What Do We Need Marketing For?

In my (very glamorous, high-profile) job as an industry analyst, I’m supposed to be on top of industry trends and happenings. For other analysts, that means talking to a lot of people.

Ugh. Mr. Cranky doesn’t like talking to people. 

So I’ve planted listening devices in the offices of leading financial services execs to hear what’s really going on.

The following is (as best as I can make it out, the audio quality wasn’t that good) a conversation between the CEO and CMO of JYAFCU (Just Your Average Federal Credit Union), on Monday, November 7th, the first working day after Bank Transfer Day. 

CEO: How did we do on Saturday?

CMO: (mumbling) You would know if you had bothered to show up.

CEO: What’s that? Can’t hear you. 

CMO: I said, “wouldn’t you know, we did very well.”

CEO: I read that overall, credit unions pulled in 40,000 new accounts and $80 million dollars in deposits. What did we bring in?

CMO: Well, considering we’re JUST YOUR AVERAGE credit union, we opened 6 new accounts, and added $12,000 in deposits. 

CEO: So that’s like, what? One account per hour that we were open on Saturday?

CMO: Uh, yep.

CEO: And were all branches open?

CMO: Uh, yep. 

CEO: So then, not every branch even averaged one new account per hour. 

CMO: Uh, nope.

CEO: How did we do in the month leading up to Bank Transfer Day? CUNA says credit unions opened 650,000 new accounts and brought in $4.5 billion in new deposits. 

CMO: Well, boss, seeing that we’re JUST YOUR AVERAGE credit union, we opened 91 accounts and took in $630,000 in deposits. 

CEO: Well, I’m no CFO, but something doesn’t seem right to me with those numbers.

CMO: I’m the marketing person. Maybe you better explain it to me. 

CEO: Well, on BTD we averaged $2000 in deposits per new account. As did the industry overall, for that matter. Yet, in the month leading up to BTD, we averaged nearly $7000 in deposits per new account. Why the discrepancy?

CMO: I don’t know. My people are working on it. 

CEO: OK, so let’s recap. Since the end of September, we’ve added 97 new members, did I get that right?

CMO: Sure did. 

CEO: So we currently have how many members?

CMO: That would be 12,783. We ended September with 12, 686, which, interestingly enough, is the credit union industry average. 

CEO: Well, I’m no CFO, but my trusty calculator says that’s about 0.8% growth in the month. 

CMO: That’s correct. 

CEO: Remind me again what our membership growth was from September 2010 through September 2011. 

CMO: We grew by the industry average of 1.7%.

CEO: And remind me again what our marketing budget is. 

CMO: Our marketing budget is 1% of assets, which is about the industry average, which comes out to $1.3 million. 

CEO: And remind me again what we spent to create Bank Transfer Day.

CMO: We didn’t spend anything to create Bank Transfer Day.

CEO: OK. Now remind me of one last thing: What do I need you for?

CMO: Huh? What do you mean?

CEO: Between September 2010 and September 2011, we spent $1.3 million on marketing which produced 216 new members. That means we spent about $6000 per new member. According to that Net Promoter guy from Bain, it costs 6 to 7 times more to acquire a customer than retain one, isn’t that right?

CMO: Ron Shevlin says that’s quantipulation.

CEO: When Ron Shevlin writes a bestselling management book, I’ll listen to what Ron Shevlin has to say. In the meantime,  I have to assume that the vast majority of our marketing budget is focused on member acquisition and not retention. So, even if the part of the marketing budget that went to acquisition was just $1 million, we still spent more than $4600 in the past year to acquire each new member. And what you’re telling me is that in the past month we acquired 45% of the total number of members we acquired in the previous 12 months — at absolutely no cost to us. I ask you again:

What do I need marketing for?

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Credit Unions: New Members, Boiled Lightly

Well, Bank Transfer Day has come and gone.

Actually, I doubt that it really has “gone” as I’m sure that credit unions will do everything under the sun to keep the glow of the Bank Transfer Day movement a-burning.

Ironically — and I don’t hear anybody else talking about this — credit unions might not have been the only financial institutions to have benefited from BTD. And I’m not referring to the “shedding of unprofitable customers” that some people talk about.

Anecdotally, I’ve talked to a few folks at mid-sized banks who have told me that they’ve seen pretty good growth in new customers over the past month or so.

