This is the time of year when you cannot avoid the movie It’s a Wonderful Life and are reminded what a credit union used to look like.
Times were so simple then. We had shares and we had loans. And then along came the share draft account. The Depository Institutions Deregulation and Monetary Control Act signed into law by President Carter in 1980 did not say we HAD to offer checking. It merely said we could.
What if you had never offered checking?
Seriously. Think about it.
- According to the American Banker article published in December of 2011 the average checking account costs around $350 a year and fee income averages around $150 per account.
- PFI (primary financial institution) indicator? Think again. In August of this year Cornerstone consulting reported the median products per household dropped by 28% to 2.52 per household. And one of those is checking.
- Two words: call center. They didn’t exist until we offered the checking account. What percentage of incoming calls are tied to checking? Even though you’ve spent hundreds of thousands on devices to keep them from calling.
- One word: Target. I feel bad that the second largest security breach in US history happened to a retailer I love, but it did. And it’s going to cost some credit unions tons of money to make sure their members’ checking accounts are secure.
Raddon has done the math on this for years. A single service household (checking) is unprofitable. Period. It’s a black hole of expense if you don’t do something with the relationship. PFI doesn’t just happen. You have to be willing to lend to these new unknown entities.
Bank of America, in the wake of the backlash over their proposed $5 a month debit card fee, admitted to being “okay” with single service households moving to a credit union.
What if you dumped checking? Told all of your checking account holders that you were going to help them move to the credit union down the street. Maybe even offer them an incentive? Then show them your interest rates on savings? You could probably pay 50 bp or more. And your loan rates? You guessed it – you could beat everyone. Think of the staff you could reduce. The regulation headaches you could eliminate. The fraud you would avoid.
It’s a wonderful life.
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December 30, 2013 at 11:32 am
James Robert Lay
I like your thinking here.
Another thought… think about the branches a credit union could close and the way operations could be enhanced for a humanized digital economy.
Maybe this could be the path to a digital only credit union as it simplifies so many things. This is already happening in the UK: http://www.mycommunitybank.co.uk/
January 1, 2014 at 11:40 am
Serge Milman | Optirate
I am heartened to see Credit Union influencers admit to two core tenants of retail banking:
1) checking account relationships generate operating losses, and
2) the notion of cross-selling through checking accounts is a 1950’s notion that hasn’t worked for atleast the last 10years – and probably longer.
Credit Unions incur operating losses on 80% or more of their member relationships. This is borne out by research from Callahan, ProfitStars, and direct experience from working with many Credit Unions and Community Banks.
While it is true that most Credit Unions generate an operating loss of $200 or more on 80% of their member relationships annually, simply asking these members to go elsewhere will not improve profitability – in fact, it will further deteriorate profitability. In simple terms, revenue (what little of it is generated from these members) will decrease to zero as 80% members go elsewhere, but the cost structure will remain unchanged, thus generating a substantially higher operating loss.
One of the reasons for this is that majority of Credit Unions costs are concentrated in the so-called “fixed cost” buckets including items such as branches, staff, technology, and 3rd party services. But the reality is that these costs are NOT fixed, and must be managed aggressively.
Optimizing cost structure for 2014 and beyond requires a different operating model that is
a) member centric (vs product centric), and
b) substantially skewed toward self-service / online service for low revenue accounts, and value priced for high-value opportunities
Fundamentally, it isn’t about a checking account, or checking-account-called-by-another-name product. It IS about creating tangible and recognizable value for members. The strategic direction that is developed from this not-so-simple assessment will guide the direction for all else including channels (branches, online, mobile, call center, etc.), pricing, product management & development, relationship management, technology, and marketing.
Here’s to a great 2014!
January 2, 2014 at 6:56 am
Denise Wymore
Serge,
Thanks so much for your comment. This post has created a lot of offline comments and most would agree with you. Once you’ve invested in the infrastructure, driving the checking account away is not a smart direction. In my research I found quite a few credit unions with no checking or a watered down checking with very little penetration. They have an advantage, as I see it. They can compete on cost and focus on their target audience to serve them better than the plethora of “all you can eat” financial institutions.
Cheers and Happy New Year!