16 July 2008

What Credit Unions Can Learn from Costco

Credit Unions could learn a ton from Costco. A 2007 story by Barron’s attributed the company’s success (they are currently the world’s fourth largest retailer) to four things: keeping expenses and prices low, treating employees well, making discount shopping fashionable, and keeping shareholders happy. These are outstanding “big picture” ideas—general in focus, huge in their implications. However, let’s look at two specific details of Costco operations that the credit union movement would be wise to consider for implementation.

Controversial Topic 1: Membership Fees
In credit unions’ quest to gain market share in the financial services market we have sought easier loans via indirect lending, easier ways to join via community charters, and nearly non-existent barriers to joining (membership fees, maintenance fees, etc.). While we have not achieved “open membership,” I would argue that it has never been easier for an American to join a credit union. In many cases, citizens of certain states or municipalities have multiple choices of fine credit unions to join. Some companies even offer their workers membership into multiple credit unions as part of their employee benefits packages. It’s exciting to know that if someone wants to join a credit union, chances are quite good that there is one out there for which he/she is eligible.

In many ways, though, this has cheapened the relationship. It has simultaneously become just as simple to leave a credit union as it has to join one. With some credit union members, there’s a diminished sense of belonging with their financial institution. With others, they have no obvious vested interest in remaining a member of their specific credit union.

Costco charges an annual standard membership fee of $50. For a marginally higher investment, you can get an executive membership that gives you cash back on your annual purchases at Costco stores. What does this fee cause shoppers to do? Shop. Shop A LOT! Costco members realize that to get their $50 out of their membership, they need to make enough annual purchases to offset their annual fee. How cool, huh? Costco gets $50/member/year AND members who want to do as much business with them as possible.

I think there’s a market out there for consumers who want to feel some exclusivity with their financial institution. People who want to feel special. People who want to save money. People who are impressed by a financial institution that is so confident in their services and ability to save members money that they can charge an annual membership fee. Show them your value. Keep track of members’ annual savings, and communicate that with every transaction.

“Thank you for stopping by today, Mrs. Jenkins! You have now saved $455.34 this year by being a member.”

As an added bonus, return 5% of that calculated total to members at the end of the year. With luck, that total will be at least the $50 membership fee required for renewal. The purpose of the fee would not be income, after all, it would be for loyalty. Even more than that, it’s to prove the value of your financial institution. You’re saying “it’s well worth your $50 to be a member at our credit union.”

Controversial Topic 2: Gas
Gas prices are sucking the life out of American families. The purpose of credit unions is to promote thrift among our members. Isn’t there something we can do, within that purpose, to ease the burden of fuel costs?

Costco sold 1.7 billion gallons of gasoline in 2007. Typically saving Costco members three to ten cents per gallon compared to competitor gas stations, the idea to offer discount gas as a membership perk has proven to be a tremendous business decision. Members help justify their membership fee with the cost savings they receive with this discounted gas. Costco in turn is able to become more attractive to potential members.

How about forming “Credit Union Gas Stations”? Credit unions could form a gas cooperative that would require member credit unions to invest .1% of total assets in year one to fund its start (eg. $500 million credit union invests $500,000). Credit Union Gas Stations would be built in high traffic, high visibility locations across the nation to provide this membership perk. Gas would be sold at the per gallon cost plus two pennies to offset operation costs. The effect would be around six cents per gallon savings for participating credit union members. To pump gas at these stations, you must be a credit union member of a member credit union. You will be able to join a credit union at the station’s information center. Credit unions would issue a card to their members that authorizes the pumping of up to 40 gallons/month at these stations, making sure that no member or member credit union gets an unfairly high proportion of the fuel supply.

We’re cooperatives. Let’s take advantage of our collective economies of scale to make something like this happen. Costco has proven that it can be successful.

Story also published at the Filene Research Institute's CU Tomorrow Blog.


Anonymous said...

I love the ideas. However, (in the U.S.) laws and regulations would limit the ability of credit unions to sell gas. We're creatures of limited powers. These powers are usually listed out in the state or federal law. If it isn't there (or somehow possible through incidental powers), we can't do it. (Lawyers!) But, I'm not ruling out that some creative minds couldn't work with some outside partners to create some gas-related benefits.

