Widening Gap - Study Finds Some CUs Grow Services While Bulk Lags; Experts Differ on How to Correct
SEATTLE -- A few more credit unions successfully stepped up their efforts to expand the average number of the products and services their members use and build their average account balances in 2007, but most did not.
That is one of the conclusions drawn by credit union consultant Tony Ward-Smith. Each year, Ward-Smith analyzes NCUA's year-end data with an eye toward discovering and documenting the CUs that he identifies as "high performing." In Ward-Smith's definition, a high performing credit union averages 2.5 accounts per member, an average of at least $4,264 balance per all accounts and a positive year end return on average assets.
According Ward-Smith's analysis of NCUA's year-end data, 546 credit unions in the U.S. were high performing institutions last year versus 536 last year. Further, while only 7% of CUs in the U.S. have become high performing credit unions, fully 33% of the total U.S. credit union membership belong to a high performing credit union.
But Ward-Smith said he viewed the data from CUs that were not high performing to be the more important set and that these should act as a wake up call for the CU industry as a whole.
"The data show credit union membership growth is not keeping up with U.S. population growth and suggests the majority of credit unions are not marketing their products and services to their members effectively," Ward-Smith said.
Ward-Smith worries that the bulk of credit unions are gradually losing the competitive battle to meet their members' financial needs, pointing out that the number of credit unions overall continued to drop last year and credit union membership growth has not even kept pace with U.S. population growth.
While higher performing credit unions improved their performance matrices in many areas, Ward-Smith noted, most credit unions, as a whole remained flat. In 2002, for example, his data showed that 41.8% of CU members had checking accounts, but that number had only increased to 45.2% by the end of 2007. Likewise, the percentage of members with their CU's credit card actually declined over the same period, from 15.7% in 2002 versus 14.3%, and the percentage of CU members with first mortgages from their CUs rose only two-tenths of a percent from 1.5% to 1.7% over the same time.
"I think sometimes that there can be unwillingness among some credit union leaders to really look at and confront some of these issues," Ward-Smith said. "I think as an industry we really need to look at what our unique market niche is as credit unions and what we can really offer our members that other, for profit, financial service firms are not going to offer."
Ward-Smith stressed that he does not have the answers to these questions but estimated that part of the answer will likely be found in credit union's identity as financial cooperatives, as institutions which exist not to make a profit from their customers but to serve their members as people helping people.
But Ward-Smith has not been alone in considering these questions. Jim Blaine, CEO of the $15 billion State Employees Credit Union, which did not make Ward-Smith's high performing list for this year, cautioned against using standard for-profit metrics to judge credit union performance.
"If you use only the metrics from the for-profit world, credit unions are always going to lag behind in those areas," Blaine said, suggesting instead that credit unions make meeting their members financial needs, whatever they are, the more important standard.
"For example, one problem with looking at the number of products and services per member is that not all of your members are going to need all of your services," Blaine pointed out. "If we have a member who is a 19 years old, a student and a part time DOT employee, if we have helped him out with a car loan and or a student loan, we have all the business he is going to give us right now."
Other credit union leaders have also begun to investigate what it is about higher performing credit unions that makes them higher performing.
In 2007, the Filene Research Institute published a study called "Thriving Midsize and Small Credit Unions," which looked at why, at least in part of the industry, some CUs were thriving and others were not.
Researcher emeritus Robert Hoel authored the study and found that thriving credit unions do a number of things differently than the bulk of other CUs, which he identified as the "laggards," and the strategies the higher performing CUs (the stars) employ get into choices about both the products and services they emphasize and how they market them.
"Aggressive lending is key to the overall superior performance of star credit unions. More than offering a lengthy menu of consumer loan products, aggressive lending requires aggressive marketing and selling. In fact, many stars do not offer more extensive loan menus than laggards do," Hoel wrote.
"Stars emphasize auto loans, particularly used auto loans, which contribute handsomely to their overall asset yields," he wrote. "More stars than laggards are engaged in indirect lending."
"Real estate lending has become more important to the national credit union movement over the past 10 years. Because of stars' aggressive pursuit of mortgage opportunities, including second mortgages, their real estate loan portfolios grow considerably during the study period. Real estate lending grows at laggard credit unions, too, but does not reach the share of total assets achieved by star credit unions," he added.
Ward-Smith said he hopes the annual compilation of data from high performing credit unions will help spark conversations in the industry overall about how credit unions can become a bigger part of their members' financial lives. He pointed out that the market for financial services is crowded with competitors and consumers have more choices than they have ever had before. It's up to credit unions to help them make their way to the choices which will be best for them, Ward-Smith said.