A Distinguished Performance Model

Credit unions need to evaluate financial performance results using not-for-profit parameters and a cooperative lens.

In today’s environment of tight yields and fierce competition, it is essential for any financial services provider to carefully monitor its performance. Credit unions have a variety of tools including traditional banking metrics to evaluate their financial performance. Banking metrics provide essential data for credit unions, but credit unions should approach that information from a cooperative perspective. Because credit unions are not-for-profit and answer to member-owners rather than third-party shareholders, they must break out of the banking mindset and embrace a wider definition of institutional success. The broader challenge for credit unions is to identify the correct benchmark that takes into account their particular vision, membership, and business model.

For example, when a bank evaluates its net interest margin, higher is better. That is the perspective of a for-profit institution. And for banks, which only need to worry about the institution, earning more interest is a valid goal in and of itself. Credit unions, however, must take into account their member-owners as well as the institution. For cooperatives, higher isn’t always better. Instead of making the margin the end goal, credit unions must balance the member-owner demand of higher savings rates and lower loan rates with the institution’s need to create enough surplus to build net worth. Credit unions must find an optimal sweet spot that satisfies both parties.

Here are other examples boards and managers can use to spark discussion about what makes cooperatives different and how the credit union can redefine its measurements of success.

Performance Measure Institutional Perspective Member-Owner Perspective
Net Interest Margin Higher is better Highest savings rates; lowest loan rates
Operating Expenses Lower is better Service should be responsive to my needs
Return on Assets Higher is better Earnings should be sufficient for capital needs
Capital/Assets Higher is better Are investments being made that provide value?

More Than One Master

A credit union must clearly identify its critical stakeholders to set effective performance benchmarks. In the 3 Stakeholder Model, for example, the board and management weigh the best interests of three entities: the institution, the employees, and the member-owners.

The stakeholder model has become the core of how we make decisions, says Doug Fecher, who introduced the 3 Stakeholder Model to Wright-Patt Credit Union ($2.6B, Fairborn, OH) when he became CEO in 2000. We made the conscious decision that no one stakeholder would be more important or less important that the other two. The challenge we face is how to take the value this credit union produces and balance it among the three stakeholders. Every program we put together is designed to take care of one of three stakeholders.

Power To The Employee

It is imperative that board members understand why it is important to take into consideration other elements beyond the institution. Just as important, though, is the buy-in from employees. Employees are on the front line every day, and they make decisions that affect the credit union’s performance.

Affinity Plus Credit Union ($1.7B, St. Paul, MN) has an MOE (member, organization, employee) philosophy that empowers everyone from the front line to the back office to make important decisions. When making decisions, employees balance the primary stakeholders’ interests by asking: Is it right for the member? Is it right for the organization? Is it right for employees?

If employees can answer yes to those three questions, they know they can act with the support and backing of the credit union. In order to answer the three questions, however, employees must understand how the credit union makes money. Without that knowledge, the power to make decisions on behalf of the credit union can be overwhelming for the employee and detrimental to the institution.

The open finance movement puts into practice the rationale that all employees need a firm understanding of their organization’s business model. This management practice promotes equipping employees with the information and education to understand the financial drivers of success and how employees influence them.

For example, many members complain about statement fees, and when they do, most member service representatives (MSR) want to do what is in the best interest of the member and remove it. That’s the easy answer and makes for a pleasant interaction, but it’s not the optimal answer. After all, paper statements cost the institution time, money, and human resources, and members have simple ways, such as signing up for an electronic statement or using home banking, to avoid the fee.

Instead of automatically removing statement fees, MSRs must consider all the credit union’s stakeholders. The MSR will still remove the fee in some cases for example, if the member is older or cannot sign up for home banking but will keep the fee in place for a majority of the membership. The employee should then explain to the member how that fee influences the credit union’s performance. Saying: Estatements have allowed us to lower our expenses and, in return, pay more on savings, or We must charge a slight statement fee to help cover the costs of paper statements, will resonate with members. And providing a reason makes it easier for employees to say no.

Power To The Member

Callahan & Associates communicates the value of member-ownership across institutions in a concrete way through its Return of the Member (ROM) index. ROM captures a comprehensive view of member value and weighs aspects such as:

  • Are the credit union’s loan rates lower or deposit rates higher than its competitors?
  • How many products and services does the credit union offer?
  • How many members are using these products?

A credit union’s ROM score provides transparency to member-owners and direction for employees. Credit unions across the country use their ROM score to promote their success, drive institutional focus, and incentivize employees. Learn more about the history of ROM and how it calculates member value by reading Return Of The Member Index Quantifies Member Value. The Top 100 ROM scores for each peer group are available in Search & Analyze. For this week only, they are free to all credit unions. Callahan’s 2-Year Report also provides the credit union’s individual ROM score. That report is available within an individual credit union’s Search & Analyze profile page. ROM scores are not available until NCUA releases the complete data set for all credit unions, so select the year-end 2012 cycle from the drop down menu.

April 7, 2017

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