What’s Stunting Credit Union Membership Growth?

A Credit Union Times article about credit union growth challenges notes that although about 20% of credit unions now have a community charter, the majority aren’t growing their membership ranks. Mark Weber (it lists his name as Frank, but I have inside info that it’s really Mark) of Weber Marketing said:

“If good service were the secret, credit unions would be thriving in membership growth. When a credit union gains a community charter, absolutely nobody beats a path to your door. “

My take: You nailed it, Mark (as if Mark might actually read this). But Mark’s comment begs the question why should this be this case?

To understand why, let’s break down growth down to two simple components:

1) how much you sell, and
2) to whom you sell it to.

Revenue basically equals price times volume. But volume is a function of price. The laws of economics (which have not been repealed by social networking, Web 2.0, etc. by the way) say that if you raise your price, all other thing being equal, volume goes down. But if volume goes down less proportionately than the price increase, then revenue rises. The same logic holds true for a price reduction. Revenue will actually rise if the price decrease produces a disproportionately larger growth in volume.

This little lesson in economics holds the first clue why many CUs haven’t seen membership growth: They’re simply not price competitive.

The past few years have seen the emergence of the online high-yield savings account. According to NetBanker, about 2 million shop online each month for high-yield savings accounts. CUs like Patelco have recently countered with higher rates, but for many CUs who aren’t raising savings rates, a “service advantage” is often insufficient to overcome the price disadvantage.

While price is one lever impacting volume, the marketable universe (who you sell to) is a gating factor. With the right elasticity, a price increase or decrease might produce a huge increase in volume (and hence revenue), but if you can only sell to 100 people, your potential revenue is less than it would be if you could sell to 100,000 people. Which is exactly why so many CUs are looking to community charters to expand their marketable universe.

But just as there’s a decision to make regarding prices (increase or decrease?), when a CU’s marketable universe expands there’s a decision that has to be made: Market to prospects with no existing product (i.e., savings account, car loan, checking account, etc.) relationship or steal prospects away from their existing relationships.

Before the coming of age of Gen Yers, the new prospects that CUs were chasing were almost always coming from the latter group (existing relationship). And therein lies one of the biggest reasons why CU membership ranks haven’t grown with expanded charters.

According to a study by three economists from the Federal Reserve Board entitled “Who Competes With Whom? The Case Of Depository Institutions”:

We predict that 89% of customers who leave a bank in response to a deposit rate decrease migrate to another bank in the market, whereas 10% who leave migrate to a thrift.”

Conversely, when a customer leaves a thrift in response to a rate change, there’s only a 50% chance that he or she will stay with a thrift (even less in rural markets).

Tying this all back together, I’m left with three conclusions:

1) Many CUs are simply not price competitive with banks.
2) Becoming price competitive is not a panacea — consumers aren’t very likely to switch from a bank to a thrift.
3) Many CUs would do better to refocus on the existing base — i.e., increase “market penetration” within its existing marketable universe before expanding their charter.

The cold, hard reality:
If a CU isn’t very good at marketing to its existing potential membership universe, what makes it think it will succeed by simply expanding the universe?

In practice, CU’s service advantage helps retain existing members — not attract new ones. The service advantage is something that customers have to experience for themselves.

To attract new members, CUs are going to have to do what sophisticated direct marketers do: Develop predictive, analytical models to understand the attitudinal, behavioral, and demographic attributes of their best members, and apply those models to find prospects in the marketable universe who look most like existing members across those dimensions.

“Cumbaya” marketing efforts like BankerSpank and LookOutForTheLittleGuy aren’t going to cut it. Instead, understanding consumers’ expectations and desires to do business with innovative firms and the types of relationships they value (interpersonal connection, objective advice/guidance, or operational excellence) hold the keys to opening the door to membership growth.

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9 thoughts on “What’s Stunting Credit Union Membership Growth?

  1. Ron –

    You nailed it! I think in many cases, credit unions do offer a better value for the consumer when you factor in the fee schedules & overall cost of doing business vs. banks. The problem is that consumers unfamiliar with CUs tend to paint them with the same brush they paint all FIs (namely, “they stink and they will fee me to death if they get a chance”).

