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CU Relationship Pricing - Problems over Profits?

In the early 2000s, Goldman Consulting & Strategy (GCS), Inc. conducted numerous focus groups and research programs testing various relationship pricing concepts for credit unions nationwide. In so doing, GCS discovered many consistent findings throughout. Different programs, of course, had different nuances, however most shared common themes.

Fast forward to today, and more than a decade later, numerous credit unions have reached out to us to revisit the relationship pricing question. Indeed the world has changed. Points programs and engagement through gamification are now expectations. Perhaps, then, it is time to revisit (and reinvent) your relationship pricing model.

Below are relationship pricing observations gleaned from GCS focus group research, originally published in 2012. Most suggest the ineffectiveness and potential risks involved should such a program be pursued. At that time, we suggested CUs heed the member participants’ “warnings” below in rolling-out and implementing a new relationship pricing program. We also invite you to use the following to invent new, and/or improve your current program, and encourage you to always test potential concepts before launch. GCS can help.

Relationship Pricing Lessons from GCS Research (initially published 2012):

Fear of Becoming "Just Another Bank."

In most cases, credit union members share a pervasive fear and suspicion on the part of members (as do financial consumers in general), as to the motivations behind relationship pricing programs. Comments such as, “I joined a credit union to get away from things like this,” and, “What’s the difference between this and a bank,” illustrate some of these concerns.

“It’s too complicated.” Consumers want simplicity in their lives and especially in their financial service relationships. In large part, as long as a credit union “does what it’s supposed to do,” with no errors and no mistakes, and is efficient in its processes, members will be satisfied. The less a consumer needs to think about his or her finances (with the significant exception being investments), the more contented he or she will be. Thus, a relationship pricing program, which introduces various levels, or tiers — and, within which a member may qualify one month and not qualify the next —causes concern for the member and the inability to “not think about it”. This is potentially frustrating to, and often ignored by, members.

“What happens when I pay off my loan?” Most relationship pricing programs we tested were either deposit-balance based, and/or loan- balanced based with the cumulative balances acting as thresholds for qualification to reduce or eliminate fees and/or gain additional services. For credit seeking members and members of lower economic status, typically the only way to qualify is through borrowing at the credit union. Within a few minutes of introduction of the concept in a focus group, one of the participants will typically raise the concern, “but what happens when I pay off my loan and drop below the $5,000 minimum requirement?” In most cases, the answer is simply that the member would then lose the benefits of the higher relationship; members reply, “That’s unfair” and become alienated to the program.

The “pay your own way” argument is uncompelling. For the credit union, a relationship pricing model makes excellent sense at its core: the concept effectively states the following: the greater the relationship, balance or product usage with the institution, the more likely the member is “paying” for him/herself. Thus, additional fees to cover the expense of servicing that member are not required. Conversely, members with minimum balances or heavy transactions with only a single account obviously cost more for the credit union; with relationship-pricing programs, these members would incur fees to pay their way. Regrettably, even when explained to members, this argument is not found to be compelling. Consumers, in general, do not expect to pay for the use of financial services, do understand why fees exist in financial service usage, and often erroneously believe banks and credit unions are “already making money on my money, so why do they need to charge me.” (Many, if not most, consumers see account maintenance fees as greed on the part of the institutions.)

Older members are especially skeptical. Older, long-time members, who grew up in the credit union movement, find the concept of relationship pricing especially unfair: they say that they were helped with free programs, and received the benefit of subsidizing by older more affluent members when they were young. Many — and especially those within a tight FOM — wish to do the same for members who are just starting out today.

Traditional models of relationship pricing programs do not move members “up the ladder.” In theory, as we understand it, one of the goals of relationship pricing programs is to encourage members to conduct more business with the credit union to gain additional benefits from the heightened relationship. Though sound in logic, implementation of these programs tends to fall flat. Quite simply, members (and financial consumers in general) buy products because of their inherent benefits. That is, they obtain a mortgage with the credit union because the mortgage program is competitive, and not because an additional checking account benefit will be received. What typically ends up happening, then, in relationship pricing programs, is the multi-relationship, high-deposit members who end up receiving the greatest benefits from a relationship pricing package because of their high existing level of business get rewarded for activity they are doing anyway, and see it as a plus. Members who are not doing that high of a level with a credit union are not compelled to do more business with the credit union simply for the added perks (extreme example, free leather check book), but rather for the merits of the product itself.