But that’s not what this blog post is about. This one is about the Wall Street Journal.

I’m a big fan of the WSJ. Read it every day. Agree with the editorials far more often than I disagree with them. But when some press outlet screws up — whether I support it or not — regarding something related to the world of financial services, then I’m going to call them out over it.

And that’s what this blog post is about — calling the WSJ out regarding an article titled Credit Unions Poach Clients (you may need a subscription to access this article. Surprise, surprise, I have one).

Here’s are the issues I have with the article:

1. Credit unions did not poach clients. According to my handy (online) thesaurus, “poach” means infringe upon, trespass, or boil lightly. Sorry, but credit unions didn’t do anything of these things. I’m pretty sure that the new members that credit unions have signed up in the past month came over willingly. I also don’t think that credit unions went over to banks and “trespassed” in any way. And if you know of any credit unions that lightly boiled their new members, please — PLEASE — let me know.

2. Profitability of switchers is an unknown. The WSJ article claims that “people who gravitate to credit unions tend to be unprofitable for giant banks because of the small balances they keep on deposit…” Not so fast. Take a look at the report I did for BancVue. There are many credit unions — and community banks — who offer high-yield checking accounts (Rewards Checking) where the average balances are about 4x the size of free (no-interest) checking accounts, and whose profitability exceeds that of the free checking accounts. According to CUNA, 650k new accounts were opened at CUs leading up to BTD, with $4.5 billion in new deposits generated. That’s nearly $7k/account. Not exactly “small balances.”

3. CUs charge fees, too. The article says “banks try to recoup such costs [to maintain a checking account) by imposing overdraft fees and other charges.” While credit union members may — on average — pay less in fees than the average bank customer (let’s not get into the quantipulation inherent in that statistic), guess what WSJ? Credit unions charge an overdraft fee, too.

4. Banks are everywhere, man.  Johnny Cash shoulda done a song on this. The WSJ quotes a guy from NCUA (which it says is a trade group, which isn’t accurate according to @paulsworld) who says “many of the nation’s 7,200 credit unions are in rural areas where there is no other banking option.” I don’t think this is a supportable statement.

5. The housing bubble comment was a poor choice. The article states that “several large commercial credit unions…went bust after loading up on high-risk mortgages during the housing bubble.” True statement. But in comparison to the impact the housing bubble had on banks, calling out the impact on the credit union industry was pretty manipulative. 

C’mon WSJ: We expect a lot better from you.

p.s. If you want a copy of the report referenced above Financial High Coup: Why High-Yield Checking Accounts Trump Free Checking, contact BancVue.

Bank Transfer Day Needs A New Name

Bank Transfer Day is a gawdawful name. I saw one CU person’s tweet alluding to it as BTD. Ugh.

What the hell does it mean? Transfer your money from one bank account to another?

Yes, I know full well it’s about moving your money OUT OF a bank (and into a credit union).  But how is that obvious to the 99%? 

One friend (who shall remain nameless unless he tells me it’s OK to attribute this to him) suggested calling it Tell Your Bank To Shove It Day.

Now we’re talking. 

How about CU Later Banks! Day? (Or is that too obvious?)

Or maybe Break The Bank Day is better. On second thought, Durbin’s already pretty much proclaimed 2011 to be Break The Bank Year.

Spank Your Bank Day is another option. Too violent?

I don’t know what the right answer is, and it doesn’t really matter what I think since nobody is going to change the name based on what I have to say. But maybe I can get the powers to be to rethink the name.

Having said that, who are the “powers that be”?

If you know, please let me know. Because after I ask them to change the name, I’m going to suggest that they change the date. Doing this on a Saturday isn’t the best idea.

And who came up with that picture? It looks like The Joker from the Batman series and movies.

What do you think the day should be called?

Maybe Bank Of America Has A Plan

Maybe — just maybe — Bank of America has a well-thought out plan behind its debit card fees.

Maybe it actually WANTS customers to leave.

Crazy talk, you say? Not sure about that. After all, ING Direct has been lauded for “firing” customers. Bank Technology News wrote this a while back:

“To promote customer homogeneity and keep costs down, ING Direct won’t hesitate to fire customers who demand too much. Better to win over customers with shrewd marketing and good rates wrought by the cost efficiencies of doing business online.”

