.
Nuggets of
Opportunity
Peter Duffy summarizes his dialogues with CUs about their competitive
analysis results.
June 10, 2004
You
may recall the column from a few months back where I discussed the
benefits of conducting competitive analysis instead of (or along with)
peer analysis. We offered for anyone interested, a free competitive
analysis.
In
all, we had 12 CUs e-mail us their top five competitors (banks and
credit unions) for whom we built the analysis and reviewed the findings
in a conference call. The conference call for each CU lasted 30 minutes
to an hour and we were able to identify at least three or four “nuggets”
of opportunity.
I
would like to share the nuggets that were most common among the dozen
CUs we analyzed. These common themes are areas of opportunity for most
CUs.
As a
preface to my list of nuggets, let me share with you an opinion about
marketing and building market share. Resist the temptation to be a home
run hitter. Building a business that becomes a reliable, long-term
income stream for any product or service (CUs, financial services (my
business), diapers, coffee, sneakers, whatever) typically is better
accomplished when the marketing and sales message is focused on
satisfying the needs of the majority of the customer population. I know
that sounds obvious, but bear with me.
In my
business, I can spot a home run hitter instantaneously. Many are looking
for that huge client that will make the “hitter” a lot of money. It
makes good business sense, after all, to do some big game hunting. The
problem becomes when marketing efforts and the overall focus eschew all
other customers. Most people want to take the easy way out of any
problem. It is human nature. Still, the best-run companies I know
concentrate on winning the business “household by household.”
By
focusing on the fundamentals of the business that apply to most
customers and forcing a discipline that “covers” all the customers, big
and small, the marketer is better able to fine-tune marketing and be
more nimble. This same marketer also builds a business that spreads its
risk among a diverse group of customers.
The
same principle can, and should be applied to the competitive analysis.
There
is no magic elixir. Stop looking. This is one of the most important
findings of all the analyses we have done. Some folks who participated
in the calls are hoping to hear the one big idea that juices the
business. There isn’t one. There are many little and medium-sized ones.
That is why I always insist that the CEO and as many senior management
folks as possible sit in on the call … so they can each follow through
on the ideas generated.
Here
are some of the most typical "nuggets":
1. The investment portfolio is hindering income and exacerbating
interest rate risk. By holding an unnecessarily short duration
for the investment portfolio, CUs put more funds out in lower-yielding
instruments when rates are low, making margins tighter than those of
their competitors and tighter than they would be with a more appropriate
duration. In all rate environments, credit unions under perform their
competitors on yield, which is also unnecessary as regulations allow for
better performance.
2. Capital is underutilized. Capital over 8 percent is
funds not reinvested for increasing member value through more ATMs,
branches, higher share rates, etc.
3. The deposit/share make-up of the local marketplace has many
CUs at risk to the competition in various rate environments.
Many competitors have higher-yielding investment portfolios than CUs.
Plus, CUs often have more deposits in money markets. This leaves CUs
vulnerable to members asking for money markets instead of regular
shares, but CUs’ margins are not as capable of handling the higher-cost
deposits.
4. Predatory pricing (on shares in particular) is becoming a big
issue in a lot of markets, and many CUs are not as prepared as they
could be. An extension of point 3, in predatory pricing the
competition aggressively promotes their money market accounts to “take”
shares away from credit unions.
5. Financial competitiveness is a big opportunity for many CUs.
The above "nuggets" and better asset/liability management strategies can
help more credit unions come out on top.
6. Regulations are hindering the business plan and
income-earning potential of many CUs (vs. the competition).
Banks are not held to the same risk criteria as credit unions. CU
regulations are based on duration (i.e., the longer the duration, the
riskier the investment is perceived), thereby discouraging, at least at
certain levels, credit unions from building their mortgage lending
programs and hurting market share. The duration “tax” also reduces
investment portfolio performance (income).
7. Fine-tuning marketing and market research, while expanding
the marketing budget, is critical to future business. CUs need
to take the strong perceptions members have of credit unions out for a
test drive and see if the unsold masses will feel the same way, once
they get to know the credit union values and culture.
Some
CUs we spoke to showed almost no interest in the above because they were
looking for home runs—in what is a singles, bunt, hit and run business.
Said in a different leisure time context: While fox hunting, these CUs
were looking to bag an elephant.
The
lending and deposit gathering "business" is, among other things, a
spread business. The spread over cost of funds (margin) is getting
tighter every year. In most markets we have analyzed, loan yield is
"tight" to competition as is share/deposit pricing. Why then, would we
not figure out how to get better investment performance vs. the
competition?
Those
CUs and banks that outperform the competition on investments have a huge
stealth advantage. Those that more efficiently use capital by plowing
more dollars into marketing can build households and increase household
penetration. The CU leaders we talked to who recognized these finding as
“nuggets” to build on will win more business in the future.
