Success at credit unions is often defined as achieving 10% asset growth and 1% return on assets, while maintaining an 8% net worth.
But I firmly believe those figures do not truly define success.
All too often, credit unions focus on serving their existing members, rather than on potential members.
If you ask credit unions why they should focus on growth, they may tell you they need it to survive and to achieve economies of scale. I think those two answers are correct, but there is a more compelling argument—because it is our moral imperative.
Credit unions should focus on growth because doing so literally will make the country wealthier and more equitable. The reason I don’t hear this answer as much is because I don’t think most credit unions truly understand the impact their financial products have on their members’ lives or their communities. That, we need to change.
Tracking Real Impact
Credit unions must begin quantifying their true impact. I don’t mean charitable giving or activities; I mean providing financial services to their members.
Virtually no credit union does that.
To address this gap, we have developed two specific metrics to track a credit union’s impact. The first is a risk-based member benefit calculation that quantities precisely how much more money each individual member has in their pocket as a result of their relationship with a credit union. The second—which I’m even more excited about—is a ratio we have named “Member Benefit Impact.”
“Risk-based member benefits” measure the economic value provided to credit union members as the result of attractive pricing of loans and deposits. The benefits are calculated using the sum of deposit benefits and risk-based loan benefits.
Deposit benefits are a measure of the degree to which interest rates on deposits at credit unions are higher than at banks. Analysts typically compare the average interest rate that credit unions and banks charge. Then, they multiply the difference by the amount of the deposits each has. Usually, they compare those figures for each type of deposit: checking, savings, money market, etc.
Risk-based loan benefits are a measure of how much lower interest rates on loans are at credit unions compared with banks. In the past, measures of loan benefits did not take into account the extent to which some credit unions have members with incomes or credit histories that differed from the national average.
This means that analysts should not compare the interest rate charged by a credit union to a member with weak credit with the national average. And they shouldn’t compare interest rates for credit unions that focus on members with weak credit with the national average.
That is comparing apples to oranges.
It is more accurate to compare the interest rate charged by a credit union for a loan to a weak member with the interest rate that same person would be charged at a bank.
Here’s how we calculate member benefit impact: Risk-based member benefits divided by member income. This could be calculated for an individual credit union member, or an entire credit union.
There are two ways that an entire credit union measurement may be calculated. First, total member benefits could be added up and divided by the sum of income across all members, or average member benefits could be divided by average member income.
This calculation demonstrates that $500 of benefits have a larger impact on the life of a member with an annual income of $30,000 than on a member with an annual income of $300,000.
Focusing on member benefit impact helps credit unions to ensure that benefits flow to a large number of members, including those with lower incomes who have small loan and deposit accounts.
Finding the Right Balance
Credit unions balance the interests of many types of stakeholders. Banks instead can focus on maximizing profits and focus their attention on a single group: stockholders.
But credit unions are democratic institutions. So, they must balance the potentially conflicting interests of multiple stakeholders: borrowers with incomes high and low, borrowers with credit scores high and low, and on and on. Many credit unions try to do this using a scorecard approach, but too many focus on the same metrics banks use rather than focusing on maximizing the benefits they provide stakeholders over time.
Credit unions must consider members’ credit histories and incomes, so they don’t focus on wealthier members. They also must balance the interests of current and potential members down the road.
In the end, credit unions that provide larger benefits to their members and that seek new members will grow faster. The hallmarks of credit union success should be providing large and growing benefits to current and prospective members.
Successful credit unions simply balance providing benefits today, investing in the future, and maintaining ROAs that are high enough so that as their assets grow, their capital reserves also grow.
To recap, credit unions succeed by serving the credit needs of their entire communities through high loans per assets ratios and portfolios that actively include members with weaker credit. Such portfolios yield more interest revenues. In turn, credit unions with larger interest revenues can simultaneously afford larger risk-adjusted benefits for both borrowers and depositors, larger investments in member acquisition, and set aside sufficient capital reserves. Such credit unions attract more members and more of their funds and can have high enough ROAs that their capital grows in line with their assets.
Balancing benefits, investments in the future, and ROAs ensure credit unions’ long-term financial sustainability as well as their ability to continue to provide large benefits to future members.