How to Win and Keep Profitable Members in Today’s Environment (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

How to Win & Keep Profitable Members in Today's Environment

National Association of Federal Credit Unions l www.nafcu.org 2

Average member profitability down at most institutions following crisis – Globally, average member profitability declined 5% to 15% since the crisis

Efforts by institutions to restore member profitability face hurdles

– 59% reported decreased loyalty – 63% say members are more price sensitive – 63% say members are „shopping around‟ more frequently – Greater willingness to move away from „poor‟ service

Traditional profit recovery strategies – rate and fee increases, conventional cross-selling and organic growth – will not readily fix the problem. Many will struggle.

– Consumers have broader expectations – Service demands have increased

June 2010 Accenture study across 35 retail banking institutions

Industry Update


June 2010 Accenture study across 35 retail banking institutions

Legislation and regulation continue to be game-changing.

We expect more regulation in the financial services sector in the near future.


1 Billion

3 Billion

5 Billion

9 Billion

7 Billion

11 Billion 13 Billion

Reg E

Durbin Amendment ?

Next Legislation. . .


Legal and regulatory developments promise to have a significant impact on Credit Union profitability

• CARD Act: „Reasonable‟ penalty fees defined • Regulation E: NSF/Overdraft fees • Dodd-Frank Act: New Regulator • Durbin Amendment (part of Dodd-Frank Act): Interchange The Cost of Non-Compliance is Significant • Bank Secrecy Act • Regulation E (Electronic Fund Transfers Act) • Regulation Z (Truth in Lending Act – which also includes NCUA Truth in Savings Act and the

CARD Act) • Regulation B (Equal Credit Opportunity Act)

More to Come – Numerous Compliance Challenges for 2011 and beyond • Fair and Accurate Transaction Act (FACT Act) – risk-based pricing notices • New Privacy Regulations • Other Regulatory Issues on the Horizon


Checking Account Revenues 2008*: $68.1B

Source: Novantas, qtd. in 12/23/09, “Consumer Fees: The Hits Keep Coming,” American Banker

Regulatory environment threatens revenue sources

*2009 total and breakdown expected to show little change.


$150

$218 -$30

Opt-In

$188 -$20

Interchange

$168 -$18

Future Regs

How do you

replace

$68 of annual revenue?

($5.66/mo)

Free Checking Profits are Dropping


Revenue pressures from legal and regulatory developments were exacerbated by ongoing

consumer behavior trends.


39% Don‟t want all of their accounts

in one place because they don’t trust financial

companies.*

94% Believe trust is somewhat or

very important in choosing a FI.

80% Plan to permanently increase

the amount of money they save.*

64% Want to learn more about managing their finances.**

*Members with $100K+ household income

**Members age 18-24

Source: 5/10, “Seven Predictions for the Future of Banking,” Mintel Comperemedia (webinar)

Members expect more from their financial institutions


Banks Making Satisfaction Comeback

10

J.D. Power & Associates May 2011

Bank Industry customer satisfaction average improved four index points due to improvement in product offerings and educating on value of these offerings. On a scale of 1000 throughout 2010: Small Banks improved from 779 to 782 Medium Banks improved from 759 to 764 Large Banks improved 741 to 746

779 782

759

764

741

746

720

730

740

750

760

770

780

790

1 2

Small Banks

Medium Banks

Large Banks


New initiatives that Credit Union’s are doing to engage members and rebuild trust:

• New embedded strategy with new benefits • Migrating from free to fee while marketing to acquire new

members

• Retain members by embedding more robust benefits for profitable accounts

• Deploying mini bundles: cash back checking, cash trax checking, and achievement checking


Benefits: Cash Back Checking Benefits: Cash Trax Checking Benefits: Achievement Checking

• ID Theft Insurance • Everywhere Cash Savings • Everyday Rebate Rewards

• ID Theft Insurance • Music Downloads & More • Everywhere Cash Savings

• AD&D Insurance • Common Carrier • Destination Discounts • Coupon Book • Everywhere Cash Savings

Credit Union Provided Benefits Credit Union Provided Benefits Credit Union Provided Benefits

i.e. • Enrollment in E-Statements • Online Bill Pay

i.e. • Enrollment in E-Statements • Online Bill Pay

i.e. • Free order of checks • Safe Deposit Box discounts • Online Bill Pay

Estimated Revenue – Assuming 10K Accounts



•Member charged $3 per month generating ~ $20K monthly revenue



Embedded Configurations “At a Glance”


What all of this means

Many national “brands” have disappeared – a few more could also falter.

The winners will be those employing distinctive strategies and tactics that cost-effectively target, attract, and capture profitable deposit members.

New products and differentiated acquisition strategies and tactics are essential.

Fees are ok as long as they are not changed multiple times and are communicated and understood by the members


How are you handling…

Current account structure?

The cost of free checking?

Number of members who opted-in?

Increased branch operation costs?

Personal performance pressures?


