Posts

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Data Mining Could Lead To Revenue Streams

Marketing isn’t what it used to be.  As with most disciplines, marketing has evolved rapidly in this technological age.  Credit union marketing strategies need to evolve, too.  It has been reported that Amazon’s conversion to sales from recommendation could be as high as 60%. Why?  Because they understand how to mine their customer data and make relevant recommendations to their customers.  We’re all bombarded daily with thousands of marketing messages from billboards, radio, TV, the Internet, magazines, etc.  It makes sense that recommendations that actually interest your members are much more likely to result in sales than a shotgun approach.  Target is so good at understanding their customers’ buying patterns that they reportedly are able to identify who is expecting, and send maternity and baby ads to them without the customer ever mentioning that she is expecting.  It’s not necessary to go that far.  In the credit union world, there are institutions that have implemented very sophisticated data mining and those that have yet to consider such an approach.  In this era of tighter competition, effective sales and marketing is key to success.  Even the smallest credit union has data on member payments to other institutions and information on when loans are paid off.  It may be easy to identify major life changes such as a move or birth of a child, which are prime times to replace old buying habits with new ones.  Simple data mining can help your organization take a step in the right direction.
Even if you start small, just get started.
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Budgeting For Loan Growth

In this uncertain economy, many credit unions are seeing loan growth come in below budget.  Others are experiencing loan growth that meets their budgets; however, they are still below budget on loan interest income.  Why?  Interest rates have fallen since their budgets were created and competition for loans has resulted in the credit union getting the loans at a lower rate than budgeted.

Example 1:

 

Can the credit union make up this revenue variance by making more loans?  Maybe, but as the example below indicates, the credit union would need to grow loans 25% over the budgeted amount to breakeven on loan interest income.  Many credit unions would feel this is not achievable in today’s environment.

Example 2:

If the credit union is not able to increase loan growth, then, all else equal, net income will fall short of budget.  However, all else doesn’t have to stay equal.  While cost of funds may be hitting a floor for some places, other credit unions still have room to move lower.  And operating efficiencies are key for surviving today and being successful in the future.  Remember, the point at which you address a problem is directly related to the number of viable options you have to solve it.  If you are in this situation, begin laying out alternative plans now to help achieve your desired level of income.

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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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Perfecting The Process

Looking over the last 12 months, what has happened to your credit union’s net interest margin? If yours is like most credit unions, the answer is it has declined. Competition for loans and low interest rates continue to erode yield on assets.  Cost of funds has declined but (for most places) not enough to completely offset the reduction in asset yields.

If interest rates remain low throughout 2012, the yield on assets will continue to decline.  Can the cost of funds be reduced further?  For some, the answer is yes; however, others are at, or near, the floor.

Below the margin, many credit unions have made cuts to operating expenses over the last couple of years.  Most of the “low hanging fruit” has been picked.  Some credit union managers are feeling they have done everything they can do with operating expenses, yet earnings still aren’t where they would like them to be.  What can you cut after you’ve cut everything?

Sustainable expense reductions often come not from cuts, but from improving processes.  Have you examined and mapped out all the processes at your credit union? If so, were you surprised (shocked?) by what you learned?  We’re doing what!?!

Improving processes to remove unnecessary steps, to move members through the process faster and free up employee time, can both reduce expenses and increase revenue.  Remember that every minute a frontline employee spends completing a non-value-add step in a process is a minute less they spend interacting with members.