27 January 2009

A Credit Union without Deposits and Loans?

I have always seen credit unions as being consumer advocates. I mean, aside from typically offering great rates, low/few fees, and a wide portfolio of personal finance solutions, our job is to help members become better savers, better investors, and better money managers. Doing what is best for members is supposed to be what's best for the credit union, right?

Well, according to our current business model, that's not necessarily true.

If a member wants to open a new savings account, employees are compelled to offer the credit union's best possible product to fit the member's deposit profile and term requirement. There's nothing wrong with that. But what if the member can get a better rate elsewhere? What if the member can get a MUCH better rate at another financial institution? This situation puts the credit union's mission, and its bottom line, in a precarious position.

Could a credit union model emerge to address situations like this? Not just a gentle paradigm shift...a dramatic change? I mean, what about a credit union without deposits...without loans?

What I'm proposing is adapting the travel agency model and the Progressive Insurance model to the financial services world. This new credit union's purpose is completely selfless: find members the best possible pricing on all financial services, whether it's in house or not. For an annual fee, members basically get a completely unbiased advocate who scours the marketplace to find the best deal.

This credit union could generate operating income by negotiating contracts with major financial institutions. Because in a small way this credit union becomes a marketing arm for these financial institutions' services, it would be worth paying some sort of "subscription" or "broker" fees to be included in the search process. Membership dues, educational seminars, and a dramatically reduced operating budget as compared to traditional credit unions would further help this model work.

To avoid conflicts of interest or "pay to play" scenarios all relationships with any financial institutions would be disclosed to members up front. As the credit union builds capital, future deposit and loan products could be offered...but only if they are priced at on a "price match" basis. In other words, if the credit union cannot offer (based on current spreads) the best possible price on a product they simply lead the member to the market leader.

This model saves members time, money, and gives them something they don't necessarily have in today's marketplace: a totally non-biased, trusted guide through the complicated world of personal finance.


Anonymous said...


I think you're totally on to something especially in this economy. How about adding a financial advisor that can take someone like me, scan through my checking account history and question all my items.

You know how everyone is trying to leave a smaller carbon footprint? We need a name for when people are trying to live smarter by spending, investing and borrowing smarter.

Case in point. I pay $24.99 a month to T-Mobile so I can surf for "free" in Red Carpet rooms and Starbucks. Been doing this for years (am doing this now) and just found out that the Red Carpet AND Starbucks have decided to give me free access. Cell phone plans, long distance carriers, TiVo, Direct TV, caller ID....do I NEED all these things? Are there alternatives? It takes time to cancel, change plans, etc. and I would totally partner with someone to help me out.

Middle class is getting hit hard in this recession - and we need to change our habits. I know Wesabe is doing a great job in this area - but I like your "human touch" spin on this...hmmmmmm......promoting thrift takes on a whole new meaning.

Ron Shevlin said...

What you're describing is something called "customer (or member) advocacy". Doing what's right for the member, and not the bottom line at the expense of the customer (member).

To truly be a member advocate means making difficult tradeoffs between short term revenue and long term revenue.

BTW, when a CU demonstrates member advocacy, it often motivates members to share their experience with friends, family, etc.

That's why it's A LOT MORE IMPORTANT to measure your member's perceptions of advocacy than it is to measure the likelihood that someone might refer you.

Guy Messick said...

Matt, this has always been the litmus test of member advocacy. Are you willing to send the member to another provider if it is in the best interest of the member? While it is often done in credit unions on a one to one basis between a friendly member service representative and a member, I have not discovered a credit union that makes the practice a policy. You are either all in or not in a trusted advisor relationship. If you are not willing to be completely honest with the member, the trusted advisor is just an empty promise.

I wrote and article a while back entitled "Make Membership Matter" where I advocated for the very point you are making. I cited the movie "A Miracle on 34th Street" where the real Santa working for Macy's sent kids to Gimbals for toys if Macy's did not carry the toy the child was looking for. Macy's was going to fire Santa until they discovered that the customer loyalty that the trusted advisor relationship generated made Macy's the store of choice

Your thoughts also highlight the fact that some credit unions are changing from deposit gathering entities where income is generated from investing the deposits in member loans and investments to transaction based entities where income is generated from fees.

