Managing In The Dark: The Impact of Scarcity on Leadership

Years ago when I worked in training I recall being in an training development committee meeting in which we were within weeks of rolling out the pilot training for new managers on how to coach front line staff. Everything looked like it was set to move forward when one of the committee members, a senior branch manager who had been part of our profile group, said, “I have to admit I don’t know how I can afford to do this once we roll this out. I have eleven people in my branch and I still have to do my real job.”

Silence entered the room as each of us absorbed the potential reverberations of what one of the pilot designers had just thrown onto the table. The chairperson started going around the table asking for input from other members to see if they had similar concerns and then one young leader (who later stated she was nervous on speaking up because she was only a coordinator and not a “manager”) said, “I have around eleven people on my team and I can’t afford not to do these things with my team. So we have been doing this for the last year.” With that simple statement it became clear to me who the real leader in the room was.

This example also drove home to me the lesson of mental focus and how it can shift our deliberations. In how we can have people we trust operate from a scarcity mentality and if left unchallenged can limit the options on the table for our organizations. Take the example stated above. When that branch manager stated he couldn't afford the time to do something he enabled himself to place that task beyond reach. It shifted from being difficult but obtainable to simply not relevant as there was no perceivable manner in which the task could be accomplished.

Compare that to the 2^nd leader who by concluding she couldn't afford not to do it she changed the very focus of the leaders who were gathered around the table. She had concluded that she had to afford it and worked towards that goal. When we ask “How can I afford to do this” it shifts the playing field from scarcity in not doing the task to scarcity in not completing the task.

For many in the credit union industry this same type of scenario happened last year when new regulations required members to opt into courtesy pay. Some organization decided that they simply could not afford the time and effort to re-opt everyone into courtesy pay so they simply discontinued the service. Other organizations came to different conclusions as they realized that they very much needed the non interest income that courtesy pay provided to their credit unions. For them the question became the 2nd “How do we opt all our members into courtesy pay and still continue to do everything else we had planned?”

These leaders realized that there is a need to be able to see and operate in the dark. To take steps forward trusting in the talent of the organization to provide the next lamp of light before the last one fades. New ideas were presented, resources reallocated, and operational focus shifted. These leaders were able to decide what they wanted to accomplish. Too often we as an industry look to large credit unions or Big Banks to see what the options are and then follow in their lead. In effect we wait to be told what to choose.

I still marvel at the courage of Unitus Community Credit Union for charging a modest fee for personal financial management tools for their online members. The normal choice on the table is to offer it for free and simply let the membership of the whole credit union absorb the cost. Yet, what if the credit union is trying to keep rates low and still grow net worth. It would be very easy to come to the conclusion, “that we can’t afford to offer PFM for the online members.”  Instead they came up with a third option that goes against what everyone else in the industry would tell them they could choose.

One of my favorite chapters I have read recently is the first chapter of Rich Dad Poor Dad by Robert T. Kiyosaki who wrote of the dynamic of hearing two different world views from his parents.  He had been exposed to two opposing attitudes in thought that played out like you see below.

• One Dad thought that the rich should pay more taxes to take care of the less fortunate. The other said, ‘Taxes punish those who produce and reward those who don’t produce.”
• One Dad recommended, “Study hard so you can find a good company to work for.” The other recommended, “Study hard so you can find a good company to buy.”
• One said, “When it comes to money play it safe and don’t take risks.” The other said “Learn to manage risk.”
• One believed, “Our home is our largest investment and our greatest asset.” The other believed, “My house is a liability, and if your house is your largest investment, you’re in trouble.”
• One taught me to write an impressive resume so I could find a good job. The other taught me how to write strong business plan so I could create jobs.”

I think for many leaders who sit at our tables we have similar disconnects as some have one view and others have the opposite view. As our economy begins to pick up and Big Banks begin to rev up front line operations, acquire our talent and look to cross sell within their branch networks to our members we will find ourselves having to make decisions on how we will compete in an improving economy.  We will face similar questions and diverging worldviews.