So, rather than flat out telling unprofitable — or potentially unprofitable — to close out accounts, BofA figures, “hey, we’ll slap a fee on them, and if they don’t like it, they’ll leave. And if they stay, they become more profitable.”

And wouldn’t you know it, but Durbin opens his mouth, and HELPS BofA by telling those customers to “walk with their feet.” Talk about effective word-of-mouth marketing!

So what happens if 1 million customers leave BofA?

If they’re truly the least profitable customers, BofA’s average customer profitability increases. And with less unprofitable customers to serve, the bank can more easily shrink to a more manageable size.

But you know what else happens?

Unprofitable — or potentially unprofitable — go join credit unions or open accounts at community banks. The credit union folks think this is great because it probably means the average age of members goes down. Hooray!

But oddly, the credit union’s profitability is adversely affected. Because if it’s low balance accounts  walking in the door, the income accelerator — the revenue generated on deposits beyond the spread and fees — is diminished. (This by the way, is one of the key reasons why high-yield checking accounts are more profitable than no-interest accounts. See my report on Why High-Yield Checking Accounts Trump Free Checking).

Let’s look at a  scenario: Assume you have 100 customers, equally split across 4 segments. Assume that the average profitability per customer of segment 1 is $1, segment 2 is $2, segment 3 is $3, and segment 4 is $4.

You’re making $250 in profits with average customer profitability at $2.50/customer.

If, thanks to BofA, 25 new Segment 1 customers walk in the door, profits go up to $275, but average profitability declines by 12% to $2.20/customer.

If the four segments represent the generations, it’s possible that you will lose Segment 4 customers (Seniors) over time. So let’s say 25 new Segment 1 customers come in thanks to BofA, but 10 Segment 4 customers are no longer with you. Profitability still goes up, to $255. But average profitability declines to $2.13, a 15% drop.

And if the ratio of customers in the four segments doesn’t change — that is, if segment 1 customers don’t become as profitable as segment 2, 2 as profitable as 3, and 3 as profitable as 4 — over time, then your FI is in trouble.

Oh sure, you can hold hands and sing cumbaya and hope those customers become more profitable over time. But smart firms don’t do that.

———-

So maybe BofA’s plan is to drive out customers it doesn’t think are — or can be — profitable, and let some other FI deal with them.

I’m sure many credit union marketers are thinking that this is great, that they would love to have those relationships, and grow with them over time.

Maybe they can. But if the BofA rejects….oops, I mean defectors….are the younger, less affluent, Gen Yers, then it may take some time for them to have a material affect on the CU’s profitability.

I’ve heard CU cheerleaders talk about being more open to extending credit to younger and less affluent consumers, and finding ways to help those consumers manage their financial lives without the high rates and fees that the big banks charge.

But there’s a reason why those consumers either don’t get credit or have to pay higher rates and fees to get credit, loans, and accounts. They’re higher credit risks, and they bring less funds to the table, resulting in less profits.

Seems to me there are a number of people in credit union land ignoring those realities.

——–

But, back to BofA, maybe the imposition of fees on debit cards is a smart move for the bank. I wouldn’t have advised the bank to do what it did, instead, I would have told them to levy fees on writing checks.

The CU Water Cooler Symposium 2011

If you’re a financial services professional trying to choose a conference to go to, you can flip a coin to make your choice.

Heads, you go to some large industry-wide boondoggle in Las Vegas with a thousand other attendees and see Sully (oops, I mean CAPTAIN Sullenberger) in the 43rd minute of his 15 minutes of fame. Tails, you go to a smaller functionally-focused conference with 150 other attendees and see your colleagues talk about what their firms are doing (if you can stay awake through their entire presentation, that is).

If you’re lucky, however, the coin will land on its edge. And then you can decide between Finovate and the CU Water Cooler Symposium.

I wasn’t able to attend Finovate last week, but I did get to go to the CU Water Cooler conference. Even better, I got to present there.

When Tim McAlpine told me a few months ago that he was selecting me to speak, I asked him what he wanted me talk about. He said “I don’t know. I like the way you bring humor to your blog, and want you to bring that to the Symposium.” I told Tim that I don’t do stand-up comedy, so he said “Do what you want.”

I chose to speak on Quantipulation, and tried to debunk a few marketing myths. CU Times wrote that I have a “simple message for credit unions, ‘Don’t believe any numbers without question.’”

