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

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

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

Industry Update

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

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

Legislation and regulation continue to be
game-changing.

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

June 2010 Accenture study across 35 retail banking institutions


Next
13 Billion
Legislation. . .
11 Billion

?
Durbin
Amendment
9 Billion

7 Billion
5 Billion
Reg E
3 Billion
1 Billion


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


Regulatory environment threatens revenue sources

Checking Account Revenues 2008*: $68.1B

*2009 total and breakdown expected to show little change.

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


Free Checking Profits are Dropping

$218 Opt-In
How do
-$30
you
replace
$188 Interchange
-$20
$68
of annual
$168 Future Regs revenue?
-$18
($5.66/mo)

$150

Revenue pressures from legal and regulatory
developments were exacerbated by ongoing
consumer behavior trends.


Members expect more from their financial institutions

39% 94%
Don‟t want all of their accounts Believe trust is somewhat or
in one place because they very important in choosing a FI.
don’t trust financial
companies.*

80% 64%
Plan to permanently increase Want to learn more about
the amount of money they managing their finances.**
save.*
*Members with $100K+ household income
**Members age 18-24

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


Banks Making Satisfaction Comeback

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:
790

782
780
779
Small Banks improved from 779 to 782
770
764
760 Small Banks
759
Medium Banks
750
Medium Banks improved from 759 to 764 746 Large Banks

740 741

730

Large Banks improved 741 to 746 720
1 2

J.D. Power & Associates May 2011


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


Embedded Configurations “At a Glance”

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

• ID Theft Insurance • ID Theft Insurance • AD&D Insurance
• Everywhere Cash Savings • Music Downloads & More • Common Carrier
• Everyday Rebate Rewards • Everywhere Cash Savings • Destination Discounts
• Coupon Book
• Everywhere Cash Savings

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

i.e. i.e. i.e.
• Enrollment in E-Statements • Enrollment in E-Statements • Free order of checks
• Online Bill Pay • Online Bill Pay • Safe Deposit Box discounts
• Online Bill Pay

Estimated Revenue – Assuming 10K Estimated Revenue – Assuming 10K Estimated Revenue – Assuming 10K
Accounts Accounts Accounts

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


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?


Decision Point

Financial Institutions

STATUS QUO DECISION POINT INNOVATION

RISK VS. REWARD REWARD VS. RISK


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

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

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.

Improved Greater
member tenured
Satisfaction member
relationships
Deeper &
more Heightened
profitable frequency of
member member
relationship interaction
s (increased
LTV)

Increased
member Member Reduced
operating
acquisition
Checking expenses


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 Going paperless with
daily balance of $X electronic statements

Having “X” signature- Enrolling in
based transactions online bill pay

Enrolling in Signing up for
online banking direct deposit

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


Sample Account Behavior Scenarios

Scenario A: $6.00 monthly account fee, must meet all Scenario B: $8.00 monthly account fee, must meet all
5 account qualifiers, then all debit transactions are 4 account qualifiers and entire monthly fee is credited
rewarded with a $0.25/swipe credit

Signing up for Going paperless with Enrolling in Going paperless with
direct deposit electronic statements online bill pay electronic statements

Maintaining a minimum Enrolling in Signing up for Minimum of 15 debit
daily balance of $100 online bill pay direct deposit card transactions

Enrolling in $0.25 credit for every
online banking debit card swipe

Example Outcomes
• 24 debit transactions = Full $6.00 credit to account
(member paid nothing!)
• 15 debit transactions = $3.75 credit to account

= qualifier behaviors = buy down behaviors


More Sample Scenarios

Scenario C: $8.00 monthly account fee, must meet all Scenario D: $7.00 monthly account fee, must meet all
3 account qualifiers, then all debit transactions OVER 4 account qualifiers and fee is reduced to $3.95 (partial
$10 are rewarded with a $0.50/swipe credit reward vs. full fee waiver)

Signing up for Going paperless with Maintaining a minimum Going paperless with
direct deposit electronic statements daily balance of $250 electronic statements

$0.50 credit for every
Maintaining a minimum Signing up for Enrolling in
debit card swipe OVER
daily balance of $100 direct deposit online bill pay
$10

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

= qualifier behaviors = buy down behaviors


Consumer Insights


Background/Objectives

 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


Methodology

 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)


Category Interest

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

Consumer Interest Index*

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)


Top Benefits Driving Acquisition
Likely to Switch or Open an Account with… (Compared to 2010 Research)
Individual Appeal
% 1.5x

