Credit union fee income has become increasingly important as downward pressure on the net interest margin is felt and the high cost of administering non-active accounts has gone up, say credit union officials. And the argument over whether or not such ''relationship pricing'' plans are in keeping with traditional credit union philosophy is rendered moot as those plans have proved a point: the more members support their credit union cooperative, the better deal they get.
''We found the average 'basic' member was losing the credit union between $40 and $50 a year,'' said Tom Baldwin, chief financial officer of Space Coast Credit Union, Melbourne, Florida. ''If you multiply that by some 80,000 people, it's $4 million a year. That's real money, and that's what we based our decision to initiate the Members Reward program on.''
The Members Reward program benefits members that use more of SCCU's products and services with lower rates on loans and higher interest on deposits with some special discounts on others products thrown in. The whole point, said Baldwin, was to encourage members to make the CU their primary financial institution (PFI).
It was rolled out nearly five years ago, he said, after a sift through SCCU's MCIF system and an analysis by a consulting firm determined that some members were getting services below cost, and those costs were borne by more active members. ''We had free checking and some members had only a free share draft (checking) account and were shopping elsewhere for more profitable products. We determined that our most active members were earning us double our net income,'' noted Baldwin.
The transition saw a huge drop in overall membership, he said, from 140,000 five years ago to today's 117,000, but ''the credit union has been able to grow assets and better serve our active members by focusing on increased participation within the cooperative,'' Baldwin said. (SCCU assets are approaching $909 million.) ''While we were sensitive to less active members, we knew we had to find a way to reward our loyal members. Many who fled initially have come back because they realized the deal they had was pretty good.''
SCCU's Member Rewards has four levels: Basic, ($3,499 or less total balance); Silver, ($3,500-$9,999); Gold, ($10,000-$19,000); and Platinum ($20,000 and higher), and member status is determined on the last day of the month and is based on the household average total deposit balances, or total loan balances, (whichever is greater).
The monthly checking fee for basic level members in a no interest checking account is $5 monthly if the account drops below $500 during the month. Interest bearing accounts cost $7 monthly if the account drops below $750.
Using auto loan rates as a baseline, the benefits really kick in for more active members: the silver level rates are .25% better, gold is .50% better and platinum is.75% better. The mortgage loan processing fee discount is $100 for silver level, $150 for gold level and free at platinum level. Bonus rates on CD's have ranged from .05% to .20%, said Baldwin.
The fact that there are now fewer basic members and more platinum level members is proof that they system works as intended, said Baldwin.
The above case study will appear in Callahan's soon to be published Relationship Pricing Report, available September 2002, will show how credit unions are using relationship pricing as a strategy to improve earnings. The report analyzes the use of relationship pricing by over 240 credit unions, the types of programs in place, and its effectiveness as a way to increase profitability. Click here to pre-order your copy.