Not to make a mountain out of a molehill here, but that’s not quite accurate. Instead, I told the conference attendees not to believe any number they heard over the course of the conference without questioning the number’s assumptions.  But I’m quibbling here.

With no intended disrepect to the speakers I’m not mentioning below (I didn’t actually get to hear all of the presentations), here are the three highlights for me, in no particular order:

1. Demystifying Creativity. Someday Charlie Trotter (the one living in Foat Wuth Texas, not the restaurant owner) is going to be well known, and I’m going to get to say “yeah, I know Charlie.” It’s OK if he doesn’t admit to knowing me. Charlie talked about what creativity really is. Charlie helped me (and I hope everyone else) to better see how creativity is not synonymous with imagination. Imagination is the ability to imagine. Creativity is about DOING something. According to Charlie, you aren’t creative until you’ve actually created something. The third concept Charlie hit upon was talent. Talent + Imagination + Creativity = Success. Charlie didn’t actually say that, I’m just quantipulating.

2. Boomification of Credit Unions. Damn, that Denise Wymore is a good speaker. I truly wish that I had her ability to connect with an audience. On the other hand, I’m glad that I’m not wrong about stuff like she is. Denise’s presentation truly was excellent — engaging and compelling. Problem is, her ideas are just simply wrong. Ideas like getting rid of FICO, and judging loan applicants based on their “character.” They have a name for that, Denise: Discrimination. And it’s illegal. Or the idea that profit-driven is somehow the antithesis of people-driven. A false dichotomy, Denise. Denise’s cumbaya makes for a great presentation, but cumbaya won’t sustain a credit union, nor the credit union industry.

3. Future of Payments. As I listened to Jeff Russell, CEO of The Members Group, a little voice inside my head was screaming “ARE YOU LISTENING TO THIS, PEOPLE?!” My perhaps skewed perspective on the things I hear from credit union professionals lead me to believe that too much of the conversation is about lending. Jeff’s message, if I’m interpreting it correctly, is that payments is where the focus should be. If I’m getting him right, I couldn’t agree more. There’s no better way to help a credit union member best manage his/her financial life than to help them make smart everyday spending decisions. You simply can’t do that if their primary spending account is a checking account or credit card held at some other financial institution. On top of that, the future of cross-sell marketing for banks and credit unions will come from payments-related and payments-triggered transactions. If your credit union is a payments laggard, good luck. You’re not going to make it up on car loans.

I do wish, though, that Jeff hadn’t said two things that he did. The first being that mobile payments will be the dominant form of payments in five years. I’m willing to bet a LOT OF MONEY that that won’t be the case. In the past 15 years, I’ve NEVER been wrong underestimating the rate of technology adoption.

Second, I’d argue with Jeff regarding his view that free checking is dead. Free checking isn’t — or shouldn’t be — dead, and for two reasons. First of all, unlike Jeff said, debit interchange doesn’t fund free checking accounts. Free checking accounts have been around for a lot longer than the increase in debit card activity.

The advent of free checking was born out of the the belief that getting someone’s checking account was the steppingstone to getting more of their financial accounts. If that belief is true — and it’s certainly a discussion for argument, since so few financial institutions have done a good job of successfully cross-selling — then a cut in debit interchange shouldn’t portend the complete death of free checking.

The other reason why is free checking isn’t dead is because it never really was alive. When we say “free checking” what we’re really saying is “no monthly fee” checking. Tell the people who don’t pay a monthly fee, but pay out hundreds of dollars in overdraft, foreign ATM, and safety deposit box fees that their checking account is “free.” I hope you don’t get punched in the face.

———-

Beyond the presentations themselves, the other thing that makes this conference top-notch is the attendees.

I wonder how it felt for first-time attendees who aren’t tied in to the credit union twittersphere. I wonder if they felt like this was some party they were crashing. I certainly hope not. But the conference really is a gathering for a lot of credit union professionals who actively engage with each other on a daily basis. And of course, some of the attendees have known each other for a long time. Denise Wymore and Janine McBee told me they’ve known each other for….

Oh, hey, did I tell you that I finally met Jimmy Marks in person? I’ve never hugged a man the first time I met him. But I gave Jimmy Marks a hug when I “met” him. (It’s OK, it was one of those male “shoulder bump” hugs). Although I had never met him in person before this week, I’ve been tweeting with him for at least two years. And I “know” him better than I know a lot of my colleagues at work.

