Jul 01 2013

Patronage, Loyalty, and Credit Unions’ Shared Surplus

Report  
Number  
304

Healthy credit unions generate surplus in the form of net income every year. As cooperatives, they should use that surplus to reward and encourage loyalty, return value to members, and build a differentiated value proposition.

Daniel Cote, PhD
HEC Montreal
Report Number 304

Executive Summary

At the base of a member’s credit union relationship lies the promise of surplus—whatever a credit union earns in excess of its expenses is to be used on behalf of or returned to members. Beyond deposit-based dividends, members extend implicit flexibility to boards and managers about how that shared surplus should be used. Most members don’t think of the surplus as theirs, because most credit unions don’t talk about it that way. But credit union leaders, as stewards, should think about that surplus and how it should be used to grow, to deliver value to, and to strengthen the cooperative.

What is the research about?

This report challenges readers to think about the shared surplus and consider how practices like patronage dividends, incentive programs, and strategic use of the surplus can engender loyalty and strengthen the credit union. The first part of this report examines the academic research behind loyalty, including Professor Côté’s own thinking about how a “new cooperative paradigm” can invigorate credit unions that cultivate loyalty.

The second part of the report analyzes how three Canadian and three US credit unions use their surpluses (in very different ways) to return value to members. In these six in-depth case studies, cash dividends are one way, but rarely the only way, to distribute the surplus to members.

What are the credit union implications?

This report has done its job if it stimulates management and board discussion around how the surplus is currently accounted for and spent and then how it should be spent. Along the way, here are some principles to guide that discussion: 

  • Shared surplus is a productive way to think about member value, economic or otherwise. 
  • Pay more than lip service to loyalty.
  • Rewards-based loyalty programs are not costly to operate. 

As you think about how your surplus is spent, consider the ideas here. Support growth and stay safe, of course. But also consider dividends, loyalty programs, and returning value in a way that binds members to your credit union.

This report is sponsored by Credit Union Central of Canada.