Financial Institutions

DECISION POINT STATUS QUO INNOVATION

RISK VS. REWARD REWARD VS. RISK

Decision Point

National Association of Federal Credit Unions l www.nafcu.org 16 16

Back to basics

Embedded accounts that marry financial and non-financial products and services

Non-financial products need to resonate with members

Fee checking accounts that are behavior based with the ability to “buy down” the monthly fee

Development of overlay strategies to compliment core account


The Decision

A member engaging account design allows FIs to provide increased value within their DDA accounts, enhance the member relationship, drive profitable behaviors and deliver incremental fee income.

Increased member

acquisition

Deeper & more

profitable member

relationships (increased

LTV)

Improved member

Satisfaction

Greater tenured member

relationships

Heightened frequency of

member interaction

Reduced operating expenses

Member Checking

Whether your choice is: 1. To keep Free Checking, or… 2. To eliminate/grandfather Free Checking


Drive Positive Behavior Change

Members have the opportunity to earn down their monthly fee by exhibiting these behaviors that are convenient for them and cost effective for you:

Maintaining a minimum daily balance of $X

Having “X” signature-based transactions

Enrolling in online banking

Going paperless with electronic statements

Enrolling in online bill pay

Signing up for direct deposit

Simple Member Behavior Changes = Highly Engaged Members = Increased Retention & Profitability


Sample Account Behavior Scenarios

Maintaining a minimum daily balance of $100

$0.25 credit for every debit card swipe

Enrolling in online banking




Scenario A: $6.00 monthly account fee, must meet all 5 account qualifiers, then all debit transactions are rewarded with a $0.25/swipe credit

Example Outcomes • 24 debit transactions = Full $6.00 credit to account

(member paid nothing!) • 15 debit transactions = $3.75 credit to account

Minimum of 15 debit card transactions




Scenario B: $8.00 monthly account fee, must meet all 4 account qualifiers and entire monthly fee is credited

= qualifier behaviors = buy down behaviors


More Sample Scenarios

Maintaining a minimum daily balance of $100

$0.50 credit for every debit card swipe OVER

$10



Scenario C: $8.00 monthly account fee, must meet all 3 account qualifiers, then all debit transactions OVER $10 are rewarded with a $0.50/swipe credit

Example Outcomes • 17 total debit transactions for the month, but only 8 of

those were over $10 = $4.00 credit to account • 15 total debit transactions for the month, but only 3 of

those were over $10 = $1.50 credit to account




Scenario D: $7.00 monthly account fee, must meet all 4 account qualifiers and fee is reduced to $3.95 (partial reward vs. full fee waiver)

Maintaining a minimum

daily balance of $250

= qualifier behaviors = buy down behaviors


Consumer Insights


Seeking to determine how effective its benefits are in motivating consumers to select a checking account

Identify which of its benefits help ease the transition to fee-based checking

Understand what behaviors/requirements consumers are willing to adopt in order to maintain free checking

Determine which benefits have the greatest revenue potential

Consumer based research is desired to determine the optimal combination of value added benefits and account requirements that has the greatest acceptance rate

Background/Objectives


Independent study was conducted by third party research firm, AMI

National online interviews were conducted

Interviews were divided into the following regions: Northeast

Midwest

South

West

Survey results were stratified by age, gender and Census Region to determine a

final random and representative sample

Discrete Choice Analysis was used to determine all of the “best groupings” of product benefits and financial behaviors

Results represent optimal bundling strategies and can be used to make projections of consumer acceptance with a high degree of confidence (95% Confidence Level)

Methodology


Category Interest

ID Fraud Benefits

Savings Benefits

Credit Management Benefits

*Function of (% Def/VL to Switch) x (Mean Score Rating) – Perfect Score = 500 (100% D/VL x 5.0 Mean Score)

Consumer Interest Index*

Consumers continue to want/expect certain benefits from their financial institution


%

%

%

%

%

%

%

%

%

%

Likely to Switch or Open an Account with…

Responses Based on a 5 Point Scale – Top2 Box = Definitely Would Switch/Open and Likely Would Switch/Open

Top Benefits Driving Acquisition

(Compared to 2010 Research)

1.5x

1.3x

1.4x

1.5x

1.6x

1.5x

1.4x

1.1x

1.1x

N/A

Individual Appeal


Discrete Choice Conjoint Analysis determined best “3-benefit” bundle

Nearly 1/3 of U.S. adults would select this bundle if offered as part of

checking account

Everywhere Cash SavingsSM

Everyday Rebate Rewards

Payment Card Protection

Best “3-Benefit” Bundle


Discrete Choice Conjoint Analysis determined best “5-benefit” bundle

Over 1/3 of U.S. adults would select this bundle if offered as part of

checking account




Daily Credit Monitoring

Credit Reports and Scores

Best “5-Benefit” Bundle


Consumers are willing to maintain certain behaviors

to keep their account free

% Definitely/Very Likely To Do In Order To Keep Free Checking…

Responses Based on a 5 Point Scale – Top2 Box = Definitely Likely/Very Likely

Consumers Accept Change

Likely behavior acceptance to keep free checking


Five of the best product benefits bundled with the best two financial benefits will realize the highest consumer acceptance level nationwide

44% of U.S. adults would select the account above and pay a monthly fee if offered those account features