• Is our goal to take care of the less fortunate or to go after more affluent or younger members?
• Is our goal to grow organically or to use our capital looking for a sweet out of state merger opportunity?
• Is our goal to conserve capital to appease our regulators or is it to push and manage risk for higher margins?
• Is our goal to help members get into homes or is it our goal to manage our pipeline to what mortgages we can sell to banks because we can’t afford to have low interest mortgages on the books for 30 years?
• Is it our goal to decrease cost by slashing jobs or is it our goal to increase sales and service, deepen wallet share to the point we have to create more jobs due to growth?

Whatever our choices are it is critical that we understanding how we arrived at them. To add a service or not add a service, to fee checking or not fee checking, to close branches or open in new markets, all of these questions are impacted in how we form our deliberations. Did we come from a place of scarcity to arrive at our conclusions? Are we certain we haven’t just looked across the banking divide and blindly allowed our Big Bank counterparts to tell us what to choose?

True Grit: Who Will Redefine The Model in 2011

 As a movie it was a classic, untouchable in many regards. True Grit was the only movie the “The Duke” won an Oscar for when he portrayed a scruffy, hard-drinking US Marshal named Rooster Cogburn. My initial thought when I heard that Jeff Bridges was in the remake of True Grit was blasphemy! [Editors note: keep reading it really is not a movie blog post.] It was going against an established standard that everyone else followed. It was John Wayne’s defining performance. For any other actor to follow would be folly and a huge mistake!  Guess what…I was wrong. The movie rewrote the standard and suddenly what was unthinkable was a stone cold reality…the new reality was Jeff Bridges in True Grit was simply cool and it worked. In 2011 as credit unions we also need to reexamine how we view some established standards.


Today in financial services banks and credit unions are waking up to their new reality. Big Banks are now in the position of having to wring more revenue out of customer accounts. The new trick and question on the table is how to justify new ways to raise fees on basic products like debit cards, ATM machines and checking accounts.


This new focus comes as many financial institutions brace for as many as 200 new regulations that could hit the books in 2011. Many of the new regulations will focus on reducing the fees that can be accessed by financial institutions on consumers. The end result is in my opinion a mixed bag for consumers and for credit union members. I fully believe this is the year that many bank credit-card users will experience higher inactivity fees and foreign-network exchange charges, while free checking accounts will simply fade into memory.


In a recent article in the Wall Street Journal author Robin Sidel wrote, “To counter that lost revenue, banks are thinking about imposing annual fees of $25 or $30 on debit cards, according to people familiar with bank strategies. Some are also considering limiting the number of debit-card transactions that a customer can make each month, these people said. Another idea circulating in the industry: Limiting the size of a purchase that a customer could make with a debit card. At the same time, reward programs for debit cards are likely to get the ax, these people say.”


This mad scramble for lost revenue will be even harder for credit unions as they have built their reputations on being less fee- centered than Big Banks. Sadly this becomes a more pressing issue as it is the smaller credit unions that are still expected to compete with the products and services of Big Banks. Following “the stampede” to fee on basic services is a mistake that will hurt those members who can least afford the fees.  It is low income members who will suddenly face new fees because they can’t maintain higher deposit balance limits or use self service access points like online banking.


The challenge for 2011 is how do credit unions pay for services with limited capital, share insurance premiums, and tighter margins as interchange income looks to be slashed as new proposals, part of the Dodd-Frank financial-overhaul bill , cap interchange at twelve cents a transaction become part of the new reality of 2011. By some estimates that could represent a reduction of about 84% from the current average rate of 44 cents.


The answer comes in a change of perspective and a wiliness to challenge standards that for many of us we never thought we would challenge. As a industry we have to look at premium value added services. This idea hit me as my wife and I were joining a gym. Editors Note: Yes, I like millions of others around the world have already joined a gym hoping that this year it will “really take” and that I won’t quit in two months.