Trey Reeme said...

Big problem with an existing CU charging for membership - when what once was free is no longer free, the stuff hits the fan.

Offering premium membership, however... hmmmm...

S&L CU in Australia is good example of both these scenarios: http://savingsloans.typepad.com/savingsloans/2008/06/transaction-fee.html

Matt, the Credit Union Warrior said...

@Anthony Awesome comment! Thank you for that perspective. I truly believe (maybe mistakingly) that under the umbrella of a CUSO or private sector contract this is still possible. Collective bargaining and inter-CU cooperation should be encouraged by regulators (the right is from my understanding guaranteed). It's all about making a compelling case that such ventures are in the public's best interest. Seems like a simple case to make in this case.

Anonymous said...

"Keep track of members’ annual savings, and communicate that with every transaction."

Matt, I agree wholeheartedly that CUs need to find a way to quantify and communicate the value of CU membership in a tangible way. The intangible just doesn't cut it in the hyper-competitive marketplace.

However, getting your arms around this proves difficult. I wrestled with this exact concept for over six months as a member of a Filene i3 project team and for my own CU.

For example, say your member has two loans and a checking account with you. How do you calculate value on the loan products? Rate, right? For comparison, do you use national averages or local competitors. In either case, do you have historical rates (as of the loan origination date) for all credit score tiers (your member may not be A credit after all)? Now add in (or subtract) any loan origination fees ( do you have these for competitors???) and presto you have your calculation for the member value for loan number one. The checking account gets more complicated. Do you have fees and a comparison for all your checking products vs. all of your competitors? Can you even stack up your "ultra free super checking" versus competitor A's "good, but not great checking"?

You get my point. CUNA did have a product that calculated a member value figure. My recollection is that it took your rates (for a single point in time and only for A+ credit scores) and measured them against national averages. It then took the differences between your CU and the nat'l avgs and extrapolated these for your entire membership for one year. In my opinion, this was a great start, but overly simplistic if one were going to create alot of PR around a number ( I would want a number that could withstand some scrutity).

I would be interested in hearing your (or others) comments in this area. If credit unions could find a way to clearly communicate the value they provide to their membership (or ideally each member individually) , imagine the impact we could have in the marketplace!

Matt, the Credit Union Warrior said...

@Nathan Awesome comment! I think, as we often do in this industry, we are trying to make this a little too difficult. My grocery store calculates my annual savings, and communicates it to me with every purchase. Is this savings as compared with the national average purchase price on a per item basis? Absolutely not? Is it a comparison between how much I spent at that particular store as opposed to what I would at a local competitor? Heck no. What it is, though, is a good faith estimate on the value I receive at that store. I agree that there is some complexity involved, but maybe we can look at Professor William Jackson's study on The Benefits of Credit Unions to North Carolina Consumers of Financial Services for some clues on how to do it.

I feel great when I see how much I saved at the grocery store...whether that's a real value or not. I think we can create some algorithms on the individual CU level to make this happen - it will just take some creativity and faith that we are in fact offering a true cost savings (vs. National Average Rates, Local Rates, or whatever your specific criteria may be).

Unknown said...

Hi Matt:

I just discovered you and your blog today and I really think you're doing something worthwhile.

Matter of fact, so much so that I posted your link on my blog (www.wanderingsalsero.net). Those videos are top notch. I watched them 3 times and laughed my butt off each time.

You're right about banks though. I think the average employee is OK but the top management.....I think they're all elitist schiesters. They do not have the interests of the average citizen at heart.

Best regards,
Art williams

Kacie McKinney said...

@Nathan @Matt, It's these simple things we need to do to communicate the message. You know Costco is different from your local grocery store before you even walk in. You expect to pay a membership, you expect to flash your card at the door and you expect to find food samples and bulk products when you walk in. What do you expect when you walk into a credit union? You can't tell the difference between it and the bank next door. People need these tangible reminders. Even small things add up to a big change in picture.