Relationship pricing programs DO tend to keep member relationships strong. One of the few benefits we have noted that exists in relationship pricing testing is that current high relationship members who receive the most benefits sometimes recognize and enjoy those benefits. They see them as reinforcement to keep their relationship strong at the credit union. Thus, if the goal is to retain high-end members, and the CU seeks to a high-ended only niche, then there may be some utility to a relationship-pricing program like the ones we tested.

New concept relationship pricing programs merit further study, and the following may potentially be recommendable.

“Start free and make it better.” One of the growing concerns GCS has observed in the marketplace is the move towards segmentation and price structures in credit unions that in the minds of members “look, feel, and smell bank-like.” Thus, we suggest that if you can implement a program that adds no fees but offers benefits… “starts free and gets better”… this certainly will be more positively received by the membership. As a subtext to this point, GCS certainly understands the consideration of “fee-ing out” low balance, high transacting abusers, and does not discourage such activity with the exception of members starting-over in life due to divorce, death, education, or youth.

Reduction of fees IS motivating. Although the jury may still be out on whether fee reduction programs leave members motivated and loyal, or just relieved, it does appear that rewards programs that require product bundling or added services to qualify may indeed be effective. Such programs that DON’T start free, but require engagement to waive fees may feel and be more bank-like, but this is why banks use them: they work.

Points programs. Similar in concept to a credit card points program in which the higher the balances and/or higher the volume the more points earned, this concept may in fact have merit. As such, the program only adds value and opportunity for members to add benefits. That is, it offers a carrot of both choice and opportunity “ starts free and gets better”… but not a stick. Thus, lower participation merely reduces the opportunity for further gain but does not inherently offer a penalty.

Recognize tenure. Typically, relationship-pricing programs base their fee structures on balances and account relationships. Of particular importance to members is tenure: the amount of time the member has spent with the credit union. Over a member’s lifetime, he/she may have borrowed significantly from the credit union, but in aging, their borrowing years may be over. As such, some older members may not have investments with the credit union, and/or their deposit balances may not be significant. Thus they may not currently qualify but would like to be recognized for past activity due to the profitability offered to the credit union in the past. Accommodations for this would be well received by the membership.

Grace periods would be highly encouraged and well received. Members are concerned that if a balance atypically drops below a certain level (due to unusual activity or an unusual need for funds over a one or two-month period), that they be given a grace period to not incur fees and stay qualified in a particular tier which they have either elected or previously qualified for. That is, in a new program, perhaps a one-month grace period, and over an extended term, perhaps a two-to-three month grace period for this is a new concept we are testing and expect to be well-received.

Investment balances should be included. Upscale members in particular who would like to qualify and feel justified in qualifying for programs typically would like to see investment balances other than merely insured accounts be included in their calculation of total deposits of record.

Family benefits are well received and again tend to reinforce credit union relationships. That is, single household and/or family members’ combined balances included in total balance and all family members receiving the same benefits are well received and tend to solidify relationships with all members of the family. We have seen parents dislike the program but stay at the credit union due to the benefits their children receive that they otherwise wound not.

Product bundling works. GCS’s research shows that consumers tend to choose deposit and loan products for the inherent value of that product, and not for the potential or ancillary benefit of a reward. Still, related or “bundled” product packages do tend to work. To illustrate, this is the difference between, “Get a .25% discount on a future mortgage loan with an auto loan” (relationship pricing – unrelated benefit), vs., “Get a .25% reduction in your auto loan with direct deposit checking” (product bundling – direct benefit). If the benefit is related to and improves the product sought, that’s bundling. This appears to be very effective in GCS’s research.

In our view, for relationship pricing programs to work well from the members’ perspective, they should be very simple, they should address members’ concerns of family members qualifying in the program and receiving family benefits, ideally should incorporate a tenure component, and should offer surcharge rebates (expanded free access) however possible. The truly engaging program will add “carrots” with minimal “sticks”—but from a profitability-over-raving-fan-loyalty perspective, sticks can work. GCS encourages remembering the credit union philosophy and why members joined the credit union to begin with: low or no fees, competitive rates, and a place to be treated personally and with respect. If constructed in this manner, a program will have a greater chance for success from the members’ perspective. The question of course remains, would it be profitable for the credit union to do so.

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