As my wife and I were filling out the paperwork the size of the gym and the types of equipment really impressed me. How could they afford to offer this gym with no contract for only 1 dollar down and ten dollars a month? Now many of you probably already see the business model behind the gym membership special. By charging a low cost of entry fee and low monthly maintenance fee the number of people opting out of the gym is not tied to the number of people not using the gym’s services.  Most people will cancel a gym membership if the cost is too high and they do not feel they are getting the value they thought they would.


However, with a low cost model this gym is counting on people continuing to pay the membership dues even without going to the gym. The ten dollars a month membership fee goes from being “membership dues” to “membership I will take advantage of tomorrow.” Simply put at ten dollars a month the membership is worth it to say, “I belong to a gym that I might use next week if I feel like it.” Ten dollars buys me convenience and peace of mind that I am not giving up on my goals. So what happens is that the many are now paying the membership price of those who actually use the gym on a regular basis. This sounds shady when you say it like that. I am not prosposing charging members for services they don't value or need. Yet, that is exactly what most credit unions do when they do not pass cost for premium value added services that do not pay for themselves.


For credit unions to offer premium services "free of cost" to a small select group of users (for example those 5 to 10 thousand members who use your PFM) and to then to pass that cost onto the whole membership is in fact doing what the gym does. You are charging members for a service that they are not using. Think about it... in the past if most credit unions were to consider offering personal finance management for online banking or adding the new iphone app for the small percent of members using mobile then the whole membership would bear the price of those costs as the credit union added those service costs to its operating expense which places pressure on credit union margins in loan or deposit rates.


Perhaps it is time to rethink this model. Two years ago the concept of free checking was considered table stakes for most financial institutions. Today the reality has changed. An example of this shift in mindset is being seen as credit unions exit 2010 and enter 2011 with new product offerings that are no longer free.


Take the recent headline in Netbanker which comments on Unitus Community Credit Union, a credit union with around 70,000 members and over $800 million in assets, as it unveiled its new personal finance management tool, “Total Finance” in late 2010. After, a 30-day free trial, members pay $2 per month for the service.


In years past the pitch would have been to make this service free as it makes members more “sticky” to your financial institution. The reality is that this sales pitch has been the highlighted bullet on PowerPoint sales presentations from vendors for far too many years. Credit Unions have been investing in bill pay, WAP mobile banking, electronic statements, account aggregation, credit score monitoring, electronic billing, and Short Message Service (SMS) text banking all with the same pitch line, “This makes your members stickier.” 

This year we will see credit unions begin to identify value added premium products and services and then pass those costs along to those members who want to opt into those services. At economic cooperatives this model seems fair to me. Offer free mobile and SMS text banking but if people want the newest DROID application with built in personal finance management with remote check deposit then you have those members opt into that. You share the cost with those members who value the service without passing the expense to the rest of the credit union membership by lowering rates of deposits or raising rates on loans.

After all I would have never have though you could redefine my favorite old west character Roster Cogburn. Yet, there I sat in the movie theater eating my popcorn and not once did I remember that this movie was a remake. I got exactly what I paid to see a story about my favorite US Marshall and left satisfied. The difference was in how the makers of the movie had defined the character.


This same challenge is what credit unions have to face in 2011. How are you going to add premium services with less non- interest income with loan rates at historic lows? Many people will see this issue differently but make no mistake the line is crossed and now others will follow. It is not a question of when only a question of who and how do you keep up.


No matter what side of the isle you find yourself on you now have to answer the question on the table. If you don’t charge can you add that new app or service and what will happen if your members don’t see you keeping up with the services they want? If you do charge do you risk public outrage by bloggers and disgruntled members who see you as adding fees?  No easy answers on this. Regardless of where you fall on the issue you will have to have True Grit to stick to your position.