Discrete Choice Conjoint Analysis determined the best optimal bundle

Optimal Account Design

Acceptance




Daily Credit Monitoring

Credit Reports and Scores

Bill Pay or Direct Deposit

Online Banking


Fee Account, with Product Benefits

Average Balance

Lifetime Value Tenure

3 years $600 - $900

$480 per year

1.7x longer

Up to 2.5x

higher 2.3x

higher

Free Checking

Average difference between free checking account and an enhanced, fee-based checking account with Affinion benefits

In addition to extensive revenue to our clients, value added services deliver increased tenure, deposits and overall lifetime value

Real Value to the Bottom Line

Source: NetGain! data analysis, First Manhattan Consulting Group data analysis, Affinion Enhanced Checking client analysis


Consumers are willing to pay for value, but increased fees must equal increased value

Consumers are accepting of certain behaviors in order to keep their account free

Consumers prefer fees they can control

Introduction of fees does not equal increased attrition On average, FIs could expect ~13%* attrition when changing the core account

structure (e.g. introducing a fee) Attrition above includes: normal account attrition, FI closed the account,

consumer closed the account (or converted to another)

Understanding which combination of services drives purchase interest and retention is essential

In Summary

*Attrition rate varies based on brand affinity to the institution.


Case Studies


Checking Account Case Study- Moving From Free to Fee Checking

FI Regional bank with 1,300 locations in the Midwest

Need Initial need was to deliver an identity theft solution to protect consumers and drive retention and non-interest income while positioning the bank as a market leader Evolved into a more holistic strategy of addressing moving from “free to fee” checking account strategies – the bank was no longer going to offer free checking accounts

Solution Design an identity theft product solution which could be embedded into the core checking account for a nominal monthly fee Position bank as an industry leader and provide a value-based fee message to customers

Business Results • Bank has over 210,000 active customers in

the identity theft program • Bank cross sells over 38% of all new

accounts into the identity theft program • Bank will generate $10.0 Million in net new

revenue this year


Credit Union Success Story – Fee Income / Acquisition

Need:

To develop a brand new checking account designed to create a competitive advantage, drive non-interest income, and attract new members/accounts - all while providing a valuable product that members want and can design themselves.

Solution: Create 6 different “Packages” ranging from credit and identity theft services to travel and shopping discounts and services. Let members design their own account by choosing the package(s) they want, for a nominal fee, to add to their account. Leverage CU‟s strong sales culture as an opportunity to maximize revenue and program penetration.

Client Data – Western CU • $620 Million in Assets • Branches 20 • Members 56,000

Business Result:

20% cross-sale ratio in the first two months (account launched in April)

Nearly 20% of all new checking accounts have at least one value-added package (year-end goal 50%)

Program is trending 100 brand new checking accounts / week

“Credit Package” as been the most chosen of all package options

National media exposure: Forbes, Yahoo Finance, CNBC


Credit Union Success Story – Incremental Fee Income and Protection for Members

35

Client Need: Concerned about the ongoing threat of identity theft and wanted a comprehensive solution to offer to members. Find alternative methods for incremental revenue by generating a predictable, recurring fee income stream. Affinion Solution: Create a comprehensive, robust identity theft solution designed to proactive mitigate fraud risk for members. Also provide personalized resolution and insurance to members in the unlikely event fraud does occur. Offer the solution in multiple distribution channels; in-branch, online and via direct mail, so members can interact with the product in their preferred communication channels. Give members the opportunity to try the product at no charge for 30 days with the opportunity to continue the protection for a monthly charge of $9.95/month after the trial period.

Business Result: • Credit Union launched the program with

an initial direct mail campaign to 128,927 members

• Initial mailing achieved a 1.84% response rate, equating to approximately $151,000+ in annual incremental revenue for the Credit Union

• Follow-up mailing was sent to 106,809 members achieving a 1.03% response rate

• Approximate current monthly revenue to the Credit Union based on all channels is $21,000/mo

• = $252,000+ in annual incremental revenue for the Credit Union

Client - Credit Union in SE • $1.9B in assets • 205,000 members


Credit Union Success Story – Upgrading Benefits

36

Client Need: Affinion client since 2001 and program was strong but growth slowed in 2008.

In 2009 Affinion facilitated consumer research on our CheckMax checking account program and recommended changing the benefits and upgrading to newer benefits

Affinion Solution: In August 2009 we launched the revamped checking account program utilizing our “Best Practices” including newer benefits, training, incentives, goal setting.

Business Result: • Since that time we have seen 30%

growth rate in the program

• Currently we have • 1882 enrolled in

CheckMax/CheckMax Plus Account

• 19% penetration rate

Client - Credit Union in Midwest • 10K Checking Accounts • 19,000 members


Conclusion


Re-designing accounts and acquiring profitable members can…

Deliver deeper and more profitable member relationships (Increased ROI and LTV)

Improve member satisfaction

Lengthen tenured member relationships

Heighten frequency of member interaction

Reduce operating expenses

Generate incremental fee income

Increase member acquisition

Offers that resonate to the member

Communicate via the member preferred channel


Thank You

Wayne Conte

[email protected]

(615) 764-2537

www.affiniongroup.com

Questions

mailto:[email protected]

