- Personal Finance»
- Banks, S&L's, Credit Unions
The (Generic) Credit Union Mission
The Credit Union Mission
Recall from a previous post, that the Not-For-Profit perspective has relevance even for credit unions that are for-profit, income tax paying credit unions. The Not-For-Profit perspective really provides insight into what is “the mission” of most (if not all) credit unions. In the private-sector view, the ultimate mission is the enhancement or maximization of long-term shareholder value or return on investment. But what should things look like when the customer is the shareholder (i.e., the credit union model) and that shareholder does not individually own any significant share of the organization’s capital?
One approach would be to view that collective capital as belonging to no customer (i.e., member) and therefore viewing it as traditional external capital that seeks a maximization of profit from that pool of capital. Then, assuming that the owners (i.e., members again) are seeking a maximization of return on the pool of capital, a disbursement of “excess profits” is returned to the owners as dividends. However, this naive approach ignores that fact that the current membership as a whole (i.e., the owners and customers of the credit union – they are the same people) do own that capital and that capital is to be used for their benefit. The benefit should be a maximization of value for the members, not a maximization of profit.
To better understand the distinction between value and profit, it will be helpful to consider a typical credit union’s stated vision or purpose for existing. In the majority of cases, Canadian credit unions will state their purpose as something along the lines of the following concepts:
- · Owned by, belong to, and are accountable to the members
- · Exist to add value to the members and their communities
- · Desire to be a financially strong and sustainable credit union
- · Be the financial service provider of choice for their members
All credit unions will typically have similar reasons for being because they all typically subscribe to the universal co-operative principles. To generalize, a credit union will want to be financially strong and sustainable in order to be able to serve members’ financial needs as well as to assist in improving the communities of its members.
Competitive Credit Union
Credit union members can bank anywhere. And, in many circumstances, credit union members do maintain relationships with their credit union as well as some other financial services provider. If credit unions are not competitive in their product and services offerings, then it is logical to assume that many or most of their members will discontinue dealing with them. So, a traditional For-Profit approach to how a credit union chooses to compete in the marketplace is relevant and we can identify three broad value propositions to pursue for any credit union. Credit unions can choose to compete on price, they can compete on product, or they can compete on member intimacy (i.e., closeness of relationship with the members). In choosing one of these strategies, the credit union does not exclude the others but they would focus on one and then do “good enough” on the others. Let’s see if we can quickly determine what makes most sense for a credit union.
Product seems an unlikely approach for a number of reasons:
- · Target market would be early adopters (credit unions are typically conservative, risk-averse, mass-market players)
- · Innovation would centre on product development (credit unions live in a “me-too” product environment and products are readily copied quickly by competitors)
- · Need to be nimble dealing with regulatory processes (the credit union industry is highly regulated which can stifle product innovations)
- · Need high switching costs (or some sort of lock-in) of products to fend off competitors (very difficult in the credit union business where new products are almost instantly copied by competitors)
This does not sound like the right approach for a typical multi-physical-branch-based financial intermediary with ambitions of enhancing its members’ circumstances through involvement in their lives and communities.
Price Leadership / Operational Excellence
This approach, described by the bullets below, has more promise but still comes up short:
- · Drive toward complete electronic supplier and customer relationships to drive out cost (e.g., minimize branches and personnel to minimize cost of delivery)
- · Better, faster, cheaper process improvement culture; learning and growth focused on process improvement capabilities
- · Drive supplier costs continually lower to drive out cost
- · Regulatory and social responsibility processes focused on avoiding issues to minimize costs
- · Non-customized products/services and the credit union would only offer products/services with wide appeal – consistent, low-priced, non-customized offerings (i.e., little or no advice given because customization is required to make the advice giving effective)
- · Speedy access; consistent quality; appropriate selection of products/services; lowest cost in the market
Cost is obviously very important in the credit union’s business but it doesn’t have to be the only consideration. If we think about the McDonalds business model, they sell the exact same, low cost, items everywhere. You always know what you’re going to get when you order. However, McDonalds does not make it its business to advise its customers on what they should eat. They certainly do not try to customize their product offerings to each individual customer’s health situation. In other words, they provide products at the lowest cost in the most efficient manner possible (i.e., they lead on price). Similarly, in an example from the financial services industry, ING provides products to customers that are looking for a particular thing at market-leading price. Presumably, those customers are not looking for advice or a complete solution from ING.
