Tolerance for risk is just one factor credit unions consider when deciding how to reward members who borrow. Incenting deeper engagement is another.
In fact, the rationale for relationship rewards vary from institution to institution, but the idea remains the same: the more they give, the more they get. And that’s true for member and credit union alike.
Here three credit unions ― one each in Texas, Tennessee, and Arizona ― share best practices and pricing strategies that work at their institutions.
No. 1: Lower Prices For Long-Term Members
In 2013, Resource One Credit Union ($454.5M, Dallas, TX) introduced a relationship-based structure that offers more aggressive pricing for longer-term, loyal members.
For signature loans, the credit union offers members who have been with Resource One for one year a discount of 50 basis points. After five years of membership that discount jumps to 100 basis points.
As of November 2016, Resource One’s standard rate on a signature loan for borrowers with a credit score of 740 or higher was approximately 7%, depending on the term, says Lee Strickhouser, the Texas credit union’s chief lending officer. And the average signature loan was $500-$1,000.
CU QUICK FACTS
resource one credit union
DATA AS OF 09.30.16
- HQ: Dallas, TX
- ASSETS: $454.5M
- MEMBERS: 56,166
- BRANCHES: 10
- 12-MO SHARE GROWTH: 8.3%
- 12-MO LOAN GROWTH: 8.3%
- ROA: 0.61%
Resource One has used its signature loan portfolio as a test case for relationship-based pricing. The loans in this small portfolio are riskier but offer a higher yield, so the credit union doesn’t mind the loss in interest. In contrast, consider the credit union’s auto loan portfolio a loan type for which the credit union once considered adding relationship-based pricing. Approximately 46% of the credit union’s total loans are autos, compared to 37% at credit unions with assets from $250M-$500 million, according to data from Callahan Associates.
The tossup is, if we’re getting auto loans anyway and meeting our production expectations, is getting a boost from a promotion going to be worth the millions of dollars of interest I’m giving up to do it? Strickhouser asks.
But the credit union is reconsidering relationship-based pricing on autos, as well as adding it anew to checking accounts. That’s because Strickhouser has seen a sustained boost in signature loan volume since 2013. In the years before this pricing structure was implemented, Resource One routinely did approximately $600,000-$700,000 in monthly production. In the years since, monthly production has hovered around $900,000 to $1 million.
As far as best practices go, Strickhouser advocates for strong training so employees know when and how to implement the pricing change. For Resource One, the price on its loans are set manually and therefore can be prone to mistakes.
It’s easy when you just need to move the rate down, but it’s harder when you give them a lower rate they didn’t qualify for, Strickhouser says. We don’t move those, but it looks sloppy. We differentiate ourselves as an institution by our personal interactions and relationships, but we’ve got to get the transactional part right. Because you can only mess up so many times before members leave, no matter how nice you are.
We differentiate ourselves as an institution by our personal interactions and relationships, but we’ve got to get the transactional part right. Because you can only mess up so many times before members leave, no matter how nice you are.
No. 2: Rewarding Indirect Members
At Leaders Credit Union ($296.0M, Jackson, TN), indirect lending is big business. The credit union has 70 dealer partners, and its 80% indirect loans/ total auto loans well outstrips the 52% posted by credit unions in the $250-$500 million asset range, according to data from Callahan Associates.
Not surprisingly, according to Brett Beckham, inside sales manager, a large group of the credit union’s new members come through this channel.
CU QUICK FACTS
leaders credit union
DATA AS OF 09.30.16
- HQ: Jackson, TN
- ASSETS: $296.0M
- MEMBERS: 70,586
- BRANCHES: 6
- 12-MO SHARE GROWTH: 13.4%
- 12-MO LOAN GROWTH: 12.7%
- ROA: 1.20%
And most of them have never met anyone from Leaders or been in any one of our branches, he says. So how can we establish that next piece of business beyond that initial indirect loan?
In February 2014, Leaders introduced its Perks program, specific to those members who start their relationship through an indirect loan. The Perks program consists of offers on two different timelines.
