RALEIGH, N.C.-Is the definition of member equality changing?
A small but emerging trend in the traditional year-end bonus and loan rebate paid by many CUs suggests that may be the case. A small number of CUs have begun to calculate those payments according to how committed a member is to the co-op.
Analysts and CEOs agree that revenue pressures, costs for keeping up with compliance, slim margins, and NCUA assessments have CU leaders rethinking the concept of member equality, and refocusing on having all members pull their weight.
For example, Coastal CU recently paid a $1.5-million dividend only to "VIP Program" members who actively used CCU.
"A lot of credit unions just pay the annual dividend across the board to every member," said CEO Larry Wilson. "We think paying a special patronage dividend based on members having qualifying relationships is actually more in line with the cooperative principles of credit unions. It's about every member contributing."
This was the first time the $2-billion Coastal paid a special dividend, and 6,000 of the CU's 51,000 VIP members received the bonus. The VIP Program requires having a checking account and performing 12 withdrawals each month. The dividend is then paid based on the size of loan and deposit relationships. To get the loan rebate, the member must have two loan relationships. The same rule applies for the deposit bonus, with checking being one of the deposit accounts. Loan rebate dividends and deposit bonus dividends ranged from $25 to $500. Wilson said four members received the $1,000 maximum give-back.
In St. Louis, meanwhile, for the last five years the $175-million Gateway Metro Credit Union has been making it clear to members it wants them to be "engaged," said CEO Larry Pixley. Engaged Gateway members are those who have checking and direct deposit. They receive significantly higher deposit rates than "non-engaged" members-about one percentage point higher on CDs, a high yield checking account, and 50 BP discounts on loans.
Pixley acknowledged that the pricing strategy has prompted thousands of unprofitable members to leave, but more important, has encouraged a significant number of unprofitable members to become engaged. "Initially our membership total dropped from this move," noted Pixley. "But at that same time we became more profitable. Our goal was never to drive away members but to encourage them to use us more."
GMCU made the move in 2007 because numerous "rate shoppers" were parking large sums of money in CDs and refusing to take other services. "They said, 'No thanks. I have these services with my bank.' We then had to draw the line," Pixley explained. "We asked ourselves why should non-members, really what these people are, get the same benefits as full members?"
Observed Wilson, "Someone is parking $500,000 with me, won't take any more services, and then the credit union has to pay assessments on that money as well? These people are not living up to the credit union standard that says everyone contributes."
Counter To Cooperative Idea
Michael Moebs economist and CEO at Moebs $ervices, Lake Bluff, Ill., urges more CUs to realize that treating every member the same actually runs counter to the cooperative model.
"This is the year in which credit union philosophy must focus on member equality. It has been unequal prior to this," said Moebs, explaining that equality does not exist when a small percentage of the membership generates almost all of the profits. "We are seeing the larger credit unions grasping relationship pricing while the smaller ones are not. Relationship pricing is the only way credit unions will be able to survive."
Relationship pricing, to Moebs, means more than just special year-end paybacks or preferential loan and deposit rates; it is fees, too. Moebs said credit unions should institute more fees, but waive them for members who have deep relationships. "I am sorry. If we have members who have more business with us they don't pay that fee. Members who don't have the business with us better start paying."
Coastal's Wilson does not rule out some day adding fees for those members who don't use the credit union a great deal, and moving to deeper relationship pricing. "We had been thinking about relationship pricing for years and the bonus dividend for VIP members is what we settled on. We felt this was the most efficient way of supporting those who help bring up our bottom line. With net interest margins as tight as they are, this will be our plan for next three to four years. Then we may make other decisions."
Many will be forced to make some relationship pricing decisions in the near term, observed Bill Handel, VP of research and development for the Lombard, Ill-based Raddon Financial Group, who would not be surprised if more fees are felt by members who do not make the CU their PFI. Increased regulation from the Consumer Financial Protection Bureau and extended low rates from the Fed mean earnings pressures.
"We are hitting the floor in how low deposit rates can go, and assets keep repricing down, so there will be an even greater squeeze on spread income," he said.
But changing the CU mindset can be difficult "We worked on this for over a year and we had to work with our board, who wrestled with our new pricing concept, to get them to understand why we should not support people who do not help us generate income," said Coastal's Wilson.
Wilson and Pixley acknowledged that credit unions are debating relationship pricing and the issue of member equality. They agreed that some CEOs will argue that the year-end dividend paid to every member based on a percentage of the loan and or deposit relationship rewards those who are pulling more of the weight. But that approach alone does little to encourage members to use the credit union more and effectively drive profitability.
"The direction we have chosen is the one we have to take," stated Wilson. "We are just rewarding those members who helped us earn our income."