CU Employee Community Chair

Member dividend/giveback program methodologies?

For those of you who have a formal "member dividend" or "member giveback" program, I'd be very grateful to know what methodology you use to determine who gets rewarded how much, and what constraints might get attached to those rewards. For those not familiar with them, these are those practices where credit unions offer a cooperative-style profit-sharing payment back to their members (similar to what REI does) -- sometimes annually, sometimes on just an occasional basis. I expect that there are as many ways to calculate the rewards as there are programs out there, but it'd be interesting to know if CUs tend to cluster their practices around a handful of (analytical) approaches.

Chime in as a reply to this post, for message me through the CULytics messaging system. Thanks!

Dale Davaz
STCU Research & Development
CULytics Community Chair

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  • Vendor

    Dale -- I'll give you my two cents on the member giveback approach from an activist perspective.  The bottom line is you should treat those who contribute the most to credit union the best; and that is not who you think it is

    • It's not the member who you gave the great rate on a CD or MMKt balance.  They already received their dividend on the product.
    • It's not the member who got the great rate on the loan product (i.e., high FICO).  They already received their dividend on the product.
    • It's not the member who has a "$25 to join the CU" checking account and an indirect loan.  That is not a member; that is a rate shopper.

    All of the members "types" above provide no rate of return on the net worth other members have contributed to the credit union.  So what is a member that contributes a lot?

    • It's the one who carries a low cost checking and savings balance that is funding investment and loans.
    • It's the member that uses their credit/debit card a lot.
    • It's the member who carries a loan balance (or balances) at a higher rate than "well-qualified" members pay.
    • It's the member who saves the credit union money by using electronic statements instead of mailed statements.
    • It's the member who uses a lot of products and services; who is "all in" for the credit union.
    • It's the member who we charged a high "risked-based" rate to borrow money, but did not miss a payment (i.e., it should be called perceived risk-based pricing).
    • It's the member who has a direct deposit account.

    I think you see where I am going here.  Some members are really not members; they are rate shoppers that take from other members and contribute nothing back to the credit union, so exlude them.  Look at the credit union like a stockholder activist would, and you will see who is making a contribution and who is not.  Sorry for rambling on; I could write a book on the subject.  Contact me directly if you would like to discuss further.

    • CU Employee Community Chair

      Thanks for that perspective, Mike. I expect that there are many who frequent this forum who’d be sympathetic to your view. To the extent that there are cases where the product pricing at our respective credit unions doesn’t do a good job of properly (rationally) rewarding certain members for their engagement with us — or too generously rewards others — we can imagine these member giveback programs serving as a nice, corrective remedy.

      As with so many things, though, I worry that the devil is in the details:

      • Even though modest-balance savings and checking accounts tend to cost us little in interest expense, they may well have extremely high operational costs (branches/tellers, ATM networks) that make their profitability very suspect — even maybe worse than high-dividend products! If we could fully allocate costs to individual accounts and accountholders, that'd be great. But anyone who's tried knows it's not at all easy.
      • Higher-risk borrowers who don’t get our very best loan rates often do cause us higher loan losses — as a group — so that’s not always a credit union windfall to be reimbursed, either. We pool loan risk, like health insurers pool health risk, and it’s not quite right that folks expect to be reimbursed for premiums they didn’t end up using on an individual level, nice as that might sound. Their consolation is that they didn’t get sick (so didn’t need a hospital stay) or didn’t lose their job during dicey economic times (so didn’t end up defaulting on their loan).
      • Convenient as direct deposit can be, is it really worth some dollar premium more than members who develop just as rigorous a habit of mailing in their payroll every pay period? Or deposit it in the night drop? It’s hard to say that lots of particular services have some specific attributable value. True, to be perfectly rationally priced, we probably should charge members for mailing them paper statements if that’s their service preference. I'm more critical of regulators than members... it's the former that require us to make paper statements a default.
      • Like you, I’d be a big fan of rewarding share of wallet. Folks who lean on us for all of their financial needs are showing a level of commitment that's commendable. If only there was a good way to measure it. Do you think members will be truthful if we asked “do you have 100% of your finances at our credit union (and if you do, we’ll give you a bonus)”? Somehow I’m skeptical. Lacking perfect knowledge of what they have at what FIs, how do we distinguish folks who are simply low-balance because they’re of modest means versus high rollers who only use us for a fraction of their business? They’re apt to look woefully similar.

