Determining when to diversify a credit union's product offerings - Member Access Processing

Every credit union experiences change over its lifetime. Members come and go, branches are added and industry trends serve as a catalyst to evolving best practices.

Amid all this fluctuation, credit union executives need to make decisions about what products to add, to alter, to maintain or do away with. One trend many credit unions will get on board with in the coming year is expanding loan and deposit options for their business members, according to Credit Union Times.

The decisions to expand, contract or sustain your offerings aren’t easy ones to address. You may never feel you know for sure what the right answer is. It’s important to offer your individual and business members the services they rely on. But some credit unions may find it’s not always beneficial to offer too many options.

Studies in diversification strategy

Over the course of a decade, University of Alabama professor of management and finance William Jackson carefully followed the success of credit unions based on the diversity of their product and service offerings or target market.

Jackson found that, yes, diversity is a crucial determinant of success, according to his report for the Filene Institute. But he also found that product diversification is only beneficial some of the time. Throughout his study, Jackson discovered that diversification can be the detriment to a financial institution.

There are a number of ways a credit union can introduce diversification into its business model, Jackson pointed out. Institutions can vary their:

  • Loan product offerings.
  • Deposit services offerings.
  • Revenue streams.

Diverse loan offerings might include the various auto, home and personal loans a credit union provides, as well as credit cards and other versions of secured and unsecured loans.

Diverse deposit services can range from regular savings accounts, certificates of deposit, money market accounts, share drafts and more.

Diverse revenue streams relate to how the institution actually makes its money. The typical credit union generates most of its income through interest revenue, while the average bank only takes in about half its income this way. Jackson noted that the median revenue concentration among credit unions is:

  • 81.3 percent: Interest revenue.
  • 18.7 percent: Noninterest revenue, such as fees and other charges.

Strategic diversification

Jackson found the best indicator of a successful credit union is a varied approach to revenue. Credit unions that brought in more than the median percentage of noninterest revenue experienced better return on assets as well as greater asset growth.

Additionally, he found that greater deposit services options had the opposite effect. Institutions that offered a wide variety of deposit options experienced lower:

  • Return on assets.
  • Asset growth.
  • Member growth.

Finally, he found that a wider variety of loan offerings had little to no effect on any of these measures.

Upon discovering that more deposit options correlated with worse return on assets and growth, Jackson attributed the trend to the concept of choice overload.

Choice overload is the notion that, presented with a wide variety of options, a consumer will either be unable to make a decision, or will make a decision but feel unsatisfied with it as a result of worrying that the wrong choice had been made. Jackson also noted that one particularly successful financial institution, ING Direct, specializes in a small group of product offerings and doesn’t stray from this core group of services.

While a diverse selection of loan offerings didn’t immediately correlate to higher or lower success rates, Jackson suggested that credit union carefully consider whether they want to diversify their loan products or not. More loan products may hinder growth, again pointing to the choice overload concept. Or, it could cost the credit union time, money and resources to offer products that don’t bring enough benefit to be worth the while.

Be the go-to resource

Jackson’s research indicated that focusing on a small group of product and service offerings is beneficial to credit unions, partially because it reduces a member’s likelihood to doubt their choice or to let indecision prevent them from taking advantage of their options at that credit union. But having a narrowly focused strategy can have another benefit as well.

Organizations that offer a select group of offerings typically experience a strong member following. These services are what you will become known for. Your customers’ loyalty and your brand reputation will, in turn, discourage your competitors from presenting the same options, or same grouping of options, according to a white paper from the CUNA Small Credit Union Committee.

In addition to focusing on a small group of products and services, your credit union will benefit from pointing out what makes these offerings better at your institution than similar offerings at another institution.

Know your member base

When making the decision to change your product offerings in any way, you must consider your specific member base. Broader trends in the financial industry are important to follow, but not every trend will apply to your institution. Before changing things up, take a careful look at your members and their needs.

The whitepaper from CUNA highlighted one credit union that masterfully crafted its offerings to the unique needs of its members. Communicating Arts Credit Union, located in Detroit, knew that many of its potential members were struggling with predatory lenders and a lack of resources to help them out financially when they needed it. In fact, Communicating Arts was the first financial institution to come to the Highland Park area in two decades.

Hank Hubbard, CEO of Communicating Arts decided to tailor his product offerings to the specific needs of Detroit residents. He knew many had high-interest loans with other financial providers, so he offered new ways to lower rates and save money. He also gave them tools and options to improve their financial health.

“We started with the premise that these were the people we wanted to serve,” Hubbard said. “We know they didn’t have high balances, and 80 percent of our borrowers are subprime. If you want to serve them, you need to structure products for them and charge in a way that’s fair and is a value for them.”

Every credit union leader will ponder the benefits of expanding product offerings. But before making the decision, remember, more isn’t always better. Be conscious of what your members want and need, and carefully tailor your options accordingly.