3 Key Questions For Strategic Planning

Credit unions and their members are navigating an uncertain economic environment in the second half of 2023, but both are showing more resiliency than was expected at the beginning of the year.

Consumer spending is leading the U.S. economy, buoyed by continued strength in the labor market. The Federal Reserve has continued its tightening campaign but is now slowing the pace of interest rate increases. That is welcome news for many credit unions that are focused on managing liquidity and interest rate risk — both current priorities due to the Fed’s actions during the past 18 months.

Credit union loan originations were down 31% in the first half of 2023 versus the same period one year ago. On the balance sheet, loan and share growth rates were slower than they were a year ago. The Fed is achieving the outcomes it was looking for when it began raising rates in 2022 and has slowed the economy to get inflation in line with its 2% target.

Despite the headwinds caused by higher interest rates, there are some positives for credit unions. More than 5.1 million consumers joined a credit union during the past 12 months, and savers are enjoying the highest dividend rates in more than a decade. Total revenue at credit unions was up 33% versus the first half of 2022 thanks to a jump in interest income from loans and investments. The net interest margin was the highest it’s been since 2019. At 79 basis points, return on assets was lower than the 86 basis points posted one year ago, but the net worth ratio was up 48 basis points to 10.9% due to slower balance sheet growth. And although delinquency and charge-off rates moved higher, they are coming off historic lows and remained lower than pre-COVID levels.

As credit unions head into planning and budgeting season, uncertainty about how 2024 will play out is at the forefront. Although questions about the direction of the economy are relevant for near-term plans, credit unions’ cooperative structure allows them to put more weight on the long-term. Credit unions have successfully navigated numerous economic cycles. In most cases, the more challenging the times, the greater the opportunity for credit unions to differentiate their approach from that of for-profit competitors.

With credit unions’ ability to take a long-term view, an uncertain environment presents a good opportunity for every cooperative to recenter and refocus its work. A credit union’s understanding of the distinct role it serves in the market is essential to defining its value and differentiating its market position. Planning sessions allow the time for management and boards to discuss these critical issues. If a credit union already has clarity on this, an affirming conversation reminds everyone why their work matters. If there is uncertainty around some of the key questions, it allows the group to talk through these questions.

Although many approaches can guide these discussions, Callahan raises the following three questions when facilitating strategic planning sessions.

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1.How Do We Define Our Market?

A credit union’s field of membership makes this an easy discussion topic on one level. Leaders can answer this question by listing select employee groups; trade, industry, or professional groups; or geographic boundaries included in an organization’s field of membership.

But those responses are only the general definition of a market. A real discussion needs to define the institution’s primary target market. That generally means demographic or sociographic profiles, but there are other factors at play, as well. Is it low-income communities? Middle class? Affluent? Are there neighborhoods that are areas of focus? Are there personas that can describe the target member(s)?

Whatever the answer, a credit union must define its member service strategy around this target market. What are its greatest needs? What does that imply for the credit union’s product set? What does it mean for how it most effectively reaches and serves its target market?

Gaining clarity on this question is key to strategic planning, and often the most difficult part of the process. Credit unions want to positively impact as many people as they can, but they cannot effectively serve everyone. A target market focuses an organization’s efforts on where it has the best insights into market needs. It is not intended to exclude market segments, but it recognizes the institution has finite resources and needs to prioritize how it uses those resources.

The good news is a credit union can often identify its target market by looking at the profile of its current members. So, start by asking, “What are the primary segments that comprise our membership today?”

“Credit unions want to positively impact as many people as they can, but they cannot effectively serve everyone. A target market focuses an organization’s efforts on where it has the best insights into market needs.”

2. What Is Our Value Proposition?

The answer to this question is tied to the target market discussion. A strong understanding of the credit union’s target market supports a discussion about the market’s greatest needs. Once a credit union understands its target market and its target market’s greatest needs, it can focus its efforts on delivering value that resonates with that market.

This step also brings to light trade-offs. For example, if a credit union focuses on a high-touch service strategy, delivering the lowest rates and fees might be a challenge given the costs associated with a high level of service. Organizations focused on serving an affluent membership might find it difficult to operate with a wide net interest margin. Those members can shop for attractive loan and deposit rates, so the credit union must be very competitive with its pricing.

Understanding trade-offs is another way of recognizing the credit union cannot be all things to all people. Although there are levels of service and pricing a credit union must meet to be a competitive option for members and consumers, a primary value proposition will result in some aspects of the business not being top-level.

3. What Investments Do We Need To Make?

Whatever the value proposition, credit unions can’t deliver on it without the right investments in people and resources. It is likely the credit union already has capabilities that support the value proposition based on its success to date. Given today’s competitive environment though, credit unions must make ongoing investments to stay ahead of — or even match — the competition.

People and technology are typically the primary areas of investment. Where and when to make investments in these areas are the key decisions. When planning for the next three years, there could be certain milestones or benchmarks a credit union is looking to reach during that time. Working backward from those can help inform the timing and scale of the necessary investments.

Members Provide Certainty

Despite the uncertain economy, there is one constant for credit unions — their members. Credit unions have sustained their success for more than 100 years because, in every environment, they have determined the best choice they can make is to listen to their members. Credit unions serve their members best when they understand those members and can meet their needs better than the competition. When members recognize this, they reciprocate by sticking with their credit union.

Ed Callahan once said, “Follow the member!” During times of uncertainty, it is important for credit union leadership to follow Ed’s guidance and maintain their focus on what they know best.

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