It was also a treat to see Rob Rutkowski and Jeff Hardin at the conference. For two reasons: The first, because I had met the both of them at the Forum Symposium in 2007, and hadn’t seen either of them since; and second, because the two of them make me feel like I’m not the only “old” guy at the conference (even though both of them are younger than I am).

Bottom line: Love this conference. Thanks to the CU Water Cooler editors — Carla, Matt, Kelley, William, Gene, Doug, Brent, Christopher — for their time, effort, and brainpower on doing what they do. And huge thanks from me to Tim McAlpine for giving me the opportunity to present and attend the conference.

Giving Away iPads Doesn’t Solve PFM Challenges

In about 20 words, NetBanker takes a machete to PFM, cutting it down with three swipes:

  1. It’s hard to get started
  2. It’s a pain to keep up
  3. It’s disconcerting to view spending summaries

But, as NetBanker notes — and I agree with both the swipes and the rebuttal — there are “obvious benefits” to PFM use.

NetBanker goes on to say that “one way to tackle the first problem is to offer a sweepstakes or bonus to induce trial,” and highlights Truliant Federal Credit Union’s attempt to do just that by giving away iPads to members who sign up for using PFM.

My take: Truliant is wasting its money.

If you need to lose weight, you can: 1) Read up on which foods to eat; 2) Eat those foods; and 3) Exercise more. Doing only #1 — reading up on which foods to eat — will do little good in actually reducing your weight. Step #1, without #2 and #3, is a failed strategy.

This is analogous to what Truliant is doing: Trying to solve the three-pronged PFM problem by addressing just the first prong. 

PFM is the new New Year’s resolution. It used to be that when the new year came around, we resolved to lose weight and/or stop smoking. Now we resolve to get our financial lives in order. And just as we used to join a gym to realize our weight loss resolution, we sign up for a PFM to to realize our financial resolution. 

When March rolls around, we’re not going to the gym as often, and not long after we start using a PFM tool, our enthusiasm and commitment wanes, and we stop using it. 

Realizing the “obvious benefits” of PFM requires committed use of the tool over some period of time. Simply incenting people to sign up for using the tool does absolutely nothing to encourage or ensure continued use. 

In fact, if you read the fine print of Truliant’s contest, members don’t actually have to enroll in PFM to participate. (I’m tempted to enter the contest to see if they even really limit it to members). 

My prediction: A large percentage of Truliant’s online banking members will enter the contest and sign up for PFM. Truliant will then boast about their high PFM enrollment numbers. And then we’ll never hear again whether or not those members continued to use the tool and reaped the benefits. 

What should Truliant do?

Think Foursquare for PFM. 

Despite what a lot of people think, Foursquare isn’t about location awareness or the mobile channel. It’s about gamification. It’s about earning badges and becoming mayor. And if there are rewards for doing those things, great.

People like to play games. We like friendly competition, and we like to turn routine things into games to spice them up, and make them more interesting.

And that’s what banks and credit unions need to do with PFM — make a game out of it. Points for setting up a budget, points for categorizing your spending, even more points for keeping to your budget. Points for sharing tips and tricks regarding the management of one’s financial life with other PFM users.  And giving away iPads to the people who amass the most points.

In other words, incenting customers and members to deal with the “pain of keeping up” with the use of PFM.

If you can address challenge #2, challenge #1 takes care of itself. 

As for the disconcerting nature of seeing your spending patterns, I can’t help you. I’m a consultant — not a miracle worker.

P2P Lending — The Bank And Credit Union Way

I’ve often thought that banks could easily squash P2P “lenders” like Prosper and Lending Club by creating an online lending marketplace of their own. In addition to the organic traffic they could drive to the site, they could refer loans they decide to pass on themselves, and give the option to investors/savers looking for higher rates of return than they’d get with CDs to lend money in the marketplace.

Lending Club charges a processing fee ranging from 2.25% to 4.5% of the loan amount, and hits investors with a service charge of 1% of each payment received from a borrower. Seems to me that banks could easily underprice that.

But there’s another P2P lending opportunity for banks and credit unions to capitalize on.

Do you know how much money is lent between family, friends, and acquaintances? I doubt that you do, because, as far as I know, Aite Group is the only firm to have estimated the volume of P2P transactions that occur in the US.