    So any advantage a CU may have on the fee front remains hidden. Meanwhile, banks have gotten really good at offering sweet deposit rates that grab attention.

    Those attractive rates make the job of retaining current members hard, let alone attracting new ones.

  2. Maybe it’s not price competitiveness… across the board, CUs beat banks on there (says http://www.creditunion.coop/ratedex.php)

    Specifically re: “Conversely, when a customer leaves a thrift in response to a rate change, there’s only a 50% chance that he or she will stay with a thrift (even less in rural markets).”

    If I’m a credit union member who departs, how do I find another credit union I’m eligible to join?

    If I walk into City Teachers Credit Union and I’m a fireman by trade, can I become a member? I know I can just walk into any bank and tada.

  3. @Jeff/Trey: Let me make one clarification to what I wrote: “price competitiveness” in the financial services context really has two components — fees and rates. I was referring to rates. I think CUs are more competitive on the fees front. But unfortunately, it’s so hard for prospects to make apples to apples comparisons (not just between banks and CUs but even between banks).

    The fee/rate dichotomy just goes to show how complex the growth equation is. Just ONE MORE lever to pull. You really do need to be a rocket scientist to figure it out. And I haven’t met too many rocket scientists working at credit unions (although I think Brent Dixon’s dad might be one).

  4. Excellent post Ron. Far better than my ‘Hey, check out this nifty article’ summary I did yesterday.

    Your statement: “The cold, hard reality: If a CU isn’t very good at marketing to its existing potential membership universe, what makes it think it will succeed by simply expanding the universe?” sums up the problem perfectly. Sad but true.

  5. “The cold, hard reality: If a CU isn’t very good at marketing to its existing potential membership universe, what makes it think it will succeed by simply expanding the universe?”

    Indeed.

  6. Ron,

    Well, sorry to say we agree on something. The field of membership expansion alone does not drive people in.

    BUT, if you look at the number one reason someone MOVES their checking account from one financial institution to another – they are PISSED off! Not because one account is “freer” that the other. So, doesn’t that mean that service has some value in attracting and retaining?

  7. Ron –

    I suspect that many of the CUs that converted to community charters (and even those who haven’t) have very low penetration levels within their select employee groups. To take your “what makes them think…” comment a step further – for the most part, they haven’t done a great job penetrating companies that list the CU membership as an employee benefit and, often, let the CU come to new employee orientation – there might even be a branch AT the SEG. If you can’t sell the value of your CUs membership to this type of audience, whatever would make you think you can effectively compete in a mass market?

    Also – my suspicion is that a majority of CUs that are adding members are adding numbers for the sake of numbers. No tracking of relationships built, profitability, churn, etc. As a result, there is no idea of WHY they joined and how to could attract others like them.

  8. There seems to be an assumption, and in many cases an expectation, that a community charter will automatically lead to increased membership – like it’s simply a matter of numbers. And, I can see how this could make sense in some situations, but there are simply too many look-alike choices for today’s consumer when it comes to financial services.

    I agree with you Ron in that “If a CU isn’t very good at marketing to its existing membership universe…”, but I think many of these marketers simply don’t realize that their marketing efforts aren’t up to par – and are not likely to generate new membership, community charter or not.

  9. Take my credit union’s field of membership: largely the employees of furniture and textile companies in North Carolina. The bond we have with our SEGs is our primary competitive advantage (my opinion – our rate/fee schedules are very member-friendly, but this can be duplicated). If our SEGs are sending a few hundred jobs overseas with one stroke of a pen, one can quickly understand how net growth has been a struggle for us.

    Background: 6,000-7,000 new members each year for the past few years…flat membership growth (credit union of 51,000 members).

    The credit unions I speak with are having similar member retention issues…in some cases the problem is shrinking SEG employee bases, in others it is a competition issue, still others claim they need to improve their service to members (ie product offerings, member service, pricing).

    Unfortunately, there doesn’t seem to be a one-size-fits-all cause or remedy to stagnant CU membership growth.

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