The first, which must be accepted within a member’s initial 60 days of membership, is an automatic preapproval on a credit card for up to $5,000 or a 1% rebate for any existing auto loan on the books with a competitor.
Leaders’ second offer is good for the first 12 months of membership, and includes $1,000 toward the closing of a new mortgage or refinance, as well as a one percentage point reduction in rate for any new purchase of an auto, boat, or four-wheeler if the member signs up for a checking account, e-statements, or a debit card. In addition, Leaders offers a guaranteed line of credit of up to $2,500 for those who open a checking account.
According to Beckham, as of Oct. 31, the credit union had originated 618 loans for $10 million through Perks in just under three years. Of that, roughly $7 million remains on the credit union’s books.
The program was designed with the credit union’s outbound call center in mind. Members have proven much more likely to respond favorably when the member service rep has a hard offer in hand.
Most [indirect members] have never met anyone from Leaders or been in any one of our branches. So how can we establish that next piece of business beyond that initial indirect loan?
There’s a difference in saying You are preapproved for a VISA’ versus Do you want to apply for a VISA?’ Beckham says. So now we just call and say, Hey, based on your income and credit score we can give you a $5,000 VISA with 0% funds transfer for six months. How does that sound?’ It’s a much easier process than to resell them on using us.
Read more about Leaders call center in, How To Make Outbound Calls Part Of A Call Center Strategy.
No. 3: How To Reward The Entire Relationship
Desert Schools Credit Union ($4.0B, Phoenix, AZ) first implemented its Relationship Rewards in the summer of 2015, though this was not its first relationship-based pricing product. In the past, Desert Schools had offered account-based rewards on a number of different products at the same time.
What we found was that there were so many programs it got to be confusing for staff and members, says Brian Gregory, the credit union’s vice president of products. And they didn’t necessarily fit well with one another.
Because of this, the credit union decided to retire most of its account-level pricing programs for a total organization approach. Most of all, this was an opportunity for the credit union to more effectively deepen relationships with new and existing members and make sure it was retaining the members with the largest relationships with the credit union.
CU QUICK FACTS
desert schools credit union
DATA AS OF 09.30.16
- HQ: Phoenix, AZ
- ASSETS: $4.0B
- MEMBERS: 317,683
- BRANCHES: 48
- 12-MO SHARE GROWTH: 12.2%
- 12-MO LOAN GROWTH: 12.7%
- ROA: 1.56%
Those are the members who are creating value for the organization and we want to make sure they have a good package of benefits and are seeing value. That way they are less likely to leave the credit union, Gregory says.
In designing the program, Gregory says the credit union looked at what other local credit unions were doing and found that only a few were rewarding the entire relationship. The credit union then consulted its internal product usage reports, finding that members with deeper relationships exhibited similar behaviors.
The credit union took these findings and created its Relationship Rewards points system. It rewards members at levels determined by the number of points they accrue through using Desert Schools products and services.
Members can accrue points based on the size of their consumer, credit card, or home equity loans, their deposit and investment balances, mortgage balances, and direct deposit, as well as their number of checking account transactions and whether they buy insurance from their credit union.
Desert Schools created four rewards tiers: Start (0 points), Grow (1-2 points), Achieve (3-5 points), and Prosper (6+ points). Rewards include rate discounts on consumer loans, reduced fees on a specific checking account product, and ATM fee rebates. Gregory says approximately 25% of members fall into the Start tier, 40% are in Grow, and then the remainder combine for the Achieve and Prosper tiers.
Besides rewarding members, the Relationship Rewards system is a simple way for branch employees and sales staff to understand a given member’s relationship to the credit union. It also acts as an added benefit for members in the market for additional products.
Someone in the Grow tier, for example, Gregory says, probably has accounts at other financial institutions and we’re likely not their primary financial institution. We have an opportunity to engage them in conversation where our staff can see their relationship with us and talk to them about how Desert Schools can save them interest on a loan or refinance a mortgage, and get them into a better rate or become their primary financial institution.
[These] are the members who are creating value for the organization and we want to make sure they have a good package of benefits and are seeing value., Tthat way they are less likely to leave the credit union.
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