What’s Stunting Credit Union Membership Growth?

A Credit Union Times article about credit union growth challenges notes that although about 20% of credit unions now have a community charter, the majority aren’t growing their membership ranks. Mark Weber (it lists his name as Frank, but I have inside info that it’s really Mark) of Weber Marketing said:

“If good service were the secret, credit unions would be thriving in membership growth. When a credit union gains a community charter, absolutely nobody beats a path to your door. “

My take: You nailed it, Mark (as if Mark might actually read this). But Mark’s comment begs the question why should this be this case?

To understand why, let’s break down growth down to two simple components:

1) how much you sell, and
2) to whom you sell it to.

Revenue basically equals price times volume. But volume is a function of price. The laws of economics (which have not been repealed by social networking, Web 2.0, etc. by the way) say that if you raise your price, all other thing being equal, volume goes down. But if volume goes down less proportionately than the price increase, then revenue rises. The same logic holds true for a price reduction. Revenue will actually rise if the price decrease produces a disproportionately larger growth in volume.

This little lesson in economics holds the first clue why many CUs haven’t seen membership growth: They’re simply not price competitive.

The past few years have seen the emergence of the online high-yield savings account. According to NetBanker, about 2 million shop online each month for high-yield savings accounts. CUs like Patelco have recently countered with higher rates, but for many CUs who aren’t raising savings rates, a “service advantage” is often insufficient to overcome the price disadvantage.

While price is one lever impacting volume, the marketable universe (who you sell to) is a gating factor. With the right elasticity, a price increase or decrease might produce a huge increase in volume (and hence revenue), but if you can only sell to 100 people, your potential revenue is less than it would be if you could sell to 100,000 people. Which is exactly why so many CUs are looking to community charters to expand their marketable universe.

But just as there’s a decision to make regarding prices (increase or decrease?), when a CU’s marketable universe expands there’s a decision that has to be made: Market to prospects with no existing product (i.e., savings account, car loan, checking account, etc.) relationship or steal prospects away from their existing relationships.

Before the coming of age of Gen Yers, the new prospects that CUs were chasing were almost always coming from the latter group (existing relationship). And therein lies one of the biggest reasons why CU membership ranks haven’t grown with expanded charters.

According to a study by three economists from the Federal Reserve Board entitled “Who Competes With Whom? The Case Of Depository Institutions”:

We predict that 89% of customers who leave a bank in response to a deposit rate decrease migrate to another bank in the market, whereas 10% who leave migrate to a thrift.”

Conversely, when a customer leaves a thrift in response to a rate change, there’s only a 50% chance that he or she will stay with a thrift (even less in rural markets).

Tying this all back together, I’m left with three conclusions:

1) Many CUs are simply not price competitive with banks.
2) Becoming price competitive is not a panacea — consumers aren’t very likely to switch from a bank to a thrift.
3) Many CUs would do better to refocus on the existing base — i.e., increase “market penetration” within its existing marketable universe before expanding their charter.

The cold, hard reality:
If a CU isn’t very good at marketing to its existing potential membership universe, what makes it think it will succeed by simply expanding the universe?

In practice, CU’s service advantage helps retain existing members — not attract new ones. The service advantage is something that customers have to experience for themselves.

To attract new members, CUs are going to have to do what sophisticated direct marketers do: Develop predictive, analytical models to understand the attitudinal, behavioral, and demographic attributes of their best members, and apply those models to find prospects in the marketable universe who look most like existing members across those dimensions.

“Cumbaya” marketing efforts like BankerSpank and LookOutForTheLittleGuy aren’t going to cut it. Instead, understanding consumers’ expectations and desires to do business with innovative firms and the types of relationships they value (interpersonal connection, objective advice/guidance, or operational excellence) hold the keys to opening the door to membership growth.

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