| The financial service industry is currently | | | | “Protect”, “Grow” and |
| undergoing several significant challenges, and it has | | | | “Improve”. The top 10% are members |
| never been more important to get a good | | | | we want to “protect”, the middle tier |
| understanding of your members. In this | | | | represents ones that we hope to “grow” |
| increasingly competitive world, the “one size | | | | and the bottom tier represents those clients that |
| price fits all” approach currently in place within | | | | we aggressively need to work to |
| some credit unions just doesn’t work. The | | | | “improve” their contribution so they |
| members with the most significant contribution | | | | aren’t being subsidized by the rest of your |
| are the key to your organization’s long term | | | | member base. I believe that active account |
| financial success and they are currently | | | | management of both the top and bottom |
| “subsidizing” you’re the member with | | | | categories provide the highest return for your |
| a negative contribution! | | | | efforts and are essential for your credit |
| The first step in understanding member | | | | union’s success. |
| contribution is to put a system in place that | | | | “Protect” – These members |
| accurately calculates member contribution | | | | represent the organizations most valuable (based |
| (profitability). The RPM (Relationship Profitability | | | | on contribution) and as such need to be treated in |
| Management) tool is a JHA solution that | | | | a special way. The goal with this group is to |
| determines member contribution. The next | | | | ensure that they understand we appreciate their |
| steps are to analyze the results and build | | | | business and will work hard to continue to provide |
| processes within your organization that utilize this | | | | them exceptional service. |
| valuable information to improve the credit | | | | “Improve” – These members |
| union’s profitability and member retention. | | | | represent the least valuable (based on |
| Understanding Member Contribution – The | | | | contribution) members in your credit union and like |
| best way to understand member contribution is | | | | the “protect” members need active |
| to segment your customers into various | | | | account management. These members are |
| contribution tiers. In the graph (below) I have | | | | generally unprofitable due to adversely rated loans |
| taken a $500 million credit union (almost 100,000 | | | | or “premium” (above market) rates paid |
| members) and segmented their member into | | | | for CD balances. In either case these members |
| 10% increments. | | | | don’t deliver an adequate risk adjusted |
| | | | margin to make their account profitable. |
| In looking at this $500 million credit union the | | | | “Grow” – These members represent |
| results are a bit disturbing. Their most valuable | | | | the vast majority of your members, yet deliver |
| members have an average monthly contribution | | | | very little to your bottom line. The strategy for |
| of $115 per month (which is over 200% of the | | | | these members would be to understand their |
| organizations total profit)! Conversely, the | | | | needs and build targeted marketing campaigns to |
| bottom 10% of their portfolio reduces the credit | | | | move them to a more profitable status. The |
| union’s profitability by an average of -$52 | | | | key tools to use for this approach would be a |
| per month (which is – 90% of the | | | | strong profitability system coupled with a CRM |
| organizations total profit). The middle 80% of | | | | MCIF system so you can understand both |
| the credit unions member are basically a | | | | profitability and product usage. |
| “break-even” group with a significant | | | | Summary – The key in these challenging |
| number of clients delivering a small negative | | | | times is to have good information about your |
| profitability. | | | | members (including their profitability) and |
| What does this mean and what do we do about | | | | developing strategies to deal with each segment |
| it? | | | | of your member base. If you are interested in |
| This concentration of profit leads me to classifying | | | | learning more about the RPM solution please |
| the clients into three major categories | | | | contact your Account Manager. |