We’ve estimated that US consumers borrow (and presumably, repay) nearly $75 billion from each other (and not from financial institutions or other types of businesses, legal or otherwise) each year. On average, every household in the US makes two loan payments to other people for money they’ve borrowed.

That last number is actually pretty useless, since a large percentage of households don’t make any P2P transactions for the purpose of repaying loans. But in our research on consumers who use alternative financial services (e.g.,  payday loans, check cashing services, etc.), borrowing from family and friends is the second most popular source of funds (after overdrawing on their checking accounts, which might not count).

In fact, of the alternative financial services customers that Aite Group surveyed, one in four borrowed from family or friends three or more times in 2010, and more than one-third did so more often in2010 than they did in 2009.

This is a huge P2P payment opportunity for banks. Note that I didn’t say it was a P2P lending opportunity.

How are these loans and agreements documented? I have no idea, but my bet is that in many cases they’re not documented at all. After all, among friends, verbal agreement is just fine, right?

But if there was a cheap (i.e., free) and convenient way to capture the details of that loan, and a way to actually transfer the money between participants — cheaply and conveniently — don’t you think a lot of people would use it?

The money in the P2P lending space for banks isn’t from loan processing fees or from taking a cut on the interest rates. The money is in the movement of funds.

To date, banks, as a whole, have floundered with their P2P payment offerings. CashEdge and Zashpay have gained some traction, but have hardly become household names. PayPal is a household name, but the vast majority of their business isn’t P2P.

Why haven’t P2P payments taken off?

Banks are marketing it all wrong. They’re pitching the “electronic” aspect. Big deal. People don’t care about channels and methods. They simply care about what’s the most convenient thing to do when they want to do it.

Instead, banks should be marketing convenient alternatives to transacting certain types of P2P payments — repaying loans to other people being one type.

Banks could provide an online capability for the parties to document the terms of the agreement, establish repayment parameters, and enable either the automatic or manual transfer of funds. All for the low fee of a P2P transaction, and not a cut on the loan. No future disagreements about the terms of the agreement, and proof of payment.

In addition to improve the way existing customers transact P2P loans between family/friends, this approach might help attract un- and under-banked consumers who could fund an account that could either be a savings account or take the form of a prepaid card account. 

The real winner, though, will be P2P payments. By driving trial of the service, consumers may find it convenient for other use cases. 

How To Differentiate Your Credit Union

On the CU Water Cooler site, William Azaroff wrote:

“When I look at many credit unions, I’m troubled by their blandness, their inoffensiveness. They used to stand for something, but now they’re moving away from differentiation and towards sameness. And many credit unions are doing this at the precise moment when differentiation is a necessity. The question is: do some people hate your brand? If some do, then I would say you’re doing something right. If not, then I’m guessing your organization is trying to be all things to all people, and should take a stand for something and embed that into your brand.”

My take: To quote former President Clinton: “I did not have sex…” No, wait, that’s the wrong quote. I meant this one: “I feel your pain.”

William is spot on that many credit unions aren’t differentiated in the marketplace. What William didn’t get into, however, is why few credit unions are effectively differentiated. There are (at least) three reasons why undifferentiated credit unions are that way:

  1. They don’t know how to differentiate themselves.
  2. They think they’re differentiated, but don’t know better.
  3. They don’t want to be differentiated.

The last reason might surprise you, or strike you as wrong. But after 25 years of being a consultant, I can’t even begin to count the number of times I’ve made a recommendation to a client to do something, only to be met with the following question: “Who else is doing that?” Risk adversity runs deep in the financial service business.

There are also a fair number of CU execs who think that their CU is differentiated. Almost to a man/woman they give the same description of what differentiates their CU: “Our service.” This is often — I’m inclined to say always — wishful thinking. Why? First, service may be what your firm does best, but it doesn’t mean your service is comparatively better. And second, because service means different things to different people.

The most prevalent reason why so many CUs are undifferentiated, however, is probably the first reason: They don’t know how to differentiate themselves. 

I’m not looking to pick a fight with William — I suspect he would agree with me here — but approaching the topic of differentiation from the perspective “what can we do to tick people off and be hated by some of them?” is not the right way to go about it. 

And with all due respect to my friends in the advertising business, the last thing a credit union should do is bring in the advertising people to help them figure out how to differentiate the CU. 

