Economies of Hell- My CU Times Op-Ed Piece

[This appeared in the March 31st issue of CU Times under a slightly different title]

I am not an economist, nor do I play one on TV.  My only exposure to economics theory was at Western CUNA Management School with the great Dr. Jim Likens. I still remember the bathtub with the faucets and drains image. So I kind of understand how the economy works.

The job of an economist is very similar to a meteorologist or astrologer. It’s a guessing game and you’re allowed to be wrong – frequently. Why is this? Because it’s the study of human behavior, the atmosphere and the celestial bodies. All of which are random, ever changing, mysterious and fickle.

I offer this opinion on our current economic condition: The economy sucks because our society’s values suck. There, I said it.

Everyone is looking for some one or some entity to blame. We are all somewhat complicit, in my opinion. I recall a certain Corporate CEO addressing an angry mob implying that the investment risk that was taken was in direct response to their demand for higher rates from their Corporate!? He was implying that the angry mob created the problem and therefore should suck it up. I kind of get that.

If economics is the study of human behavior, there’s no better illustration of that than the cost benefit principle and courtesy pay. Our original mission of promoting thrift, and making loans for provident and productive purposes only, vanished with courtesy pay. It was widely adopted on the premise that the benefit of not being humiliated by a bounced check was outweighed by the cost of a 300% loan. Whatever happened to the overdraft line of credit? Too costly, for us. The typical failure of a cost benefit analysis is not including all costs. In the case of courtesy pay, the cost of eroding reputation.

According to famous economist Milton Friedman, market economies are inherently stable if left to themselves and depressions result only from government intervention. The government recently intervened on certain courtesy pay practices. This benefit apparently was having an impact on our economy.

And so, credit unions have become fast followers, very seldom pioneers.

It reminds me of one of my favorite economist jokes:

Two economists are walking down a busy street and come upon a 100 dollar bill lying on the sidewalk. One bends down to pick it up and the other says “Wait, if that were a real 100 dollar bill, someone would’ve picked it up already.”

When credit unions consider a new product, rather than relying on the relevancy of the product to their target, they tend to give more weight to the idea if enough big credit unions are already doing it with some success. And therein lies the problem.  We are following, rather than differentiating from, our competitors.

30 years ago very few credit unions memberships overlapped. In fact, if there ever was an overlap it was addressed, protected and the offender was often beaten into submission.

HR 1151 changed all that. It scared many credit unions into abandoning a single sponsor – a very defined target audience- for the unknown community that was already being served by the banks.

The lemming was born. Name changes were rampant, ad agencies were raking in huge dollars to rebrand a 50 year old moniker to something as generic as possible. Credit unions began to compete with each other.  The club was killed. Membership flatlines for the first time in history.

The supply was great, the demand was not there. Once people have had a chance to react in the marketplace the easy opportunities are used up. We entered a saturated banking market with me too products and fewer branches. We seldom offered a compelling reason to switch and often resorted to an embarrassing cry of “Now anyone in the city can join!”

The majority of our marketing dollars were spent on luring in complete strangers rather than rewarding long term, loyal, profitable owners, who will market for us. The cost to switch banks today is too great – even with membership bribes that promise iPods and cash.

Differentiation is critical to your individual credit union. Not to the general public. We’ve been focusing too much on trying to explain the difference between banks and credit unions. No one cares. What should keep us up at night is how do I differentiate myself from the half dozen community chartered credit unions in my marketplace.

We have found the real enemy – and it lies within.

Last night I received an email response from David Mooney, President/CEO of Alliant Credit Union. He has given me permission to post his reply.

Denise,

I enjoyed your article in the March 31 CU Times, and thought it was right on the mark.

When I came to Alliant in 2003 after 25 years in banking with Chase and predecessors, I was surprised that so many credit unions had adopted community charters.  I wondered why they would be so eager to give up their substantial advantage as “the company store” to compete in the red ocean of traditional retail banking, on the same basis (location) as 7,000 banks and a lot of credit unions.  As you point out, there is very little differentiation, plus it is a higher cost model.  Some seem to have believed that the “grass was greener”.  Others, I’m sure, felt they had no choice in light of sponsor issues.  Allliant, the former United Airlines Employees Credit Union faced this challenge when the Airline was in bankruptcy.  We concluded that we needed to diversify membership to sustain our mission (which is not to stay in business or grow, but to provide consistently superior financial value to members) but knew and liked the SEG model, so we went the multi-sponsor route.  That allowed us to retain our substantial cost and price advantage (operating expense/assets under 1%, top 1% of CU’s in total member giveback); offer a compelling and sustainable value proposition to sponsors and members (high value employee benefit at no cost to the employer); use the sponsors’ media and channels to acquire new business in wholesale chunks; and stay out of the branch arms race (which, like all arms races, no one wins but costs everyone a lot.)  Yes, we are somewhat constrained by a limited branch network (10 locations across the country, no cash handling), but that’s a big source of our cost advantage and our members are here for the reliably great rates and low fees, not locational convenience.  Many have checking accounts at local institutions for branch access… but we have their balances.

The strategy has worked pretty well: we have had consistent growth in membership, loans and deposits well above the industry average, we have a strong balance sheet, and most importantly have continued to provide market leading returns to members.  Our growth does not depend on rate promotions or giveaways – which tend to create temporary relevance, promote mercenary behavior and undermine loyalty – or on adding expensive branches.  In fact, we have reduced our branch footprint by 44% in the past 5 years.  For branch-based institutions, market share is largely a function of branch share, which means that they must expand their footprints to grow.

You are right – no one really cares about the difference between a bank and a credit union.  What consumers care about is a good answer to the question “why should I do business with you?”.

Regards,

David Mooney

President/CEO

Alliant Credit Union