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CUs Should Improve Segmenting Of FOMs
June 2001, CU Journal
By Frank J. Diekmann, Editor
TORONTO - Credit unions of all asset sizes and charter have no choice but to
significantly overhaul their ability to segment their memberships, according to one person here.
The reasons are multiple, said Bob Lawhead, president of Raddon Financial Group: credit unions have significantly poorer efficiency ratios than
competitors, huge amounts of marketing dollars are going wasted, and credit
unions are leaving substantial dollars on the table with the members they
already have.
Speaking to CUNA Mutual's Discovery Conference here, Lawhead, whose
Oakbrook, Ill.-based firm specializes in member-base segmentation
strategies and which is retained by nearly every major bank, told credit
unions, "You all have got to think segmentation. You can't be shooting the
old shotgun much longer."
Where CUs will see significant payback is in integration of the MCIF and
ALM modeling, suggested Lawhead, whose firm sells such integration
capabilities and MCIF software. It's not a minor point, he stressed, noting the MCIF and ALM can be
integrated in many different ways.
"It's not a small tie; I think it's going to filter through everything you
do," said Lawhead. He noted that in some cases the MCIF supports the ALM function, and in others ALM supports the MCIF." "You're not very far away
from having the profitability and MCIF in sync with the ALM."
But it isn't easy, and to achieve it will require significant work on the
front-end by at least one person within the CU, he conceded.
The first thing a credit union needs to do is to "streamline data input,"
according to Lawhead. What does that mean? "I want the same source that
feeds your MCIF to feed your ALM, and that's your general ledger (GL),"
explained Lawhead. "You've got to start with the same source. You then must
look for ways to revise the GL so that it provides a common feed of
information for both systems. And this is a lot of work."
Lawhead noted, for example, that where one line item appears on many CUs'
current general ledger (in keeping with the NCUA 5300), better analysis
often requires two, such as instead of one line for interchange income,
separate lines for debit cards and ATMs.
Lawhead said 83% of the CUs his company audits for synchronization between
the MCIF and ALM fail the audit. The core problem: many of the procedures
for ALM are skewed to operations; the MCIF is skewed to marketing.
Why does the company perform so many audits? "Because quality of data is
all that matters," he responded. What quality data delivers, Lawhead noted
as an example, is the ability to give every checking account a unique cost
load according to how the member uses delivery channels.
And what types of findings can that deliver to credit unions? Lawhead noted
his firm, which has been surveying consumers every six months for 25 years,
has found for example that consumers who are users of online banking
services are often A and B paper. Where is the lesser quality paper found?
In members who frequently call the audio-response system.
Tracking Core Deposit Percentages
"Over a sufficient period, ideally two years, you want to identify the
minimum balance of an (individual) account and the average balance for that
same account," said Lawhead. "Your MCIF has this data. What we're really
going to start measuring is the average of the average. With a checking
account, I don't really want the spot balance at the end of the cycle, I
want the average balance over the cycle."
Over those two years, every account has an average balance and a minimum
balance. Minimum balance divided by the average balance is the core ratio,
explained Lawhead. "So I come up with a checking core, a savings core and a
money market core. They're not blended, they're separate, and they feed
that into the MCIF. This provides the evidence that some portion of these
deposits are stable funds."
The goal, said Lawhead, is to spot trends, because when management sees
trends from a marketing point of view, that's an "event. If you get
somebody who walks into your credit union and they open up a $19,000 money
market with you and they have no other relationship, a bell should
ring.What's the next most likely product they will buy? A loan."
Creating Realistic Growth Projections
According to Lawhead, there are six steps in this process, the first of
which is Member Segmentation by appending demographics to the MCIF.
"Demographics allow you to create effective segments to understand the
member base," he said. His own firm divides members into six segments: fee
driven (10%), low-income depositor (9%), credit-driven (20%), middle market
(25%), middle-income depositor (11%), and upscale (24%). "And I want you to
know that these segments change as Baby Boomers age," he observed.
The credit-driven consumer, for instance, is less than 35 years old and
earns more than $25,000 a year. This consumer wants convenience,
convenience, convenience. "This is the automated consumer. We're chasing
them, and there they are. Send them a CD promotion and you've wasted your
money." The low-income depositor wants branches and more branches, along
with higher CD rates, he said.
