Executive Summary
Writing about the nascent web- bookmarking service pinboard.in, Instapaper (one of my favorite services), and business efficiency software from 37signals, technology writer and critic Clive Thompson recently took on one of the consumer Internet’s ruling assumptions: It has to be free. After all, Facebook, Google, Twitter, and the golden pantheon of web-based services offer themselves as ad-supported free services. So their competitors have no choice but to fall in line, right?
Not really. Companies that rely on ads face constant economic pressure to monetize more of their experience, thereby diluting what the service was originally designed to do. So ripping off the Band-Aid by charging a transparent fee “neatly aligns your desires with those of your customers,” Thompson says.
Credit unions are neither start-ups nor Internet based, but the same business principles apply: Services are not free to provide, so even cooperatives like credit unions have to know when to cross-subsidize some services with others, and when to stop.
What is the research about?
This brief, Balancing Member Service with Organizational Efficiency, is the second in a four-part series that identifies and quantifies cost items at credit unions. The series does more than just identify the costs, however; it suggests measured approaches for minimizing costs by making informed decisions. The other briefs include treatment of item processing efficiency, branch staffing, and optimizing delivery channels. These reports provide specific cost metrics based on analysis from real credit unions and offer suggestions for how to better align the costs you do incur with your organization’s strategy.
The full report, which we encourage you to download and share across your organization, questions the rarely questioned commitment of credit unions to provide cost-effective products along with the highest level of friendly, professional, and courteous service. Joseph Prunty does not endorse rudeness as an efficiency plan, but he does question how well the ideal of cost-effectiveness can operate alongside repeated, expensive investments in ever-more face-to-face service.
"...20% of members are responsible for 150% of net income."
Case in point: A four-year analysis of member profitability contributions among 95 credit unions shows that 20% of members are responsible for 150% of net income. That’s not a typo; it simply means that the other 80%, at some level, eroded net income. A large part of that erosion, Prunty argues, comes from the cost of providing friendly, professional, and courteous service. If you’re already feeling provoked, then this report is doing its job.
What are the credit union implications?
Far from arguing that credit unions should turn members away, jack up fees, or otherwise abandon member value, this report takes for granted that, “as cooperatives, credit unions should constantly strive to minimize operating expenses in order to return more economic value to member shareholders.”
In practical terms, that means measuring account maintenance costs, including core system costs, transaction costs, and even the costs of staff downtime. Tracking is the first step on the road to improving.
In the real world, members are often not willing to pay for services that have traditionally been free (just think of Bank of America’s pro-posed, and quickly retracted, debit card fees). So it is more realistic to push members toward lower-cost delivery channels like online banking and e-statements.
And if additional revenue is necessary, it is much more palatable to charge for a new, valued service than to try imposing fees on services that members are used to receiving for free. If the search for profitable operations includes new fees, be sure you can offer tangible additional value in return.
Today’s thin investment yields mean checking account balances need to average more than $1,000 simply to cover maintenance costs. The full report contains useful cost-of-service benchmark numbers that can serve as a starting point for credit unions that haven’t yet done their own cost accounting.
The credit union business model may not be as simple as those at Internet companies. But the profitability principle is the same: Cut your own costs, or gently charge more.
