection Bureau </li></ul></ul><ul><ul><li>Threats to interchange (debit cards, credit cards?) </li></ul></ul><ul><li>Can we continue to maintain the same reliance upon non-interest income in our operating models? </li></ul><ul><li>Can we continue to support free checking? </li></ul>
  31. 31. 111 National trends for credit unions: declining NSF offset by increase in debit card income. Total income is flat to down. NSF Debit Card Total 2003 $51 $30 $113 2008 $101 $50 $180 2011 $86 $62 $176
  32. 32. 114
  33. 33. 115
  34. 34. 116
  35. 35. Regulatory Changes <ul><li>Reg E </li></ul><ul><ul><li>Opt-in success rates vary, many were fairly successful in opting in frequent overdrafters </li></ul></ul><ul><ul><li>Ongoing campaign – new accounts </li></ul></ul><ul><li>Reg II </li></ul><ul><ul><li>Projected to decrease interchange income by 30-40% </li></ul></ul><ul><ul><li><$10B – expect to be impacted in 2-3 years </li></ul></ul><ul><li>Consumer Financial Protection Bureau </li></ul><ul><ul><li>The wildcard – the impact could dwarf that of Reg E and Reg II </li></ul></ul>
  36. 36. What We Might Expect From the CFPB <ul><li>“ Reasonable and proportional” overdraft fees </li></ul><ul><li>Caps on ATM surcharges </li></ul><ul><li>Limits on credit card annual fees </li></ul><ul><li>Maximum daily overdraft charge </li></ul><ul><li>Waiver on de minimus overdraft charges </li></ul><ul><li>Increased disclosure requirements on all accounts </li></ul>
  37. 37. The Emergence of Debit Fees <ul><li>Testing a $3 monthly debit card activity fee for debit card use beginning in October 2011 </li></ul><ul><li>Oregon, New Mexico, Georgia, Washington, Nevada </li></ul><ul><li>Applies to customers that make at least one purchase during the billing cycle </li></ul><ul><li>$3 usage fee is waived for “some checking accounts” </li></ul><ul><li>Began testing a $3/month debit card fee on basic checking accounts in Green Bay, WI in February </li></ul><ul><li>Implementing a $5 debit card activity fee; ATM transactions not charged </li></ul><ul><li>Has drawn the ire of Senator Durbin </li></ul>
  38. 38. Non-interest Income Recovery <ul><li>$5 monthly debit card fee </li></ul><ul><ul><li>Everyday Checking (base checking) </li></ul></ul><ul><ul><li>Only applied during a statement cycle when a signature, PIN, or reoccurring transaction is initiated </li></ul></ul><ul><li>$4 monthly debit card activity fee </li></ul><ul><ul><li>Regions LifeGreen Checking (base checking) </li></ul></ul><ul><ul><li>Fee charged only if the card is used for purchases </li></ul></ul><ul><li>Statements Regarding Debit Card Fees </li></ul><ul><ul><li>“ Every bank around I think will ultimately end up with some type of fee.” </li></ul></ul><ul><ul><li>“ We are in the decision phase.” </li></ul></ul><ul><ul><li>Currently charge $0.30 per POS PIN transaction </li></ul></ul>
  39. 39. Consumer Response to Debit Fees In response to recent regulatory requirements regarding debit cards, some financial institutions may incorporate fees for the continued use of their debit card. Which of the following changes would be acceptable for your future debit card use? Source: RFG National Consumer Research, Fall 2011
  40. 40. If Free Checking Is Your Choice… <ul><li>Question: </li></ul><ul><ul><li>If you decide to continue to offer free checking, how should you leverage this decision? </li></ul></ul><ul><li>Answer: </li></ul><ul><ul><li>Set strict cross-sell metrics for the organization and measure at the branch level. </li></ul></ul><ul><ul><ul><li>Focus on reducing the percent of checking accounts that are “single-service.” </li></ul></ul></ul><ul><ul><li>Implement formalized Onboarding Program to enhance cross-sales after onset of new relationship. </li></ul></ul><ul><ul><li>Target “high opportunity” non-members within three miles of branches with direct mail. </li></ul></ul><ul><ul><li>Implement technologies that assist in the frontline cross selling process. </li></ul></ul><ul><ul><li>Aggressively push cost savings tactics such as e-statements. </li></ul></ul>
