Accurately calculating return on channel can help ground product pricing.
Increasingly, members expect fast and easy access to financial services via digital channels, and most credit unions are working hard to keep pace with those expectations. Where CUs may be falling behind is in accurately assessing and assigning the costs and returns across their outlets for serving members.
Understanding the true cost of delivering financial services via a particular channel has been a longstanding challenge. Historically, credit unions have considered branches as profit centers and most other channels—including online and mobile access, contact centers, ATMs and interactive teller machines—as cost centers. This branch-centric mindset could lead a credit union to incorrectly assign expenses and revenues to its various delivery systems, leaving its pricing and planned channel investments correspondingly misaligned.
If your credit union is still applying a 20th-century approach to its accounting for delivery channel costs and revenue return, that blur in your rear-view mirror may be the opportunities you’re bypassing to more effectively align channel investments to increase sales and perhaps even identify new sources of income with the next generation of digital delivery innovation.
Pinpoint the True Costs of Delivery
To understand the actual costs of delivering products and services, we recommend first identifying the truly variable costs of each delivery channel. Focus on the direct expenses that correspond with each delivery channel as opposed to credit union-wide expenses.
This approach may sound simple, but it runs counter to traditional assumptions that the branch is where credit unions sell their products and that digital channels and call centers exist in the service-only mode. Through this lens, if members need to transfer funds, pay bills or submit an address change, they call or sign in online. If they want to open an account or apply for a loan, they head for the branch. Thus, there is a persistent practice of associating profit and loss with branches, but only assigning expenses to the credit union’s other delivery channels.
As member preferences and behaviors for accessing financial services have shifted, credit unions that want to be in members’ line of sight when they sign online, tap a mobile app or phone the contact center need to move away from viewing these channels solely as cost centers. Cornerstone has seen many of our financial institution clients allocate 60 percent of operating costs to the branch network and 40 percent to online, mobile and call center channels, even though many of the service interactions with sales potential have migrated to remote channels.
Deploy a New Metric: ROC
We recommend that credit unions add a new metric to channel management, called “return on channel,” with the aim of more accurately disaggregating the revenue stream. When a member opens a new account or applies for a loan, the credit union needs to be able to evaluate the sales value of revenue from that interaction. Specifically, what is the first-year revenue value of that product?
Another way of parsing the revenue stream is tied to the retention of member relationships. There is value in holding on to deposit accounts and loans over time, and the quality of service CUs provide via their delivery channels influences the length and breadth of member relationships. In calculating an actual return, take the direct revenue generated by those account relationships and the revenue associated with retaining those accounts and compare them to the costs of channels members are using. Is each channel profitable, and is it contributing to the bottom-line value back to members?
Costs for digital channels and services, including online and mobile access, remote deposit capture, bill-pay and personal financial management software, are typically charged on a per-user fee or broader access license that covers up to a certain number of users.
According to data in the 2016 Cornerstone Performance Report for Credit Unions, the median cost per user per month for online banking is 58 cents; for mobile banking, 35 cents. In the same study, the median cost per bill-pay transaction is 58 cents. How do those median costs compare with your CU’s expenses and with branch operating costs?
Channels are among the largest costs in product delivery and have a significant impact on whether each product is contributing to overall profitability. Accurately measuring that impact requires monitoring member behavior—where they buy and transact—to appropriately allocate channel expenses to products and then calculating profitability.
Of course, decisions on offering products don’t hinge solely on income potential. CUs offer some products to achieve their member service mission and to compete effectively in a crowded marketplace. On the other hand, measuring the costs and return on products can help you make better informed decisions on fee structures and pricing. To borrow a phrase from Sally Jewell, former CEO of REI (who went on to become Secretary of the Interior): “There is no mission without margin; there is no margin without mission.”
Profitability for a Nonprofit
The focus in our movement has traditionally been on member service and the member experience, but these days more CUs see the value of evaluating the comparative profitability of channels, products and even members as a path to enhance member service. Just because a CU is not-for-profit doesn’t mean it shouldn’t be profitable.
At first glance, calculating member profitability may seem to run counter to the nature of cooperatives and the idea that every member is a VIP. Still, doesn’t it make sense to direct marketing toward the most profitable outcomes to enhance value for all members by improving product and channel offerings? Toward that end, then, what is the profile of a profitable member? How many and what type of products do profitable members hold, and what channels do they prefer? Answering these questions can direct decisions about how to allocate spending, with a goal of improving profitability overall as well as on a per-product or per-member basis.
New Income Opportunities
Another aspect that binds delivery channels to product profitability is the potential to generate revenue through various channels. When a product or service offers value, consumers are generally willing to pay for it. In that regard, the financial services industry may have slammed the door on some recent openings to increase income.
Take the example of remote deposit capture, a service members love—and with good reason. They no longer need to get in their cars and drive to an ATM or branch to deposit a check. They can sit at their desk or kitchen table, snap a photo with their phone and submit it, and the task is done.
Finding ways to streamline and improve efficiency of branch operations needs to be a priority to free up money that can be invested in channels members are embracing. But the next generation of digital delivery advances may also present opportunities to create new income streams by monetizing services that offer measurable value. For example, CUs could offer basic mobile banking at no cost and a premium service with more sophisticated features for a small monthly fee. These features might include card controls and the dynamic ability to set and manage card spending limits.
How It Works in Action
There are plenty of examples of this model in action in financial services and in other industries. Some CUs offer basic checking at no cost and interest-bearing checking with free checks and other perks for a monthly fee. The same goes for free mobile game apps with more fully functional versions available for a small download fee.
You may find ways to apply this model to a new offering that melds delivery channel and product. As the world becomes more digital, checking accounts are evolving into payment accounts, with primary access shifting from paper to remote processing via mobile. Thus, yesterday’s checking account becomes today’s mobile payment account, with valuable benefits and features tailored to members’ preferences.
Picture this all-too-familiar scenario: You load up the family car for a vacation and head out on the open road. Two states later, you stop for gas—only to find that your debit card has been shut down as a security measure because you forgot to alert the CU about your travel plans. What if your mobile app could tap into your phone’s locational capabilities and remind you to reset security measures to reflect your travel plans? Isn’t that a feature you’d be willing to pay for to prevent the hassle?
Another income-producing opportunity is increasing sales through digital channels. When it comes time for their next auto loan, members likely won’t be sitting in front of their computer to fill out an application. Mobile access has reset the buying cycle, and instant gratification is the new norm: “I just thought of this, and I want to buy it right now.” Credit unions need to figure out how to become part of that decision stream to increase their share of members’ business.
A good place to start is calculating your CU’s return on channel—both the direct, controllable expenses associated with each channel and the income-producing capabilities—so that you can better manage those building blocks to respond to members’ evolving expectations. Study after study shows that millennials rely more on their smartphones than any other communication vehicle. Finding ways to invest in new mobile services can help forge connections to your most important buying segment in the years to come.
Jim Burson is senior director of channel solutions and Tim Daley is director of channel solutions with CUES Supplier member and strategic provider Cornerstone Advisors, Scottsdale, Ariz.