"Your branches are made up of different consumer segments. What do we do?
We say every branch will grow 14%. It doesn't happen. Why are some branches
stars and others aren't? Because you have segments."
Product usage
Step two is estimating product demand. Lawhead said it is the segments that
give the credit union information on product and delivery channel
preferences.
The understanding of member base demographics leads to better product and
pricing decisions, said Lawhead, noting that once the segmentation process
is in place the credit union must then look at demand.
"What I look at here is the loan demand by consumer segment. We can see,
for instance, that credit-driven households are the clear target for auto
loans. If I want to sell a home equity line of product, whom do I sell to?
The upscale member."
As an aside, Lawhead observed, "That's the reason we get 1% and 2% response
rates, because we get zippo from some segments. A lot of small CUs say 'I
can't afford an MCIF,' and that's probably true. So a lot of small CUs do a
mailing to all members, and all they're doing is training members not to
read the mail. Those small CUs should go to operations and try to do all
the segmentation they can."
Projecting Product Gaps
The next step, said Lawhead, is to know what the consumer has with other
providers by segment and how much that consumer has with the credit union.
What that provides, he said, is knowledge of the "product gap." And knowing
product gap by segment identifies where the opportunities lie and, just as
importantly, where the credit union has high product penetration so that
money is wasted seeking more.
"Product gaps can be projected by comparing product use at the credit union
with national product use by segment or with member survey data," he said.
"How do you get your growth? By spending the money on the right segments.
That's how the high-performers do it."
One area where credit unions have significant opportunity, according to
Lawhead, is in refinancing, because so few members have mortgages with the
credit union already.
In narrower categories, the segment with the greatest equity credit
potential is upscale households, where research has shown credit unions
have a product gap of 24%. In auto loans, the strongest potential is with
the credit-driven segment, where 43% of members in the segment have an auto
loan with another lender.
One mistake a lot of new community charters make, according to Lawhead, is
to begin running newspaper ads touting free checking. That brings
low-income households that don't use automated services and fill up the
teller line in branch, he said. "There's nothing wrong with that, but you
can't keep the subsidy going on and on and on. You've got to figure out a
way to get those people a computer."
Estimating Potential Growth
Step five is estimating potential growth.
"What you want to find out is what is your share of wallet," said Lawhead.
"Hypothetically, let's say 30% is good, and you're at 21%. You're just
leaving money on the table by not focusing on the right areas."
He said CUs need to use share-of-wallet targets to set growth objectives by
product. "With many of your marketing campaigns you're going after demand
that's already in the market. All we're trying to say is spend your money
better by going after the right segments."
Lawhead noted one CU was amazed it had gotten an 11% response to a
marketing campaign, thanks to market segmentation.
"The higher the current share of wallet for a given product, the lower the
realizable potential," he said, cautioning credit unions to realize that
high-performing credit unions don't necessarily have high share of wallet.
Typically, they have higher-income, upscale members. "The higher the
current share of wallet, the greater the need for new members."
The final step, step six, is to measure financial impact through ALM. "The
old days are gone. You've got to know your potential growth. The efficiency
ratio in credit unions, which is 74%, has got to come down. That means we
spend 74 cents to generate $1 in income. The high-performing credit unions
average 62. The banks are targeting 55. And you have a brand-new
competitor, E*Trade Bank, at 27%. There's a reason they don't have any
branches. People want the higher rate."
What CUs should realize is that to drop their efficiency ratios, banks are
driving many of their least-profitable customers out the door.
And whose doors are they walking through? Often, it's credit unions, he
said. Under his company's formula, the share-of-wallet numbers are fed into
the ALM. "These growth goals, generated based on demographics, are inputted
into the ALM model," said Lawhead. "Then, run your ALM scenarios to see if
these growth goals are compatible with financial objectives. Spend your
money in the consumer segments that buy those products."
But that's not the end of the process, he stressed. "Alter your target
share-of-wallet-by-product category and re-measure the impact through ALM
until you achieve an optimal balance sheet," he recommended. "That's our
objective. That's the key."
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