Who Are Credit Unions Trying To Attract?
25 Nov
I hope I don’t get into any trouble for saying this, but I’m a big fan of credit unions. It’s for two reasons, one of which I won’t admit to in public. The other is this: I believe that the key to being a successful financial institution is doing what’s right for the customer, and not just your bottom line. And time and time and time again, credit unions (more so than banks — sorry, banks) have demonstrated this trait.
But I do worry sometimes about the marketing tactics that credit unions employ. For example, I’ve never been a big fan of the bank-bashing that CUs (or maybe more accurately CU associations) do.
Another concern I have is that credit unions are trying to attract the “wrong” customers (yeah, I know — members). It might be worse — that it isn’t that they’re attracting the wrong customers, but that there’s no rhyme or reason to who they’re trying to attract.
Here’s what got me thinking about this. CUNA published an article about a recent Filene Research Institute study which found that:
Bank customers pay substantially more in overdraft fees and other account fees than credit union members, with low-balance bank customers taking the brunt of that burden. Low-balance accountholders, which the study defines as accounts with a balance under $1,500, paid $165 per year in overdraft fees if they were customers of a bank, whereas low-balance credit union members paid $42 in those same fees.”
I’m sure that many credit union people will read this, pat themselves on the back, and think: “See, we don’t screw people over like the big banks do.”
This might not be a popular notion, but: MAYBE THEY SHOULD.
What will consumers — make that the “low-balance accountholders” — do when see this data? Naturally, they’ll switch institutions. The result: Low-balance accountholders — those with the highest propensity to overdraw on their accounts, and maintain less than $1,500 in their accounts — will account for an even greater percentage of credit unions’ membership base.
Is this what credit unions want? Are these the consumers credit unions are trying to attract as they try to lower the average age of their member base?
I have yet to meet a credit union professional who doesn’t believe that providing financial education to their member base is an important that their credit union offers. But who says that this education has to be delivered in the form of brochures and Web site pages? What if the “lesson” was a high fee for not being disciplined in managing one’s finances?
The opportunity for CUs — as I see it — is to assess OD fees in a less predatory way than the banks come off as doing. For example, why not implement fees on a sliding scale — the first time is forgiven, the second instance the member has 24 hours to deposit the funds to cover the overdraft, and then in subsequent instances the member pays an increasing fee.
If credit unions are truly more concerned with helping members better manage their financial lives — and I believe they are — then it means helping those customers make BEHAVIORAL changes. Not simply charging them less than other institutions do for their undesirable behavior.
Thanks for this post, Ron. I think it brings up a very interesting point about what financial education is, and what it is not. To me, this whole notion of covering members’ checks no matter how much (or little) they have in their checking accounts is amazing to me. A bounced check is what my parents would call a “teachable moment”. Fee, or no fee, continually allowing members to be irresponsible with their checking accounts is not financial literacy education. Set up an overdraft line of credit based off of conservative underwriting principles, give members a “get out of jail free” card or two, and let them, outside of an usurious fee, learn that you’re not supposed to spend more than what you have.
Good post, Ron. I especially like the sliding scale idea for fees. I think we already do this a lot in practice, but it would probably be more effective if there was a formal procedure that members were aware of and staff were held to.
I think the biggest value of the sliding scale is in POSTING it. It’s the marketing impact — showing members that on one hand, the CU is less predatory, but that on the other hand — if the member continues to screw up, then there’s a price to pay.
Ron,
I admit to having a little “cu envy” myself, for the same reason. For credit unions, it’s a part of their mission to do what’s best for the customer. In banking, it seems that there are individual employees that do this.
As for OD fees, I saw the controversy coming a mile a way. I think I even have a blog post or two about it myself. I agree that CUs may want to think carefully about attracting these higher OD customers. From some numbers I’ve seen, these also tend to be your higher “churn” customers. But perhaps a CU can better help change the customers’ behavior.
I love the title of your post, but feel the comments have gotten off-track and focused too much on the education value of fees, etc. Your statement about their being no rhyme or reason is who credit unions are trying to attract is right-on. There’s no real strategy in place. But heck, that’s the same case for banks, which don’t have much more of a clue who they are really targeting. Almost no existing financial institutions really do. That’s why I’m so bullish on the opportunity for niche banks.
I like to ask credit union execs and bankers this question: “are you trying to be everything to everyone? The typical answer is, of course, “no”. Then I ask, “so who are you want to just stay the heck away from you?” And there’s never any answer to that question (except when they say “rate shoppers,” which is like a “duh” answer). You can’t say you’re not trying to attract everyone until you can define who you are trying to actively NOT attract.
I’m glad you made this comment. I actually think I was the one who got off track from what the core point of the post was intended to be: Namely, about targeting.
One other thing: I hear the same thing that you do — that they don’t want the “rate shoppers”. NOBODY owns to wanting that “segment” (if you can really call them a segment). But after I hear that, I ask “oh, so you yourself don’t shop on rate, and will gladly take a lousy interest rate, or pay extravagant fees for what you perceive to be superior service?” To which the common answer is “um… er….uh…uh”. My point: Rate shopper is not a valid segment. You can identify them when they walk in the door, and everybody wants to believe that they shop on rate TO SOME EXTENT.
I remember having a few “rate shopper” discussions. I got the usual comments of the customer leaving for .5%. When I asked what we did to keep them instead of leaving for an extra $25 in a year, I usually heard crickets. On the occasions I didn’t hear crickets, I was told they either leave or we match the rate. There was nothing about customer service or other products and services we have that they could use to manage their finances better.
Good discussion regarding who a FI does not want to target for membership. In most cases, the least desireable membership segment for credit unions are the very people who serve on their boards of directors. The net savers. These people pay zero in interest and fees and expect the borrowers and overdrafters to subsidize their membership. They are also the most rate sensitive group and will move their money for 2 basis points.
As I see it, its OK to target “everyone” for membership in the credit union (at least all eligible potential members), but where they fail is in having a single strategy for targeting everyone. Each segment needs its own focus and strategy. If the focus is just on attracting Gen Y, then Boomers may begin to feel that the credit union is no longer interested in them and their needs. The most successful CUs have something for everyone and customize their product and service offerings to each segment.
Mark: Interesting comment about “the most successful CUs having something for everyone and customize their product and service offerings to each segment. ” I’m hoping the author of the Niche Banking blog will weigh in on that comment.
Ron, thanks for the prompt–I was in a turkey-induced blog coma and missed the comments on this post.
As you suspected, I do have a different take on the situation than Mark has offered. I would say that the most COMMON credit unions have something for everyone, but I would not say that the most successful ones do. In my opinion and experience, the most common credit unions (or banks, for that matter), have created an experience that’s tailored very closely to a narrowly defined set of people. Their products and services are geared to that group of people, and nobody else. People outside that narrowly defined group may still choose to do their banking with the CU, but chances are they will not particularly enjoy the experience they get…because its been created for somebody very different. This is the key difference between “eligibility” and “target market”–Person A may be eligible to join a particular CU, but isn’t necessarily at all in the target market, and may dislike the experience as a result.
This issue of target marketing vs. “something for everyone” is a real problem for larger consumer-oriented coop’s. As a bank, management has no obligation to serve everyone–there only job is to make profits for the bank. CU management, on the other hand, does have a responsibility to meet the needs of all members. So, the larger the CU, the more diverse the membership population is likely to be, and therefore the responsibility to meet a broader and broader set of needs, i.e. be all things to all people. I think this is a real structural issue for CU’s that banks, and even other co-op’s (particularly producer co-ops like farmers), don’t face. REI is maybe an exception, but they are by design a niche retailer (outdoor clothing and equipment).