Money To Burn: Three Strategies To Rethink

Nerd On The Run 

What a great memory touring Washington DC on a Segway. Yep, that sentence automatically nominates me to the Nerd Hall of Fame. There I was gliding around people and taking in the historical sights of the Capital. As I was trying to move around town and not run over people or fall on my face I could not help but notice the different ways people were taking in the sights of the capital. Some people were on tour buses, some were on rented bikes, some roller blades, and lastly some just walked from one point to the next. No matter the method people were taking in the sights and enjoying the weather in a way that fit them. 

What really struck me was that even though we were all going down similarly marked paths we were going about it in different ways with each of us expecting different things from the journey. You could literally see the difference in generations by the reaction I created as I glided past someone on the Segway. Small children pointed and said they wanted to ride. Young adults looked bored as seeing a Segway was nothing new; just a guy in a nerdy bike helmet riding a Segway. Older tourists stepped to the side and looked at me with distrust. They were visibly afraid I would suddenly lose control of the technology I was riding  and go crashing into them. Each group saw the same technology on their path as something different. Some saw amazement, some saw the normal or routine, and some saw something they simply did not trust or understand.

I think the same reaction is happening in financial services as we try to understand the sweeping changes that have enveloped our industry over the last three years. To combat consolidation in the market many credit unions are adopting technology that is supposed to help understand  the member and deliver cost efficiencies . Yet, that same technology is often sweeping in nature. So credit unions find themselves trying to navigate a path with all those same groups I almost ran over with my Segway. Like me on the Segway many credit union management teams face the same challenge of trying to create a uniform experience across age groups and delivery channels. They face the same concern that they don’t want to lose control of the technology and end up taking themselves out.

There are many different strategies out there and all of them seem to come with a complimentary white paper and free webinar on how they will revolutionize the way we serve our members. One thing I do know is that some of these strategies are the wrong strategies. I suspect that for some credit unions the key strategies they are adopting fall into a couple common themes. As you ponder these three strategies I want to share with you some research, that I believe is relevant, from the Raddon Financial Group (http://www.raddon.com). 

Tell Them We Are Not a Big Bank and They Will Come…

Yawn….they paid the money back! People have put TARP in their rearview mirror. The truth of the matter is that Big Banks went to Capital Hill, got a spanking, and then on the way out of town they grabbed all the assets, improved market share, and got a nice check for a couple billion as they walked out the door. Anyone seen a Ally Bank commercial lately? We all know they were wearing black hats at the start of the congressional hearings but when they left the building they had a new image, a new name, and a new slogan. This means that for many small community based financial institutions they are now competing with Big Banks with even more assets, with larger consumer bases which allows them to lower their cost per transaction even more. The added insult for many credit unions is that the average consumer has a very short memory or is oblivious to all the changes that have happened over the last three years. There simply is not a lot of road left on this message and strategy.

Free Checking –Leave it Free and They Will Come … Be Careful What You Ask For

Many of us are aware most Big Banks have eliminated or reduced free checking. On the other end of the spectrum most credit unions have adopted a “wait and see” strategy hoping that they will pick up deposit growth from dissatisfied bank customers. There are some basic assumptions in this strategy that credit union leaders need to validate. The chief assumption is that the growth will come from depositors you would want as members. If you break down consumers into six broad categories (Fee Driven, Credit Driven, Middle Market, Low Depositor, Middle Depositor, and Upscale) the majority of consumer movement is in on the lower end of the spectrum. Big Banks are driving away non profitable customers and credit unions are assuming that they will suddenly turn into profitable members.

Imagine a large exodus of millions of people. Each person is simply being driven out from where they were. They end up going down the path of least resistance and end up in a temporary camp. Imagine the town next to the camp being filled with kind hearted people who decide to take them in and help them back on their feet. This action is noble and it is in many ways heroic. What it is not is profitable in the short term. The towns resources are used without anyone paying additional taxes. The same thing will happen with credit unions as they become the refuge for unprofitable Big Bank customers.  Many of those that are being driven from the banks are the people who are “Fee Driven” and that segment simply is not credit worthy for the loans you will want to lend to them. So now you have low deposit, high transaction members who are credit challenged. 

I am not saying credit unions should not be the refuge for these members – we are here to serve the underserved. I am simply suggesting that the strategy has inherent challenges that need to be thought through.  Maybe you are counting on the fee income from overdraft from these members. Looking long term that source of income is squarely on the radar for the new Consumer Financial Protection Bureau who will see this income as part of their mission to make sure that markets for consumer financial products and services are fair, transparent, and competitive.

Build or Buy the Technology and They Will Come

The media loves technology and all the buzz words that come with that technology. Apps, living in the cloud, DROID, mobile, tablets, all of it just sounds cool. When you listen to that tech vendor with the great PowerPoint you almost think it is time to shutter the branch network and go virtual. Well, before you make any big budget decisions I want to provide some additional points of thought to consider. One thing to ask yourself is what do members value the most at a financial institution. The answers are as follows; Free Checking 76 %, Good Service 70 %, Convenient Branch Locations 48 %, Good Online Banking Experience  41%, NSF Fees (under 30 $) 28%, Loan Rates 18%, Deposit Rates 17 %, and Mobile Banking 12 %.

It seemed odd to see the branches ranking 3^rd on the list when it seems in the past month or so I have read numerous blog articles calling for the reduction of branches as they are becoming obsolete.  I have no doubt that members will continue to shift from branches to other delivery channels like online and mobile. That being said the biggest driver of member satisfaction other than free checking was good service. Where does the majority of that good service happen? In the branches. True, a great call center and back office staff are added bonuses but most member interaction is still face to face in the branch network.

When members were asked what would make you move your PFI the answers were; Lack of free checking 34%,Service Issues 31 %,NSF Charge (over 30$),Branch Hours/Location13 %, Deposit Rates 13 %,Online Banking 11 %,Loan Rates 10 %,Product Range 9 %,& Mobile 4 % .

What does all this mean? It suggests that it is hard to move the type of members we want to move from Big Banks. When polled 50 % of financial institution consumers said they believe they receive better service at a smaller financial institution. We also know that service continues to resonate with consumers. I believe any strategy we adopt has to also find a way to empower that teller or member service specialist in helping them feel valued in what they are trying to do for the membership. This is a hard sell. It is more fun to buy tech than it is to create incentives for great service.

So now I have poked holes in the three strategies I have heard recently. Please feel free to pass this blog article along to someone else so they too can mutter under their breath. As always this is a dialog in which I hope to generate additional ideas on how we can all compete and thrive against Big Banks. Now leave a comment so you can influence the next reader and let’s make a difference for small community financial institutions together.