is increasingly year-round, the fall is the peak season. The first
question I ask potential clients is: How much of a course
change do you want to make? While many credit unions want
a fresh look at their process, my experience is that few are seeking
radical change. For most, planning is an extension of current activities
focusing on operationally driven improvements. Extraordinary outcomes
are rarely contemplated.
are necessary, for these are the foundation that provides the potential
for breakthrough kinds of efforts. The critical question is whether
ordinary efforts will be sufficient to sustain credit union success.
At midyear, approximately 725 credit unions account for 80% of all
credit union growth. Since these are the larger ones, their performance
raises the industry averages so that the overall totals still seem
acceptable. But increasingly, data suggests that ordinary results
will not suffice.
and MBNAs Results
One of the events occurring regularly for the past two years is
the decision by some credit unions to exit the credit card business.
Each month brings another announcement that a credit union has decided
to sell its portfolio because of the difficulty of competing in
this product area. Several recent sales were by credit unions with
assets over one billion dollars.
hold a very tiny fraction of the credit card market, approximately
3%. The penetration rate, measured as the total number of cards
divided by the total number of members has fallen from 18.4% in
1997 to 17.2% today. The growth rate of credit card loans for the
past four years has been in single digits, versus double-digit growth
for all loans.
For many credit unions this ordinary result is acceptable. They
believe that the yield on the outstanding card balances, the interchange
fees and the marketing impact every time the card is used make this
an acceptable return.
Recently I was
reading the 2000 Annual Report for MBNA bank. This monoline bank
has no branches and emphasizes one business: credit cards. Some
numbers from their Report are as follows. Since going public in
1991, the loans under management have grown at a compounded rate
of 23% per year, earnings-after-tax have grown an annual compounded
rate of 26% and over the past ten years the banks share of
the combined VISA-Mastercard market has gone from 5% to 15%.
MBNA added 13.7 million new accounts in 2000. The typical new customer
has $68,000 in average household income, has been employed 11 years,
owns a home and has a 17-year history of paying bills promptly.
Their total customer base uses their card 52% more than the average
cardholder and has a typical purchase amount 30% higher than the
card industry average. The average account balance for an MBNA card
is $3,519, for the industry, $2,311 and for credit unions $1,622.
Only once since
1990 has MBNAs ROA (after tax) been below 3.00% and in 2000,
the ratio was 3.89%, the second highest for the same period. Contributing
to this earnings record is the fact that loan losses are significantly
below the industry average.
How does MBNA
achieve these results? In the words of the Report: In 1982
we began selling our credit card products to people with a strong
common interest by marketing to members of endorsing groups-known
as affinity marketing. The first organization that endorsed was
the Georgetown University Alumni Association. Nineteen years later
we have gone on to receive the endorsement of more than 4,700 other
membership organizations. Some of these include major league
baseball, the NFL, 600 colleges and 1,400 professional groups including
many states dental, bar, medical and nurse associations.
are extraordinary results, and it is this performance that ultimately
will drive ordinary players from the playing field.
Most credit unions face a common set of key drivers in the market
place. Some of these are:
of financial services, breaking down traditional distinctions
between insurance, brokerage and banking;
of the banking industry to a point that in the next 5 years no
more than 10 national organizations may control the vast majority
of banking assets;
embrace of market based long term investments and the consequent
falloff of interest in insured deposit products;
driven enhancements to customer service and convenience highlighted
by the growing impact of the Internet;
squeeze on credit union earnings caused by the slowly rising expense
ratio and the erosion of margins on both loans and savings.
unions are reacting to these common trends by using very similar
strategies. The primary elements are:
geographic markets with many credit unions filling the local community
financial institution role vacated by the bank and thrift industries;
products to bring both brokerage and insurance services via the
credit union or a CUSO
on marketing in terms of relationship pricing strategies and more
public advertising efforts to expand image and name recognition.
technology to present a more personal, real time information profile
and marketing message to each member at every contact point in
of many credit unions' planning is to move from transaction-based
relationships to relationship-based transactions.
Certainly all of the above efforts are desirable and for many larger
credit unions have been adequate to achieve performance outcomes
in acceptable ranges. But as credit unions, especially larger ones,
try to do everything well, will planning to maintain continuous
improvement in both traditional and new services be feasible? Will
that approach be sufficient to counter MBNA-like competitors in
every key market from auto lending to real estate, insurance or
even activities such as account aggregation?
The Key to
Improving everything at once, even with gusto, generally doesn't
work as a planning process. There needs to be some strategic emphasis.
The point is even more critical for extraordinary results.
I believe the
key to extraordinary outcomes is cooperation. New efforts, utilizing
recent technology, to create organizations linked through value
nets. These networked based solutions are more than cooperative
pooling of resources for scale or diversifying risk. They are organizations
to create expertise, focus and market power. They would both extend
a credit union's reach and increase its expertise at the same time.
In other words, credit unions must become more interdependent around
common and not so common business efforts.
unions pool resources in traditional areas such as shared branching,
ATMs, data processing, credit and debit card services and new efforts
such as trust services and indirect lending. The change is that
interdependence must go beyond sharing and enable the CUSO or third
party to lead change.
number of active credit unions in five years is 10,000 or half that
number, the primary constraint in strategy will be a lack of human
capital. Thousands of credit unions cannot be good at everything
and being ordinary will lead slowly to the decline of relevance.
The challenge isn't to sell our businesses to superior competitors,
like MBNA, but to create our own MBNA capabilities within the system.
For the planning
process, the most important decision may not be what the credit
union decides to do, but rather who do we want to become linked
to in the future.
on Chip Filson and his consulting