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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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A Few Questions To Consider Regarding Branch Strategy

What is your credit union’s long-term branching strategy?  That might be a tough question to answer for many institutions.  As margins have decreased, many credit unions have had to take a long and hard look at the effectiveness and profitability of their branch network.  While the bulk of new memberships, loans and deposits originate in branches, many institutions have considered shifting toward a model more geared toward e-services.  There are a multitude of questions that could be considered with respect to credit union branching, a few of which are outlined below:

  • How does the branch strategy align with the overall strategic direction of the credit union?
  • Can your institution afford to operate one or more branches that consistently have a negative overall contribution to the credit union?
  • Are branch location decisions based on where your current members live, or where members of your desired target market live?  Answering this question could lead to different decision-making regarding where to position future branch locations
  • Does your institution have the technology to allow for reduced member reliance on branch locations?  If not, how quickly are your technology offerings improving, and at what cost in terms of dollars and resources?
  • What might be the unintended consequences of your branching decisions?
  • How does the credit union measure branch success?
  • If the credit union is moving toward a model that relies less on physical locations, how will your organization effectively cross sell to members or prospective members?
  • Does the strategy fit with the financial realities your organization is facing now, or could face in the next 3 to 4 years, especially if rates remain low and loan demand is slack?
Continued margin pressure is likely to increase the importance and timeliness of these types of decisions.  Meanwhile, members are increasingly asking for more from their financial institutions which makes this a tricky balancing act.
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Where Are Loans Falling Off?

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Credit unions need to analyze and understand their loan pipeline.  Many institutions currently look at their approval ratio or a “look-to-book” that tells them the percentage of applications being funded.  Both of these measures have value but don’t necessarily provide the full picture.

Ideally, credit unions should be looking at the number of applications, percent of applications approved, percent of applications funded and percent of approved applications funded.  Additionally, credit unions should be looking at how those numbers have changed over time to identify trends.  Reviewing this information by delivery channel can also be helpful.

Below are just a few questions decision-makers should consider as they analyze the more comprehensive view of their pipeline:

  • How have the number of applications and the percentage of approvals and funding changed over time?  Why?  For example, the credit union may be approving and funding the same ratio of applications as during the boom times of 2005 and 2006, but the number of applications has decreased.  As such, they need to look into how to increase applications
  • How have credit standards changed?  What impact is this having on approvals and denials?
  • Besides credit score, why are members not being approved?
  • What are the top three reasons approved applications are not funded?  These reasons can identify opportunities to increase loans and revenue without having to adjust credit standards to do it

With these answers, credit unions can determine how best to make changes that will increase loans funded and increase revenue.

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Planning For PLL

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Given the economic experience of the past couple of years, many credit unions were forced to beef up their loan loss reserves.  Now, as things appear to be getting better, we are seeing that some credit unions feel they are “overfunded” and are not adding to their reserves.  While this may provide some temporary relief to earnings, credit unions cannot plan their long-term business models on the fact that there is no PLL expense or, in some cases, that the expense is negative.

Credit unions have worked hard in this environment to define their target markets, focus their efforts toward them and have learned to do things more efficiently. They should enjoy this brief reprieve.  However, credit unions should not become complacent.  Rather, they need to continue efforts to position themselves to be better and stronger in the future.

As far as modeling goes, assume that the PLL expense is at the level expected after the allowance for loan loss reaches an adequately funded level.  This will provide a more realistic picture of long-term earnings.  From a risk-management perspective, consider the experiences from the last couple years in making assumptions about worst-case credit risk exposure, not only from loans but also from investments.