CO-OP Financial Services Blog: Insight Vault

(Editor’s Note: Aug. 29 marks the fifth anniversary of Hurricane Katrina making landfall in southeast Louisiana, the costliest natural disaster in the history of the United States, and resulting in more than 1,800 deaths in the storm and subsequent flooding. The story below illustrates how a Louisiana credit union served its members in this disaster – and then prepared for the next.)

“If you don’t live in this environment, you may not understand.”

The words are those of Cami Crouchet, Chief Operating Officer of New Orleans Firemen’s Federal Credit Union (NOFFCU), based in Metairie, La., located seven and a half miles from New Orleans’ city hall, and at the center of the disastrous August 2005 Hurricane Katrina. More than 1,800 people lost their lives, the fifth deadliest in the history of the United States. In its wake, it left at least one credit union determined that on behalf of its members it must be ready next time. 

“Our story revolves around Hurricane Katrina,” says Crouchet. “Everything we have done for the last four to five years is to prepare for another disaster.”

Part of its solution was to contract with CO-OP Member Center, based in Fort Worth, Texas, a fully-owned subsidiary of CO-OP Financial Services. In late 2007, NOFFCU simultaneously started using the center’s 24×7 LoanLink and Member Services.

In August 2005, NOFFCU knew Hurricane Katrina was coming, and its employees stayed on the job until the last minute, making sure that its members could attend to their financial affairs before evacuating. This, says Crouchet, was always part of their business model. But, even well after most other local businesses, the credit union had to close its doors.   

“We didn’t have a plan for when our employees couldn’t get back to the main office, and our employees scattered as far away as Colorado,” says Crouchet. “We could reach all of our employees, but we did not have a call center solution where members could get in touch with us.”

NOFFCU’s make-shift solution was to start posting updates on its Web site. In the great credit union tradition of people helping people, NOFFCU eventually received call center assistance from Member Source Credit Union of Houston, Texas, where most evacuees temporarily settled.

“We had our main number transferred to that Houston call center and we had enough employees report so that we could run it,” says Crouchet. “But it was not an optimal solution. Our employees had to leave their families. Some had lost their homes. We just knew we didn’t want to ever go through this again.”

So, NOFFCU went looking for 24×7 loan and call center support. 

“The CO-OP Member Center was perfect for us,” says Crouchet. “Now, should we need to evacuate, we can simply roll over the phones to our service provider. We do not even have to wait until the last minute, because we know we have someone covering for us.”

The credit union has derived a number of benefits from using CO-OP Member Center. Yet, Crouchet still returns to the peace of mind she has in terms of disaster preparedness. And, that peace of mind has been verified by experience. In her words, “there’s something about Labor Day,” because in August 2008 the New Orleans area was threatened again with disaster – this time by the approach of Hurricane Gustav. 

Though it “only” turned out to be the second most destructive storm of the 2008 hurricane season, NOFFCU went into contingency planning mode, staying in contact with the CO-OP Member Center so that representatives could provide status updates to members.  

 “A lot of our members evacuated the area as a precaution, and we noticed a strong spike in the number of calls to our after-hours call center – people were just calling in, testing the waters,” says Crouchet.  “As a result, they felt like they could get in touch with us no matter what, that they had access to their money and that their financial affairs were in order.

 “We are not the biggest financial institution in the world and we don’t have branches on every corner, but our members felt connected to us,” says Crouchet. “We got a lot of good compliments after Gustav. Our members thought, ‘This credit union has its act together. We don’t have to close our accounts and go to a bank or an institution with a nationwide presence.’ Our credit union can’t compete with a nationwide institution by ourselves, but with CO-OP Member Center we can.”

Because of various unfavorable legislative efforts, many sources of non-interest income are under attack. The Durbin interchange amendment, in particular, has generated deep concern in the industry. Yet, these concerns can be addressed with at least a half-dozen counter-offensive moves that are still available to you, centering on increasing profitability and reducing fraud expenses.

In fact, credit unions often simply do not take advantage of their credit/debit portfolios as revenue streams. Here are some steps you can take that will make a meaningful difference to your bottom line in a post-Durbin environment:

New Account Acquisition. Big banks are raising interest rates and annual fees as well as reducing reward program earnings and redemptions for all customers, not just those that exhibit bad behavior. The banks have disenfranchised many of their best customers and have spurred consumer interest in seeking the best card deals. These consumers are seeking more favorable terms in keeping with their on-time payment records, good credit ratings and low risk status. This should be a boon for credit union credit card programs since they are already fairly priced and offer competitive reward programs. The time is optimum for growing credit card bases with low-risk cardholders.

Manage Existing Card Base. For both debit and credit card holders, credit unions can substantially increase revenue and keep costs down at the same time by promoting card activation and increasing the number of transactions per card. While credit card activation is a big issue, debit cards provide a real opportunity for credit unions to increase non-interest income by effectively targeting members to drive the usage behavior they want, such as increased signature debit transactions. With card usage analytics tools, credit unions can collect portfolio data that will enable this targeted marketing. One compelling case study is Signal Financial FCU, which experienced an 80% increase in transaction volume, a 73% increase in spending and a 68% increase in interchange income after implementing analytics tools.

Manage Risk. Fraud continues to take a bite out of card program profits. Credit unions should review processing configurations to take advantage of all the fraud fighting tools available. Other operational processes should also be reviewed to plug any potential opportunities to circumvent security procedures. Credit unions should review procedures related to card blocks, card issuance, PIN change, change of address and card reorders to make sure the appropriate member authentication occurs for these requests. These tools allow credit unions to crack down on chargeback fraud and family/friendly fraud, particularly small ticket disputes that credit unions take directly to general ledger accounts.

