Understanding Credit Union Member Contribution

The financial service industry is currently undergoing several significant challenges, and it has never been more important to get a good understanding of your members.  In this increasingly competitive world, the “one size/price fits all” approach currently in place within some credit unions just doesn’t work.  The members with the most significant contribution are the key to your organization’s long term financial success and they are currently “subsidizing” you’re the member with a negative contribution!

The first step in understanding member contribution is to put a system in place that accurately calculates member contribution (profitability).  The RPM (Relationship Profitability Management) tool is a JHA solution that determines member contribution.  The next steps are to analyze the results and build processes within your organization that utilize this valuable information to improve the credit union’s profitability and member retention.

Understanding Member Contribution – The best way to understand member contribution is to segment your customers into various contribution tiers.  In the graph (below) I have taken a $500 million credit union (almost 100,000 members) and segmented their member into 10{7bd3c7ad8bdfca6261de5ca927cd789e17dbb7ab504f10fcfc6fb045f62ae8d5} increments.

Annual Profit Chart

In looking at this $500 million credit union the results are a bit disturbing.  Their most valuable members have an average monthly contribution of $115 per month (which is over 200{7bd3c7ad8bdfca6261de5ca927cd789e17dbb7ab504f10fcfc6fb045f62ae8d5} of the organizations total profit)!  Conversely, the bottom 10{7bd3c7ad8bdfca6261de5ca927cd789e17dbb7ab504f10fcfc6fb045f62ae8d5} of their portfolio reduces the credit union’s profitability by  an average of -$52 per month (which is – 90{7bd3c7ad8bdfca6261de5ca927cd789e17dbb7ab504f10fcfc6fb045f62ae8d5} of the organizations total profit).  The middle 80{7bd3c7ad8bdfca6261de5ca927cd789e17dbb7ab504f10fcfc6fb045f62ae8d5} of the credit unions member are basically a “break-even” group with a significant number of clients delivering a small negative profitability.

What does this mean and what do we do about it?

This concentration of profit leads me to classifying the clients into three major categories “Protect”, “Grow” and “Improve”.  The top 10{7bd3c7ad8bdfca6261de5ca927cd789e17dbb7ab504f10fcfc6fb045f62ae8d5} are members we want to “protect”, the middle tier represents ones that we hope to “grow” and the bottom tier represents those clients that we aggressively need to work to “improve” their contribution so they aren’t being subsidized by the rest of your member base.  I believe that active account management of both the top and bottom categories provide the highest return for your efforts and are essential for your credit union’s success.

“Protect” – These members represent the organizations most valuable (based on contribution) and as such need to be treated in a special way.  The goal with this group is to ensure that they understand we appreciate their business and will work hard to continue to provide them exceptional service. 

“Improve” – These members represent the least valuable (based on contribution) members in your credit union and like the “protect” members need active account management.  These members are generally unprofitable due to adversely rated loans or “premium” (above market) rates paid for CD balances.  In either case these members don’t deliver an adequate risk adjusted margin to make their account profitable.

“Grow” – These members represent the vast majority of your members, yet deliver very little to your bottom line.  The strategy for these members would be to understand their needs and build targeted marketing campaigns to move  them to a more profitable status.  The key tools to use for this approach would be a strong profitability system coupled with a CRM/MCIF system so you can understand both profitability and product usage. 

Summary – The key in these challenging times is to have good information about your members (including their profitability) and developing strategies to deal with each segment of your member base.   If you are interested in learning more about the RPM solution please contact your Account Manager.

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