% 1.3x

% 1.4x

% 1.5x


% 1.6x

% 1.5x


% 1.4x

% 1.1x

% 1.1x

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


Best “3-Benefit” Bundle

Everywhere Cash Everyday Rebate Payment Card
SavingsSM Rewards Protection

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

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


Best “5-Benefit” Bundle

Everywhere Everyday Rebate Payment Card Daily Credit Credit Reports
Cash SavingsSM Rewards Protection Monitoring and Scores

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

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


Consumers Accept Change

Likely behavior acceptance to keep free checking
% Definitely/Very Likely To Do In Order To Keep Free Checking…

Consumers are willing to
maintain certain behaviors
to keep their account free

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


Optimal Account Design

Everywhere Everyday Payment Daily Credit Credit Bill Pay or Online
Cash Rebate Card Monitoring Reports and Direct Banking
SavingsSM Rewards Protection Scores Deposit

Acceptance

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


Real Value to the Bottom Line

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

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

Average Balance
Tenure
Lifetime Value
Up to
2.5x
1.7x higher
longer 2.3x
higher
Fee Account, with Product Benefits

Free Checking

$600 -
3 years
$900
$480 per
year

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


In Summary

 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

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


Case Studies


Checking Account Case Study-
Moving From Free to Fee Checking

FI Business Results
Regional bank with 1,300 locations in the • Bank has over 210,000 active customers in
Midwest the identity theft program
• Bank cross sells over 38% of all new
Need accounts into the identity theft program
Initial need was to deliver an identity theft
solution to protect consumers and drive • Bank will generate $10.0 Million in net new
retention and non-interest income while revenue this year
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


Credit Union Success Story – Fee Income / Acquisition

Client Data – Western CU
• $620 Million in Assets
Business Result:
• Branches 20
• Members 56,000  20% cross-sale ratio in the first two
months (account launched in April)
Need:
To develop a brand new checking account designed  Nearly 20% of all new checking accounts
to create a competitive advantage, drive non-interest have at least one value-added package
income, and attract new members/accounts - all (year-end goal 50%)
while providing a valuable product that members
want and can design themselves.
Solution:  Program is trending 100 brand new
Create 6 different “Packages” ranging from credit checking accounts / week
and identity theft services to travel and shopping
discounts and services.
 “Credit Package” as been the most chosen
of all package options
Let members design their own account by choosing
the package(s) they want, for a nominal fee, to add
to their account.
 National media exposure: Forbes, Yahoo
Finance, CNBC
Leverage CU‟s strong sales culture as an opportunity
to maximize revenue and program penetration.


Credit Union Success Story –
Incremental Fee Income and Protection for Members
Client - Credit Union in SE
• $1.9B in assets
• 205,000 members
Business Result:
Client Need: • Credit Union launched the program with
Concerned about the ongoing threat of identity an initial direct mail campaign to
theft and wanted a comprehensive solution to offer 128,927 members
to members.
• Initial mailing achieved a 1.84%
Find alternative methods for incremental revenue response rate, equating to
by generating a predictable, recurring fee income approximately $151,000+ in annual
stream. incremental revenue for the Credit Union
Affinion Solution:
Create a comprehensive, robust identity theft solution • Follow-up mailing was sent to 106,809
designed to proactive mitigate fraud risk for members. Also members achieving a 1.03% response
provide personalized resolution and insurance to members rate
in the unlikely event fraud does occur.
• Approximate current monthly revenue to
Offer the solution in multiple distribution channels; in- the Credit Union based on all channels
branch, online and via direct mail, so members can interact is $21,000/mo
with the product in their preferred communication channels.
• = $252,000+ in annual incremental
Give members the opportunity to try the product at no revenue for the Credit Union
charge for 30 days with the opportunity to continue the
protection for a monthly charge of $9.95/month after the
trial period. 35

Credit Union Success Story – Upgrading Benefits

Business Result:
• Since that time we have seen 30%
Client - Credit Union in Midwest
growth rate in the program
• 10K Checking Accounts
• 19,000 members
• Currently we have
• 1882 enrolled in
Client Need: CheckMax/CheckMax Plus
Affinion client since 2001 and program was strong Account
but growth slowed in 2008. • 19% penetration rate

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.

36

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


Questions

Thank You

Wayne Conte
wconte@affiniongroup.com

(615) 764-2537

www.affiniongroup.com


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

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