Select The Right Network Partnerships. The interchange earned on PIN debit transactions can vary by network. Credit unions should rationalize participation in PIN debit networks to maximize interchange and eliminate network redundancies. ATM Networks vary greatly in terms of geographic coverage, surcharge-free access and deposit-taking capabilities, so credit unions should also rationalize participation in these networks to eliminate redundancies and associated costs.

Manage Share Draft Pricing Strategies. Because revenues from share draft accounts represent about 60% of non-interest income for credit unions, preservation of these account relationships is paramount in retaining these income streams. In fact, free checking is becoming a distinct competitive advantage, one credit unions should sustain in spite of smaller margins.

Various pricing strategies can be used to modify member behavior to increase transaction volume and drive members to the revenue-generating access vehicles. When a member writes a check, this generates an expense. When a member uses a debit card, this creates revenue. Be sure the share account pricing strategies provide the right incentives to promote card usage over check writing. Finding ways to encourage use of electronic channels will also reduce overall share draft costs. It’s more cost effective to offer members account access and transaction capabilities through electronic channels like home banking and voice response units (VRU).

Solidify The Share Draft Relationship. Cross-selling other share draft features can promote more card usage. Bill pay is a sticky feature that makes members reluctant to change relationships. Adding mobile access and promoting rewards for multiple credit union products also solidifies the relationship to keep card usage on the credit union card products. Selecting a loyalty program that allows the credit union to offer reward points for multiple services or relationships also creates “sticky” members.

With the recent legislative activity concerning interchange, it’s easy to become confused by questions of “What’s next?” We urge you to stay the course.

Adopting the measures described here, credit unions can make sure their credit and debit programs are operating efficiently and card revenues are optimized – now and in the future.

The Restoring American Financial Stability Act passed the Senate on July 15 and was signed into law by President Obama on July 21. Attached to this sweeping legislation is an interchange amendment largely unchanged from the Senate bill passed on May 13 that will probably necessitate credit unions accept lower interchange rates on their debit and credit cards, to the tune of $30 per card per year by one estimate.

This is truly a setback for credit union members, as the legislation empowers merchants to place multiple restrictions on acceptance of cards. At the same time there is no promise on the part of merchants to pass their savings onto consumers. An unintended consequence may be that credit unions will need to assess fees on debit card transactions in order to cover their costs.

The latter option is definitely not good for either the member or the credit union, which places the interests of their members above all else. The “post-Durbin world” ushers in an era of uncertainty for card issuers. Still, there are at least two aspects of interchange that remain within the control of credit unions to protect their institutions and continue to provide outstanding service to members.

The first can be termed “performance,” which calls for credit unions to do some thorough portfolio analysis work to find pockets of opportunity for maximizing interchange revenue.

Credit unions can increase revenue and keep costs down by promoting card activation and increasing the number of transactions per card. They can focus on debit cards, in particular, which provide a growing stream of noninterest income. Strategies for maximizing noninterest income include effectively targeting members to drive usage behavior, such as increased signature debit transactions or increased usage at merchant categories that deliver higher rates of interchange. With card usage analytics tools, credit unions can dig into portfolio data that will enable this targeted marketing.

For instance, Genisys Credit Union, Auburn Hills, Mich., started using the CO-OP Revelation portfolio analysis tool last year to monitor its members’ card usage trends. Their stated goal was to identify low card usage members with one to five signature transactions per month. Genisys identified 11,145 members when the credit union ran its low card usage query. For its first targeted marketing campaign, Genisys sent a mailing to these members. Genisys’ debit cards are tied to a rewards loyalty program, so the mailing touted the benefits of using the card as a signature transaction, as well as popular rewards for which the resulting points could be redeemed.

Post-mailing, Genisys saw an increase of 66.5% in signature debit usage. Among this group, the purchase amount increased by 44%. The credit union also noted that the average number of monthly transactions per card user grew by 134%, from 2.6 transactions per card per month to 6.1 transactions per card per month.

To top it all, their signature debit interchange revenue increased by 47%.

The second aspect of interchange within a credit union’s control is “profitability,” which speaks to the need to evaluate the number and relevance of their various point of sale networks, so that the credit union (not the merchant) retains control of how PIN transactions route.

In the past, many credit unions had to belong to multiple regional networks to ensure cardholders had full accessibility to their funds. Today, consolidation of networks has provided credit unions the opportunity to downsize their number of partnerships and retain the needed access. Many once-regional networks have become national in scope. Understanding which networks can deliver the geographic reach and value-added services credit union members need is one of the key components to capturing financial efficiencies.

Most credit unions can succeed by choosing one PIN POS network, a signature POS network, a national/regional network, an international network and a value-added network offering surcharge free and deposit sharing access, such as CO-OP Network. Some networks (again, such as CO-OP) play multiple roles, which is why this evaluation is so important.

A credit union should choose a PIN POS network partner that maximizes its net interchange revenue – “net” meaning interchange minus switch fees. A key consideration in the PIN POS arena is that the merchant, as the acquirer of the transaction, will choose to priority-route a transaction to the network that will yield them the lowest interchange expense. We recommend that card issuers minimize the number of POS networks with which they partner. The more networks you have on your card, the greater the opportunity for the merchant to dictate the network route of the transaction, which could have a negative impact on the amount of interchange a credit union can earn on that transaction.

More than four decades after POS interchange pricing was established, the system has never been more uncertain and perhaps more unfavorable to card issuers, especially credit unions. Yet, the way forward can still be clear by focusing on the basics of performance and profitability.