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Get Them While They Are Young

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So often, credit unions focus on attracting younger members in their 20s.  The intent is to make them lifelong members so the credit union can benefit when those members are older and ready to borrow.  This idea makes sense when considering how consumers’ income and expenditures increase as they age, particularly in what is considered the prime borrowing years of 30 to 50 years old.

bls-income-vs-expenditure-for-us-by-age-group

While the idea may make sense, there are some questions on the approach.  Let us start by taking a look at some numbers.  The graph and chart below represent a composite of the demographic data we have gathered from strategic planning sessions we facilitate.

total-loan-deposit-and-non-interest-income-by-age

It is no surprise that as members move into their 30s and 40s, the balance of loans they hold increases because they buy houses and more expensive cars.  What surprises most credit unions, however, are the loan balances members still have in their 50s, and especially in their 60s.  In fact, the 60-year-olds are on par from a lending standpoint as the 30-year-olds and this is not just because of higher balance mortgage loans.  For those in their 60s, auto loans continue to be a major component of that age group’s borrowing.

Let’s circle back to the members under 30.  They account for 25% of the membership, yet only 9% of the loan dollars and 6% of the deposits.  Even taking non-interest income into account, which is usually thought to be the area in which younger members shine, they punch below their weight.  Overall, these members do not contribute very much compared the other age brackets.  While this may be expected, there are some questions to consider:

  • What types of resources are being spent to attract, retain, and service these members? At 25%, they are a sizable portion of the overall membership.
  • How long will they have to be members before they become profitable, contributing members to the co-op, making up for the resources spent to retain and service them until then?
  • Does the average length of membership of 30- and 40-year-olds support the idea of 20- year-olds becoming lifelong members?
  • Does that average length of membership also line up with the number of years it takes for those in their 20s to become profitable members?

The average length of membership for those in their 30s tends to be 5 to 7 years and 7 to 9 years in their 40s, suggesting that most 20-year-olds do not become lifelong members.  Furthermore, some credit unions that track this information regularly have seen as much as  one-third of young people leave the credit union when they turn 18.

Lining up these numbers with the competition from niche market players (think FinTechs) that are providing one-off services, getting them while they are young is harder and harder to do. Ultimately, credit unions have to ask the question of how many resources are they willing to commit on members that may not be with the credit union long enough to be profitable, especially when there may be more opportunities in other areas of the membership.

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Who’s Afraid of the Big Bad FinTechs? A Powerful Value Proposition Can Calm the Fear

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A lot of financial institutions are concerned about the competition brought by FinTechs that seem to be rewriting the script for how financial business gets done. How can a credit union without a tremendous development budget hope to compete with their slick technology? The concern is well-placed, but perhaps, not for the right reasons.

Yes, FinTechs have advanced technology and they are capturing significant market share, but the financial services industry isn’t really competing with their technology; it’s competing with new customer expectations. Remember when mail order meant filling out a paper form, mailing it, and waiting 6 to 8 weeks? People were content with it because that’s what they expected and they did not know anything different was possible. Fast forward to today; thanks to players like Amazon, customers now expect delivery in a few days, even as quick as one hour in some cases.

What the FinTechs have done is change how people expect to do business. Now that they know it is possible to have a much faster and simpler banking experience, there is no going back. We can never go back to 6 to 8 week mail order deliveries, even if Amazon goes away tomorrow. And if today’s FinTechs don’t survive, customer expectations are still forever changed.

So are faster and simpler processes a requirement for most people? Yes. Does that mean you need to look like a FinTech? That depends on your value proposition. If a FinTech’s value proposition is the ability to get a loan in pajamas, quickly, without talking to anyone, what is your value proposition? There’s room in the marketplace for more than one. If your value proposition is very low loan rates, helping people with credit issues, or building strong relationships, focus on delivering that flawlessly. If it is clear and powerful enough to truly resonate with your target market (and that target market is big enough to sustain the organization), you shouldn’t feel the need to copy the FinTechs; own your value proposition.

At the same time, you will still have to respond to those changes in member expectations; the questions are how and when. Most of that leading-edge technology is available today – for a price. Going back to the shipping example, there are plenty of successful online retailers that do not offer 2-day deliveries as a standard, but very few are in the 6 to 8 week range. Using your value proposition as a filter will result in a more strategic allocation of resources by choosing the right offerings to meet your unique membership’s expectations and support your value proposition.

Remaining relevant to your membership requires thoughtful adjustment as the world around us changes, but the key is to have a clear, powerful value proposition – and deliver on it.

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Examiner FAQs

We frequently hear about examiner inquiries regarding non-maturity deposit assumptions in credit union A/LM models.  The question is usually along the lines of, “what are the non-maturity deposit assumptions used in the A/LM modeling and how were they determined?”

Non-maturity deposit assumptions include pricing sensitivity and withdrawal sensitivity.  When it comes to pricing sensitivity the modeling needs to have assumptions about what the credit union thinks it will pay on its non-maturity deposits in different rate environments.  While there are many things to consider when it comes to pricing, one approach is to look at how the credit union has priced deposits in the recent past.  Short-term rates, which influence deposit pricing, were around 1% in 2003-2004 then rose steadily to about 5% in the 2006-2007 timeframe before dropping to the historically-low rate environment of the last few years.  A good starting point is to base your pricing assumptions on how you actually priced during this rate cycle.

Withdrawal sensitivity models the behavior of members who move their funds from lower-paying deposits (like regular shares) to higher-paying ones (like CDs) when presented with an opportunity to do so.  This behavior is much more difficult to observe than how deposits were priced in different rate environments.  In fact, in the IRR Questionnaire, NCUA says, “The uncertain timing of NMS account cash inflows and outflows can make treatment challenging.  It is not possible to predict with certainty what future balances in non-maturity accounts will be, how long they will remain open, or what future rates will be paid to members on these accounts.  Even when CUs study member behavior, or contract with vendors to perform such a study, substantial uncertainty remains.”

Similar to the approach with pricing, it is possible, however, to observe how your credit union’s deposit balances responded during the last rate cycle.  Reviewing balance changes, especially during the period of 2004-2006 (when short-term rates were increasing), can provide a basis for withdrawal sensitivity assumptions.  Still, there is nothing in recent history that replicates this extremely low-rate environment and there are valid concerns that member behavior in the future may be very different than in the past. Movement of funds to higher-paying deposits, or having to replace funds that are leaving with higher-paying deposits, can dramatically increase a credit union’s cost of funds.  As with the pricing assumptions, it is a good practice to stress test these assumptions by asking, “what if our member withdrawal is X% (for example 50%) greater than assumed?”

One last consideration:  the type of analysis you are doing. Deposit pricing assumptions are needed for static and dynamic balance sheet income simulations, NEV and long-term risk to earnings and net worth simulations.  Withdrawal assumptions are needed for NEV and long-term risk to earnings and net worth simulations.  While dynamic simulations wouldn’t necessarily employ withdrawal assumptions, it is possible to model changes in the deposit mix. Static balance sheet income simulations, by definition, ignore this threat by assuming that deposits never leave and that members never act in their best interest by moving to higher-paying deposits.