Membership has to matter or we are just a poor reflection of banks.

Matt, the Credit Union Warrior said...

@Denise That's exactly what I'm talking about. A trusted, unbiased, financial coach that promotes thrift and provides (either internally or externally) a source of credit for provident or productive purposes.

@Ron What a combination, huh? The CU becomes a pure member advocate in this scenario, makes a true difference in members' lives, and does so 100% true to the credit union's mission. Even better, this model lays the perfect groundwork for WOM/grassroots/member-driven promotion of the movement.

@Guy Funny that going back to the basics may be the the most powerful innovation of them all. Our original mission is not broken. Rather, it's never been so appealing. We just need to find a way to get back there...as a movement.

james w said...

I’ll start off by saying that being an Australian living in Australia, we have a different set of market conditions, and thus I have different views on this topic. But still,

Exactly what you are talking about has been done by an Australian CU called Australian Central Credit Union (ACCU). They offer their own home loans alongside a suite of other loans offered by other institutions, and act as a psuedo-broker. They earn broker commissions for their trouble.

At a recent conference I attended I had the opportunity to ask the CEO of ACCU why they adopted this model, and his answer was something along the lines of "to provide our members with the best possible product, not every member is suited to one single home loan".

I don't get that. What's so hard about providing the best possible rate along with flexible conditions.

OK, maybe that is a bit simplistic. But seriously, how is it difficult to provide your members with the best product for them. We’re fortunate enough to be a credit union that still has a core bond, and we know them inside out. We give them a great product, and we deliver it to them well. We work around them, and take their feedback on board.

We don’t hard sell. If something leaves them worse off, they won’t get it. We’re honest, and they appreciate it. And because of this, if they don’t deal with us today, they’ll come back later because we’ve treated them well the last time they dealt with them.

As you can tell, I don't like the broker style model. You're shipping your members off to another institutions on a price basis, but are you taking into consideration the member experience there?

Like… Do you take into consideration the service they get when they call up to make a small change? How about call wait times, or branch queues?

What about penalty/overdrawn fees? Will the penalty fees be good, bad or ugly? Do you take this into consideration.

Or how the member will be treated when they want to leave. Will there be exorbitant exit fees on their home loan? Will these even be explicitly disclosed?

It isn’t all about the rate, and I think under a broker model that’s all that really gets taken into consideration…

David Forbes said...

How is this fundamentally different than Lending Tree or Bankrate.com?

Not to rain on your parade -- but I will :-) -- but I don't see this working. No one will pay a fee for things they can get for free.

So you say, "Wait! It saves them the time and trouble of researching this for themselves!"

The problem is that people don't buy that many new financial services in a year. How often does someone open a new checking account? Not too often. Buy a new car? A new house? Take out a home loan or HELOC? Buy a CD? See where I'm going with this? It's not worth it to pay an annual fee for something like this.

My $.02 (downgraded to $.005 because of this frakking economy!)


Matt, the Credit Union Warrior said...

@David Thanks for your comment. No worries about raining on my parade...the clowns and floats haven't even been ordered yet.

You are absolutely right that consumers don't "buy" new financial products or services very often. The thing is, though, most people own or use MANY on an on-going basis. Among these are numerous variable rate loans and deposits. Imagine the peace of mind involved with knowing you always have the best deal on the market?

See, I'd agree with you completely if there wasn't already evidence that consumers would pay for this kind of service. Think about investment brokers...financial advisors...and the millions of bank customers that pay maintenence fees on their checking accounts.

Regardless...that's outside of my point. My point is (or question, rather) how can a credit union claim that it is looking out for its members when it knowingly offers a product at an unfavorable rate? If we, or any other organization, can truly claim to be advocates to our customers/members...we must make decisions based on their interests, not ours. To me, the need isn't there for MORE accounts. Instead, the need is for honest, straighforward advice, help, and advocacy.