Why Do We Deal With Financial Institutions?
Price leadership shows promise as an effective strategy for credit unions to be competitive in the market whereas product leadership does not. It’s important to think about why people deal with financial institutions. A strong argument can be put forward that the financial institution’s products and services are not what the customer is truly after. When a customer “buys” a mortgage from a bank or credit union, it is really so that the customer can buy a house. When they “buy” a retirement savings product, it is so that they can finance their retirement. The financial products and services are not truly what the customer is after.
In one sense, the financial institution products and services are a facilitator for the customer but in another sense, they are friction or obstacles between the customer and the needs they are truly trying to satisfy. Couple this last statement with the fact that most bank customers or credit union members can take out a mortgage or any other financial product or service from many suppliers (i.e., the products and services sound a lot like commodities, don’t they?), it becomes even more evident that price has to play an important role in a credit union’s strategies.
One of the original purposes of credit unions was to provide access to something that the members couldn’t otherwise get in the market. The thing members couldn’t get access to back then was financial products and services. However, most members can now get products and services from a multitude of suppliers. What if credit union members were able to get access to products and services at the best prices in the market? Perhaps this is a way to return credit unions to their original purpose of delivering something members wouldn’t otherwise be able to get if they were not credit union members. Even if credit unions delivered the best price, however, they would still be missing something.
The international co-operative principles that credit unions subscribe to speak to “Education, Training and Information” for members, employees, elected representatives and other stakeholders. The principles also speak to “Concern for Community”. These two principles in particular suggest that credit unions see themselves as educators and providers of advice to their members and that they see their role in members’ lives as being a lot more than a supplier of financial products. To live up to these ambitions, then, a credit union would fall short if their only goal was to provide the best priced individual products.
Complete Customer Solutions (or Best Value Proposition)
We talked about two broad strategies above and then took a small tangent to speculate on why customers and members buy products and services from banks and credit unions. There is a third broad strategy that we will now discuss and generally speaking, this strategy is how many credit unions typically try to compete.
Most credit unions want to be the financial service provider of choice for their members, pride themselves on “knowing” their members better than any other organization, and recognize the financial benefits to the credit union if they can provide all products to their members. This leads most credit unions to compete on a Complete Solutions approach. Another term for this is a member intimacy strategy where the credit union knows the member best and is able to provide advice and products to help meet the members’ needs. This approach is characterized by:
- · Focus on building long-term relationships with customers
- · Leads customers to feel that their needs are understood and they trust the provider to deliver tailored solutions to their needs
- · Offer “customer solutions” as opposed to products
- · Many access points to suit many different customer preferences (e.g., online, point-of-sale, in-branch, telephone, etc.)
- · Focus on selling multiple (or bundled) products and services – complete solutions, not one-offs
- · Focus on exceptional service (before, during and after the sale)
- · Focus on quality of relationship (customer or member intimacy)
- · Customer acquisition is expensive so focus on maximizing business once obtained; Focus is on lifetime profitability of relationship (because initial acquisition might result in negative profit)
Most companies that compete on this type of strategy are not price or product leaders in their respective markets. These companies typically command a higher price because they provide customized, higher-cost (and usually higher-value) solutions to their customers.
A question to ask at this point is “Why deal at a credit union if I can easily get less expensive products elsewhere and if I can get a complete solution elsewhere?” Perhaps I can get some products cheaper at a credit union and perhaps I can a better complete solution at a credit union. Industry research indicates that credit unions operate at a higher cost structure than banks. Industry research also seems to indicate that there is not much difference in customer satisfaction levels between credit unions and banks. So, “Why deal at a credit union?”
There seems to be an opportunity for credit unions to put less emphasis on measuring their success as if they were a bank and spend more time focusing on what makes them a credit union. What if credit unions decided that they were going to provide complete solutions at the best prices in the market? That would certainly provide members of the credit union with something they cannot get anywhere else.
As discussed in other posts, we think that credit unions (generally speaking) have the financial and management wherewithal to deliver on this opportunity through:
- · fixing the disconnect between profit maximization for the credit union as if it was some entity that exists to the exclusion of its members and value maximization for those members
- ·ensuring management, employees and other privileged insiders of the credit unions are not accessing inappropriate “profit share” from members that results from earning excess profits from members
Although there may be (or should be) fear in credit union circles that credit unions are becoming less relevant over time, there is opportunity for credit unions to use their unique corporate structure to be very relevant to all consumers.