How Credit Unions Can Use Media to Avoid an NCUA Fine
Media is a means to an end. Smart retail businesses use it to achieve the strategic objectives of their organization. For most, that centers on the acquisition of new customers for the lowest amount per customer or the upsell of existing customers using the most cost efficient tactics. In the case of local credit unions, however, there is a third scenario in which they can use media to achieve a goal. Let me explain.
The beauty of credit unions is that they are not subject to federal income taxes unlike banks and can therefore offer better CD and loan rates to their members. The reality of this benefit is that credit unions are heavily regulated by the National Credit Union Association (NCUA) with frequent visits from NCUA examiners. One regulation I learned about a few months ago has positive implications for local media sales people.
A very engaging credit union president told me a story of how he used media (in this case, the newspaper) to drive cash into the credit union to cover his capital expenditure on a new branch. What he explained is that the NCUA regulates the amount of cash a credit union has on hand when making a large capital expenditure like the building or renovating of a branch. Every credit union must have a set percentage of the capital expenditure available, so if the construction costs of a new branch are estimated at $2 million, the president must ensure that he has this set percentage of that $2 million available. Smart credit unions leaders realize that many construction projects go over budget, so they take measures to ensure that the money they have on hand covers that larger construction expense.
So the story goes that this particular credit union paid out a half point higher on a CD rate than their competitors were offering at the time to drive cash quickly into their credit union. It cost them more money to offer this rate, but that additional cost was smaller than the fine they would have incurred from the NCUA if they hadn’t met their obligation to have the right percentage of the capital expenditure for the new branch on hand. Thus, this smart credit union president spent a little money in paid media to save a lot of money in fines. What he realized after we went through the math of media is that he could have been even smarter if he had used retail television to market that CD rate in lieu of the newspaper because the former speaks to prospective members and existing members at a lower cost per thousand.
Here’s how you can make your own money with this knowledge. As you work with or prospect new credit unions, ask if they are planning a major renovation or new branch addition. If so, share how you can help them speak to more consumers for less about their CD rate because they may have a need to drive cash into their fold to cover the costs of adding on.
If you don’t come across any credit unions investing in the construction of new branches, don’t worry. Overall, credit unions must be 7% capitalized, or have 7% net worth to total assets, compared to banks which need to be 4% capitalized. If you ask a credit union president how capitalized they are and get a response of 10% or higher, they will likely be great pay and are potentially on the hunt to buy smaller credit unions because they have the capital to do it. These well-positioned credit unions may also be able to steal from their own deep pockets to grab market share with very competitive rates. It just depends on how aggressive their membership goals are. For those who are undercapitalized, i.e. under 7%, they need to drive cash in with CD events.
With the state of our financial system right now, credit unions are positioned to expand their market share as they offer an alternative to the banks that consumers increasingly distrust. The smart credit unions will realize that no matter if they are expanding, remodeling or just managing their loan to asset ratios, they can acquire new members for less with retail broadcast television.
Jodi de Riszner is a media and retail strategist in the firm ESA & Company, based in Red Bank, New Jersey. She lives in Buffalo, where images of sunshine dance in her head.
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ESA & Company is the nation's premier retail advertising consultancy. Founded in 1981, the firm works in over 70 U.S. media markets with thousands of local advertisers each calendar year. ESA campaigns are designed to deliver market share gains with a declining cost of new customer acquisition.
There’s a big difference between “deposits” and “capital.”
“Deposits” are members’ money. Whether those deposits are made in checking accounts, savings accounts or CD, that money belongs to the member, not the credit union. On the credit union’s balance sheet, deposits show up as “liabilities” (not as “assets,” as your article suggests). Members are essentially lending their money to the credit union, but they expect it back.
Financial institutions don’t make money off deposits unless they (1) charge fees, like Overdraft fees or Early Withdrawal Penalties, or (2) lend that money out to someone else.
“Capital” is the credit union’s money. Capital is the profits the credit union has made from fees and lending activities. If the credit union wants to do something, like build a branch, they have to use their capital. They can’t use members’ deposits to build their branch. The NCUA requires credit unions to maintain a 7% “capital ratio.” These are the credit union’s “capital reserves.”
Example: If a credit union has $100 million in deposits, the NCUA requires the credit union have at least 7% of that in its OWN bank account. That means the credit union must have $7 million in its own profits in its own bank account. If a new member walked in the door and made a $10 million deposit, it’s not like the credit union can just plop that money into its own bank account… “Voila! We now have $17 million of our OWN money in capital reserves!” It doesn’t work like that. The member’s $10 million deposit represents an IOU from the credit union to the member. It’s the member’s money, s/he is just letting the credit union use that money temporarily.
But now the credit union has $110 million in deposits, so the NCUA expects them to have $7.7 million in capital reserves. The only way to do that is to make a profit on by (1) charging fees, or (2) making loans.
Bottom Line: New members making lots of deposits with a credit union does not have any automatic positive effect on the health or stability of that credit union. If a credit union is unprofitable and has a crappy cap ratio, a flood of new money will not save it. It will simply continue to lose even more money faster.
Thanks for your comments, Jeffry. You’re absolutely right in pointing out that I was using the word assets in lieu of deposits when that is not accurate. I will modify the blog to reflect your comments and appreciate you keeping me on target here. So if a credit union wants to undertake a branch remodel or addition, they must ensure they can maintain their 7% capitalization rate despite having to use some of their capital reserves to pay for the project. Thus, they may still need to use media to do a CD push to drive deposits into the credit union so they can rebuild their capital reserves with fee income from turning around and loaning out those new deposits. Thanks again. – Jodi