Product profitability
How does one measure a financial service’s profitability? Do you fully allocate the expense of the organization to each product, or let each product fly on it’s own? If each product is on it’s own, then CD’s, for example, will always be “unprofitable”.
You could use a replacement rate to calculate profit. If you have $5M in 9 month CD’s at 4.5% and borrowing from a corporate or FHLB is at 5.5%, then you’re saving that 1% spread.
Loans are a little easier. Simplistically, the rate of the loan portfolio minus write-offs would get you close to where you need to be. I think that the only way to effectively measure deposit profitability is to use the replacement rate mentality. If you had to fund your loans with 5.5% borrowings from the FHLB or 4.5% from your members, the answer is pretty obvious.
But how much money is 100 new checking accounts worth to a CU? What about 1000 more money market accounts???
Sometimes I wish we were selling widgets. Sold widget ABC for $1 and it cost 50 cents to make. It is pretty easy to figure the profit out on that one.
CUs’ sales culture should emphasize members’ increased usage of their existing accounts, rather than putting the emphasis on selling more “special deals”.
It’s expensive to have a member keep buying products which they open because they are “on special”, then close the product when it no longer suits their needs. Some CUs which appear to be hungry for additional capital could make incentives for their additional members. Examples:
1. As a CD matures, offer the member a 0.25% rate bonus on the renewing CD when they bring in at least 50% new money to add to the renewing CD balance.
2. Restructure dividend rates on Share Savings accounts: instead of paying crummy 1% or lower rates to all members, or instead of paying high rates that discourage members from investing in CDs, provide a Premium Dividend bonust on the first $5000 in share savings, i.e. 3% rate on the first $5000 per member, then 1% rate on money above $5000. This is similar to what the online bank PC Banker offers on its e-Checking account (www.pcbanker.com). Provide the Premium Dividend share rate to members who have at least two other CU products, such as an existing checking account and Share Certificate.