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Failing Fast Can Lead to Success

As margins shrink and competition increases, credit unions find themselves in a tougher environment than in years past.  New ideas may provide a path to improved profitability, but some credit unions shy away from the additional expense.  Launching new products, services, marketing campaigns, etc. can be expensive and time consuming.  Consider doing a small test or pilot program before doing a full-scale launch.  Most importantly, understand what kind of results you expect and if it doesn’t deliver, fail fast.
In other words, don’t be afraid to say, “gee, that didn’t work out so well,” and get out.  You don’t want to be burdened with an unsuccessful endeavor for very long.  But without trying, you are unlikely to find a successful endeavor.
Many ideas such as new products, services and marketing campaigns can be tested fairly quickly without a huge investment.
Creating a culture of failing fast can be difficult, but it is necessary.  It is unlikely that the rate of change will slow anytime soon!
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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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Record Low 10-Year Treasury Rates and Net Interest Margin

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On September 22nd, the 10-year Treasury Rate touched another historic low with a yield close to 1.7%.  This is a critical measure, as many credit union assets are priced off of the longer end of the yield curve.  There are many factors contributing to the low yield, including:

  • The Fed’s decision to sell some shorter-term debt and buy longer-term debt
  • The weak economy
  • The continued flight to safety (American debt looks relatively safe on a global scale)
  • The Fed’s stated intention to keep short-term rates low into the middle of 2013

So what does this all mean to a credit union’s net interest margin? All else being equal, credit union loan and investment yields will continue to decline while rates are low and the economy flounders.  Additionally, the ability to maintain the net interest margin becomes increasingly unlikely the longer we are in this low rate environment.  Deposit rates will hit a “floor” at some point.  Even if a credit union has room to lower deposit rates—and thus minimize the loss of asset yield today—that credit union will, by default, still be adding interest rate risk to the balance sheet.  Additionally, most credit union assets are fixed rate, and these low-yielding, fixed-rate assets will likely stay on the books for a while.  As a result of all these factors, credit union margins will be further squeezed and the potential for interest rate risk will increase.

Does your credit union have the ability to absorb more interest rate risk going forward?  Can your institution remain profitable 12 months from now if current trends continue? Now is a good time to try and figure this out, and take mitigating actions if deemed necessary.

Source: US 10-yr Treasury yield falls to lowest on record, The Associated Press, 9/9/11