Why? Because there’s a prevalent — but misguided — mindset among advertising people that differentiation comes from “the story you tell.” (If you need proof, go read Seth Godin).

But the story you tell doesn’t differentiate you. What differentiates you is the story that your members tell. That they tell to themselves inside their head, and that they tell verbally to their family and friends. And those stories only come from their experiences with the credit union, not the advertising. 

Which means this: Differentiation comes from something you do

That “something” must be meaningful to members. And that something must be something that: 1) only you do; 2) you do measurably better than anyone else; or 3) you do measurably more often than anyone else.

Differentiation doesn’t come from standing for something, and it doesn’t come from your branding efforts (your differentiation drives your brand, not the other way around).

William’s credit union Vancity “stands” for community development and improvement.  So do plenty of other CUs. What differentiates Vancity is that — time and again — they do something about it. They can count the number of times they’ve done something about it, and they can measure the impact of what they’ve done.

Differentiating on service is tenuous. What does that mean? That you fix your mistakes better than anyone else? That the lines in your branch aren’t as long as they are in the mega-banks down the street? That Sally at one of your branches greets everyone by name and with a smile when they come in?

If you’re going to differentiate your credit union, you have to do something. Different, better, or more. None of those options is particularly easy to do. Technology initiatives intended to gain a competitive advantage — mobile banking, remote deposit capture, etc — are often easily (I didn’t say cheaply) copied. Better is hard to prove. And “more” requires strong commitment from the management team for an extended period of time.

This isn’t to say that aren’t opportunities for differentiation, just that they require commitment — and a lot of it.

So what can you do to differentiate your CU? I think it comes from committing to differentiate in one — and only one — of the following areas:

1. Advice. Managing our financial lives is tough and getting tougher. People need help making smart financial choices. But the advice available in the market tends to be focused on asset allocation and stock picking for the relatively affluent, or focused at the very lowest end of the income spectrum for people who need help with serious debt problems. What about everybody else in the middle? What about providing help with all those everyday/week/year decisions that have to be made? PFM holds the potential to provide and deliver this kind of advice, but the tools aren’t quite there yet. If this is the path you choose, you’re going to have to make some investments to develop them and get them to point where they can deliver on this promise.

2. Convenience. There’s one bank in the Boston marketplace that advertises itself  as the “most convenient” bank. Hooey. Having extended branch hours and free checking isn’t “convenience.” Making people’s financial lives easier — i.e. more convenient — to manage is a complex and difficult proposition. But when you’re really doing it, people know it. And you’ll be differentiated.

3. Performance. You might not be the easiest FI in the market for me to deal with, and you might not provide me with any advice (maybe because I don’t want any), but if the performance of my financial life — that is, the interest I earn, the fees I pay, and the rewards I get and earn, are superior to everyone else out there, than I will consider you to be differentiated in the marketplace.

I didn’t say differentiation is easy.

What FourSquare Means To Financial Institutions

The Financial Brand does an excellent job of putting FourSquare into perspective for financial services firms:

Most financial institutions are trying to push people out of branches — especially for routine interactions — by encouraging use of self-service channels. But a Foursquare promotion encourages exactly the opposite: frequent branch visits. If your financial institution builds a Foursquare promotion around mayors, you will be taking those who are highly wired, leading-edge, early adopter tech junkies and encouraging them to come into branches more often than they should.

Building a Foursquare promotion around the mayors of your locations may feel like the easiest and most obvious way to tap this social media platform, but it is probably the worst thing you can do. For starters, it really limits the promotion’s audience. There can be only one mayor at a time and there will likely never be more than 2-3 people who could possibly ever overtake him/her. So if you have five branches, a mayor-based promotion would mean something to only around 15 people.”

Banks and credit unions are missing the real lesson here: People like to play games. We like friendly competition, and we like to turn routine things into games to spice them up, make them a little more interesting.

So what should banks and credit unions do? Make a game out of interacting with the bank/CU. No, I don’t mean getting 5 points every time someone does some as meaningless as check their account balance.

But what about applying “game theory” to PFM usage? Construct a budget, get 50 points. Categorize your quarterly spending, get 50 points. Help someone else “in the network” set up their budget, get 250 points. Or more broadly, make a deposit into a savings account for more than $100, get 100 points. Give up paper statements, get 100 points. For every $10 you spend with your debit card, get 10 points.

