LOMBARD, Ill.-With credit unions seemingly having little control over growing earnings pressures and shrinking margins, it's time the industry takes a systematic approach to product pricing.
Pricing is something credit unions can control now and they must, insisted Bill Handel, VP of research and development for Raddon Financial Group. "You have earnings and margin pressures, both are stressed. CUs have to be much more effective in how they manage the spread side of things."
The big issue, asserted Handel, is that each credit union needs a "cogent" pricing policy, particularly on the deposit side. "Credit unions, for the most part, have not really built a framework to set price. They should be building a pricing policy based on what their financials look like."
For instance, Handel said the policy could be based on loan-to-share ratio, capital level and ROA. "Build a matrix on those three factors that says when those things look like X, I must price in the bottom quarter. Whereas when those financials look another way, I must price in the top quarter. The issue is we have to have pricing policies that are dictated by where we are financially in order to best manage margin."
Change In Thinking
Handel acknowledges it will take a change in thinking at many CUs. Often when pricing is altered it's the result of pressures from internal and external sources that are watching the competition, he said. "For example, board members insisting the credit union has to make changes to adjust to competitors. But when that happens the credit union is not making decisions based on the long- or short-term viability of the credit union. You need a defined pricing policy that creates a systematic approach to pricing."
Handel reminded that margin pressure due to record low interest rates will remain for some time, with the Fed committing to keep rates low into 2014. But pricing problems will also arise when rates begin to climb, warns Handel.
"When the Fed raises rates or Treasury rates start to rise, the credit union will get immediate pressure from the board and members to increase deposit rates. But assets won't reprice as quickly, which will hurt the credit union. That is when you need that systematic pricing approach to go to your board and say, while they are requesting one type of move that your policy suggests something else."