      On the other side of scales, we often offer deposit and loan “specials” for very important ALCO reasons. Folks to whom we offer that above-market certificate rate are sometimes seriously coming to our balance-sheet rescue, committing otherwise disposable funds to help us through a deposit drought. Sometimes at a lower cost of funds than the alternative — Fed borrowings (etc.). So I’m a little reluctant to share your same concern over folks who take advantage of our specials. If we didn’t need the balances, we really shouldn’t be offering the specials.

      All these persnickety issues aside, I do think you’re right to warn against giveback programs that are TOO simplistic, based purely on total (deposit plus loan) balances, or similar. There’s an “everyman’s ethic” that most credit unions espouse — a mission that’s oriented toward our helping those who need a little extra leg up toward financial security, rather than simply helping the rich get richer.

      To that extent, I appreciate your words of warning. I'd like to think CUs can strike some good balance between fairness in profit-sharing without skewing incentives in unfortunate ways. I don’t know if particular credit unions have landed on that perfect balance. Until I’ve seen that they have, though, if you do end up writing a book on the subject, know I’d be the first in line to buy it. :-)

      Do others have an opinion on how giveback programs work for you — or should work, ideally? Join the conversation!

      Dale Davaz
      STCU Research & Development
      CULytics Community Chair

      • Vendor

        Dale – Thanks for the thoughtful reply.  You are 100% correct that perfect does not exist, but perfect does not have to be the enemy of good.  Let me share a few of nuggets that befall conventional thinking, and prevent cooperatives from reaching their potential when it comes to give-back programs and overall business strategy (sorry for drifting a bit it what follows).

        • This is a fixed cost industry.  It’s how you leverage those fixed costs that matters and where cost accounting/allocation methodologies fail.  They assume fixed costs go away if the product or account goes away.  They don’t.  I always hear 20% of the members contribute 80% of the profit.  I have yet to see an FI get rid of 80% of their members/customers and see their profits increase.  I’ll buy the variable cost aspect, but not the fixed cost.  Look at your cost structure without the fixed cost element, and focus on leveraging them instead, and you will see who contributes what in a different light.
        • I like to look at FI’s like a golf course (heavy fixed costs).  If bad weather closes down the course for the day, the cost structure does not cease to exist.  You still have to pay salaries, benefits, debt service, equipment leases, utility bills, property tax, insurance, etc.  When the weather is nice, how many rounds of golf you put through the course determines your profitability.  Foursomes who rent carts and play 18 holes are the most profitable; however, we don’t turn down a single walker who wants to play 9 holes at twilight, because that is marginal revenue to cover the fixed costs with no variable expense.
        • This is a capital constrained industry and nobody ever factors that into their methodology. This can lead to rewarding those members the most, that are generating the lowest return on equity -- and ignoring those members who provide capital independent income (ROE is infinite; no capital required).
        • I coded one of the first commercial applications that ran ALM/NIM simulations at the individual note/account level, at a time when all of the other vendors were doing portfolio aggregation.  There is a lot of good data out there to do contribution analysis by member/customer and product, and there are traditional funds matching assumptions that are 100% wrong.  Revisit your approach to looking at spreads.  Again, a book for another day.

        Have I put these concepts into practice for a member give-back program?  No.  I don’t have the time to break away from my primary consulting practice to do it; but the data does exist to pull it off.  It would be a great project.  Thanks for providing a venue to share my thoughts and experience.

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