Sound like a loyalty program? What in tarnation do you think Foursquare is? (Side note: Hypocrisy kills me. There are people who criticize rewards programs for “buying” loyalty instead of “earning” it, and then turn around and rave about some social media concoction like FourSquare).

The keys to success are: 1) Constructing a points scheme that rewards meaningful interactions and actions (this is why I keep harping on the importance of the concept of customer engagement, and how to measure it); 2) Making it social so people can see how they stand relative to everyone else, and to encourage some friendly competition; and 3) Integrating it with enterprise-wide marketing efforts.

Of course, if you prefer publicity over profits, feel free to pursue that Foursquare promotion.

Shoveling Out From The Interchange Snowjob

If one of those big, bad companies (oh, for kicks, let’s just say it was a bank, our punching bag du jour) tried to mislead the public, what would the response be? Outrage. People would be up in arms, and politicians — especially the current administration — would be calling for legislation to punish the offender, and prevent it from happening again.

And, of course, our elected public officials would make a public spectacle out of it. Might even warrant dropping a few F-bombs, eh Carl Levin?

But what happens when those same elected officials, or some other politically-motivated individual, spews misleading information? Not only do they get a pass, but they get a platform to deliver those messages in publications like the New York Times and Huffington Post.

Examples: In a HuffPo article from February, California state assembly member Pedro Nava wrote:

On average, consumers pay $427 annually on interchange fees without even realizing it.”

Unfortunately, that’s simply not true, at least not literally. Consumers don’t pay an interchange fee. Merchants do. Whether or not that cost gets passed on to consumers is a different question of course, but if he’s going to expand the analysis to every cost a merchant incurs that works its way back to consumers, maybe Nava should start with the 8.25% sales tax that Californians pay.

More recently, the NY Times published an article written by Albert Foer, the president of the American Antitrust Institute, who wrote:

If the United States were to reduce the interchange rate from 2.0 percent to 0.5 percent, the savings would be $36 billion per year.”

That’s a true statement, kind of. $36 billion would be saved, but it’s really not clear who would reap those savings. With retailers’ profit levels declining, do you really think the savings they would accrue in interchange fees would be passed on to consumers? It’s possible. Just not on this planet.

The other fallacy in Foer’s analysis is that when companies are faced with revenue decline, most don’t sit back and do nothing. They try to find ways to recoup those shortfalls. This involves trying to find new customers, and/or offering new products, but may involve raising prices and fees in other areas. So, in the long run, those savings never materialize.

I’ll repeat that: Those savings never materialize.

If the same elected officials who are spewing falsehoods continue to (or try to) regulate firms’ ability to price their products and services, the outcome may be lower prices, but with a cost: Lower employment levels. As a firm’s revenue declines, so does its employment count.

But I should stop this rant — I’m probably preaching to the choir. If you’re reading this, you likely work in the financial services industry for a bank or credit union and agree with me.

The question that needs to be addressed: What should FIs do about this?

If there ever was a good opportunity for a national education/advertising campaign, this is it.

Callahan & Associates recently alerted credit unions to the potential impact of a cut in interchange fees:

If credit union’s interchange income was reduced in total by 75 percent (from Foer’s stated 2.0 to 0.5 percent), the lost revenue would drastically affect credit union non-interest income and the eventual value returned to members. Do your members know how interchange helps the credit union and subsidizes the true cost of providing debit and credit services?”

This is too narrow a view, though. The impact to credit union members is much broader than just the impact on their CU’s payout.

FIs — banks and CUs —  need to educate the public about what the interchange fee is. What it’s there for, who pays it, and how it helps pay for the rewards that consumers get on their credit and debit cards, and how it helps (will increasingly help) to keep checking account fees low, if not free. And how it’s a fee that merchants pay because it enables merchants to reduce the amount of cash they handle, reduces their billing costs, and helps prevent fraudulent activity.

As a VP of operations at a credit union was quoted as saying in American Banker “the current fee system puts financial institutions of all sizes on the same playing field in setting interchange rates. It allows the credit unions to compete with the largest national banks.”

This may cause a bit of a quandary for credit unions, however. After spending so much time and effort over the past 18 months distancing themselves from the larger institutions, I can’t help but wonder if this will cause some PR embarrassment for credit unions.

It doesn’t matter, though. This issue is too important.