  41. 41. <ul><ul><li>Improving Member Profitability </li></ul></ul>
  42. 42. Key Issues for Member Profitability <ul><li>What is the profitability impact of two more years of historically low interest rates as suggested by the Fed? </li></ul><ul><li>What should be our policy on member subsidization? </li></ul><ul><ul><li>Short-term v. Long-term </li></ul></ul><ul><ul><li>To what extent? </li></ul></ul><ul><li>What factors should be examined in establishing a deposit pricing strategy? </li></ul>
  43. 43. Industry Net Interest Margin Erosion Margins have declined for financial institutions over the past 15 years. This decline has occurred in both high and low rate environments. Banks – particularly the largest banks – are dramatically reversing this trend. Source: FDIC
  44. 44. The Big Four Dramatically Reduce the Cost of Funds **CU data as-of Mar-11 Cost of Funds Dec-08 Dec-09 Dec-10 Jun-11 2.06% 0.74% 0.51% 0.58% 2.23% 1.03% 0.63% 0.48% 2.70% 1.41% 1.08% 1.06% 1.58% 0.55% 0.51% 0.42% Credit Union Avg 1.94% 1.39% 0.97% 0.74%** CUs >$100M 2.45% 1.76% 1.21% 0.95%**
  45. 45. Base Savings Rates $1,000 in a Chase Savings account will earn the customer 10 cents/yr in interest! Rates as-of August, 2011
  46. 46. 89
  47. 47. Deposit Management Strategy: What is the Loyalty and Rate Sensitivity of the Base? Loyalty Deposit Rate Sensitivity Rate-Sensitive Loyalists: 13% of Members Rate-Sensitive Non-Loyalists: 41% of Members Non-Sensitive Loyalists: 7% of Members Non-Sensitive Non-Loyalists: 39% of Members
  48. 48. Deposit Management Matrix <ul><li>What is your current need for deposits? </li></ul><ul><ul><li>Attrition Mode </li></ul></ul><ul><ul><ul><li>The credit union is below “sweet spot” for loans to deposits </li></ul></ul></ul><ul><ul><ul><li>Willing to shed deposits </li></ul></ul></ul><ul><ul><li>Maintenance Mode </li></ul></ul><ul><ul><ul><li>Maintaining but not aggressively seeking new deposits </li></ul></ul></ul><ul><ul><li>Acquisition Mode </li></ul></ul><ul><ul><ul><li>Actively trying to bring in more deposits based on high loan to share </li></ul></ul></ul>
  49. 49. <ul><ul><li>The Future is Near: </li></ul></ul><ul><ul><li>Is Your Technology Ready? </li></ul></ul>
  50. 50. Technology Critical Issues <ul><li>How critical are new emerging front-line technologies such as Mobile RDC, Person-to-Person Payments, and Alternative Payments? </li></ul><ul><li>How is the role of the branch changing? </li></ul><ul><li>What back-office technologies can be deployed to improve the productivity and functionality of your traditional channels? </li></ul>
  51. 51. Efficiency Ratio Tends to Be Driven By Revenue Efficiency Ratio 57% 63% 81% 86%
  52. 52. Historical Trend in Operating Expense Inflation-Adjusted Operating Expense Incremental Increase in Operating Expense Adjusting for inflation, credit union operating expenses per household have risen by 52% from 1995.
  53. 53. 71
  54. 54. 73
  55. 55. 74
  56. 56. 400 Big difference between these two ratios indicates an opportunity to increase e-statement penetration and reduce costs.
  57. 57. Will Mobile Banking Follow the Same Trend as Online Banking? Source: RFG National Consumer Research ?? Online Banking usage grew from 8% to 61% between 2000 an 2010. Mobile Banking is currently at 11% usage; will it increase at the same rate as Online? 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
  58. 58. Likelihood to Use Remote Deposit Capture Source: RFG’s Spring 2011 National Consumer Research Gen Y is more likely to use Remote Deposit Capture, with 43% expressing at least being somewhat likely to utilize the service.
