Running the business based inordinately on CAMEL can have the unintended consequence of failing to manage for membership growth and has been confused, I fear, with a performance measurement for strategic success. Evaluating the true performance of a CU based on CAMEL is analogous to sending a baseball player to the All Star Game because he showed up to the stadium on time, didn't miss curfew and had a shiny batting helmet.
Has our focus on CAMEL taken attention and action away from the key drivers of the business?
Is your membership shrinking or flat? Maybe you're telling yourself it's because you charge fees on inactive accounts until they are closed. Depending on the parameters you've set, you could be right-for now. But if you close an account after 24 months of no activity and you've been doing this for years, we both know there's a problem. Look at member performance numbers for 60 months. Are your members telling you with their feet that you aren't doing what is necessary to keep them? It's quite possible that many of those members were good customers of another financial institution. So what didn't you do to keep them?
My experience shows that former members tell credit unions they are leaving the area, consolidating accounts or give no reason for leaving their CU. A high percentage of those moving probably didn't even leave your service area. Consolidating accounts elsewhere indicates you dropped the ball. Why didn't they consolidate their accounts at your credit union? We don't really know why members leave because most people just won't tell you. When was the last time you told a hair stylist or barber you didn't like the cut? Most likely you didn't say a word and simply left, never to return.
Remember years ago when the teller lines were out the door on payday? Have you looked at your lobby on payday lately? Things have changed. In my analysis of a $400 million credit union's transactions in a recent month, only 10% of the transactions were performed by a credit union employee. The other 90% were done by the member, including transactions by debit card, credit card, ATM card, check, bill-pay, home banking, voice response, direct deposit and ACH. Look at transactions per employee as far back as you can go. Now look at the members per employee for the same periods. What do you see? Has the credit union's behavior changed with the members' behavior? Does your CU have the same number of people servicing a more self-reliant membership? If so, you probably have an operating expense problem and a high efficiency ratio.
How many products and services per household are there in your credit union today? What about five years ago? No one can tell you what the right number is because each financial institution counts different things. But I can tell you that the number should be growing. It should be evident that penetration must be reflected in your marketing efforts. If not, your marketing dollars are being wasted. A good indication of the propensity of a member to stick with you is a high penetration of products and services.
It took me a while to really understand why return on equity over time is relevant to a credit union. It's the "over time" part. For a financial institution to thrive over time, it must be proficient at the effective use of capital, not at piling it up. The ROE trend should be positive. Go back five years or longer and see what the trend looks like. After resolving any outstanding problems or issues at a credit union, I like to see consistent double-digit return on equity over time.
These measurements get at the heart of the matter when one considers truly healthy credit unions. They tell you your membership's perception of the credit union; whether you have responded to changes in the way members and potential members do business; if your members find value in your products and services; and how effectively you use capital.
Don't ignore the CAMEL. Just don't rely on it alone. If the CAMEL is poor, obviously there is a problem. But if your CAMEL is good, it's not an indication that everything is fine.
CAMEL implies that the higher the capital ratio, the better the CU. As long as you have enough capital, it's your effectiveness at using that capital that matters. A growing institution is adding services and products that are profitable, increasing the number of members and increasing member usage. That means the CU is also growing earnings and capital dollars based on relationships with households.
What would you choose for your CU? A high capital ratio? Or more members and more capital dollars but a smaller capital ratio?
Janice Hollar is a management consultant with Janice Hollar & Associates. She can be reached at 321-750-7504 or janice@JaniceHollar.com