The Challenge of Creating Member Value

The historically low interest rates of the last two years have created new opportunities and threats for the credit union system. Low rates have helped members save money when refinancing mortgage and consumer loans. But captive auto finance companies have offered 0% new car financing options, effectively eliminating credit unions from crucial segments of this market. In addition, while credit union mortgage activity is growing rapidly, it accounts or only 2.5% of US mortgage loan volume.

 
 

Excerpted from an article in Callahan's 2004 Credit Union Directory by Jay Johnson. Mr. Johnson is the Executive Vice President of Callahan & Associates, Inc

The historically low interest rates of the last two years have created new opportunities and threats for the credit union system. Low rates have helped members save money when refinancing mortgage and consumer loans. But captive auto finance companies have offered 0% new car financing options, effectively eliminating credit unions from crucial segments of this market. In addition, while credit union mortgage activity is growing rapidly, it accounts or only 2.5% of US mortgage loan volume.

Falling rates have created investment gains in securities held in portfolio but also caused faster paydowns on many others. The average investment portfolio yield is only 2.7% for the first six months of 2003. Credit unions have a strategic advantage versus money market funds because of their mix of earning assets. But members are not as interested in the rate game with short-term returns falling below 1%.

The new era of low rates has accelerated the decline in the net interest margin thereby creating more reliance on service income. Operating expenses continue to grow at double-digit rates while total revenue is falling. Total income declined 3.1% in the first 6 months of 2003 versus the same period last year. Productivity and efficiency innovations have become critical management priorities.

The low interest rate era has forced credit unions to rethink how to provide enhanced member value. One approach has been to rely more extensively on cooperative solutions to achieve scale and spread the risk of new ventures. The emergence of the multi-owned CUSO in recent years has been an important milestone in the evolution of the credit union system. Their strategic intent is to achieve scale, diversify risk and create an advantage for the owners that they cannot achieve through individual efforts. Usually formed around a single business concept, these multi-owned CUSOs can develop expertise and market reach that no single credit union could possibly accomplish.

As credit unions look to 2004, a key question will be what lessons have been learned from this low interest era. Credit unions still hold a very small portion of the assets of financial institutions. Their 6.4% share at June 30 was only 0.7% higher than ten years ago. New thinking and business tactics will be necessary if the credit union system is to grow out of the narrow foothold in its key consumer loans and savings markets. The key to a breakout strategy will be credit unions' ability to deliver superior member value.


This article is excerpted from Callahan's 2004 Credit Union Directory. This year's edition provides the foundation for re-thinking the challenges facing credit unions today by

  • Providing insight on market sectors that can greatly influence a credit union's growth: performance benchmarking, data processing, CUSOs and auditing relationships;
  • Showing credit unions what they can accomplish by highlighting leaders in over 20 performance categories, rather than focusing on averages.
 

 

 

Oct. 27, 2003


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