  59. 59. P to P Payments
  60. 60. Current P2P Usage by Generation Source: RFG’s Spring 2011 National Consumer Research One in every three Gen Y consumers conducts Person-to-Person payments. Does Gen Y need a “Checking” account?
  61. 61. With Reg II, 30% to 40% of debit card interchange income is at risk. With Alternative Payment systems, 100% of the revenue is at risk if the debit card transaction is replaced completely (if still funded by financial institution, transaction becomes ACH). Alternative Payments
  62. 62. Gen Y Still Uses the Branch Source: RFG’s Spring 2011 National Consumer Research
  63. 63. Branch Issues <ul><li>Branch rationalization is critical in this environment </li></ul><ul><ul><li>Can your branches be justified by the volume of business from existing members as well as potential new members </li></ul></ul><ul><li>The process of serving the member can be improved through new technologies. Which of these are you doing? </li></ul><ul><ul><li>Branch design and layout </li></ul></ul><ul><ul><li>Virtual teller kiosks </li></ul></ul><ul><ul><li>Virtual member service </li></ul></ul><ul><ul><li>Automating teller functions to reduce administrative functions (i.e. balancing) </li></ul></ul><ul><li>The industry is moving towards a self service environment </li></ul><ul><ul><li>How will you upgrade the skills of your staff? </li></ul></ul>
  64. 64. 5
  65. 65. High Performers Grow Faster High performing credit unions are growing both households and loans at a significantly faster pace than the overall industry. Source: RFG’s CEO Strategies Program
  66. 66. Relationship Depth Defines High Performers Source: RFG’s CEO Strategies Program High performing credit unions are much more effective at cross-selling and have a significantly higher services per household ratio.
  67. 67. Share of Wallet is Significantly Higher Source: RFG’s CEO Strategies Program As would be expected, with higher cross-selling success comes a higher share of wallet. This is one of the most important metrics to monitor.
  68. 68. The Key to Efficiency is Revenue Growth Source: RFG’s CEO Strategies Program Better product sales and deeper relationships leads to higher revenues per household. Expense per household is also higher, but overall efficiency is much better for high performers due to the revenue levels.
  69. 69. Margins Have Not Been Central to Financial Performance Source: RFG’s CEO Strategies Program Deposit and loan pricing is not a critical difference between high performers and the industry as a whole.
  70. 70. High Performers Have Changed the Mix of Non-Interest Income Source: RFG’s CEO Strategies Program Higher non-interest income levels among high performers is a result of broader product sales as well as diversified non-interest income sources.
  71. 71. Result: Stronger Financial Performance Source: RFG’s CEO Strategies Program Financial performance does not define high performance. High performance results in stronger financial performance.
  72. 72. Four Critical Issues <ul><li>Logical Growth - Build share of wallet to drive growth and organizational efficiency </li></ul><ul><li>Diversification – and define checking account strategy for the new environment </li></ul><ul><li>Improve member profitability through effective pricing – COF is key </li></ul><ul><li>Make appropriate investments in technology </li></ul>
  73. 73. QUESTIONS? To unmute your line, hit *7 on your phone To mute your line, hit *6 on your phone You may also type a question using the Question and Answer tool provided through the Web conferencing system.
  74. 74. Evaluation Shortly an email will be sent with a copy of today’s presentation slides and a link to the recording. Please take a moment to fill out our evaluation.
  75. 75. Contact Information <ul><li>Thank You </li></ul><ul><li>Need ideas, recommendations or solutions to improve marketing results? Contact RFG for our unique blend of industry expertise, strategic analyses, objective intelligence and MCIF solutions. </li></ul><ul><li>www.raddon.com </li></ul><ul><li>www.theraddonreport.com </li></ul>Bill Handel Vice President, Research & Development Raddon Financial Group 701 East 22nd Street, Suite 400 Lombard, IL 60148 Office: 800.827.3500 [email_address]

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