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Young Members = Revenue

Young Members = Revenue

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Published by: REAL Solutions on Sep 12, 2009
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National Credit Union Youth Week
April 20-26, 2008
Do young members help or hurtyour bottom line? Conventional wis-dom says that young members costcredit unions money, but conventionalwisdom doesn’t always know what it’stalking about. The following statementsare all true:
In the short run,
membersunder age 18 are an expense tothe credit union
 As adults,
members nowunder age 18 will add more inrevenue than they subtract inexpense.
 As adults,
members nowunder age 18 will contribute agreater net revenue than theirage-mates who didn’t join untilafter age 18.
Nobody knows quite why C istrue.Few credit unions have challengedconventional wisdom on the supposed“unprofitability” of youth accounts.Even the most ardent youth advocatesacknowledge that they believe youthaccounts generate more expense thanrevenue. What motivates them is theoverriding belief that the benefits of raising financially literate youth justifyprogram costs. They’re convinced thatyoung members eventually become“profitable.” And they count on “con-sumer inertia” to keep young membersfrom switching financial institutionslater.But what if a credit union didn’t
to lose money on its young mem-bers? Then no credit union wouldhave an excuse not to have a robustyouth program. Here’s a statistical lookat the conventional wisdom of youth’s“unprofitability:”
Marginal contribution
The 2007 edition of 
in-troduced the concept of Marginal NetRevenue Contribution per Member(MNRC/M). MNRC/M equals total loaninterest paid
total fees paid
total interest and dividends earned (allper member).Some credit unions, such as the $1-billion University of Wisconsin CU(UWCU) in Madison, use theMNRC/M in strategic planning. UWCUmanagement and board consider theMNRC/M as a measure of the averagemember’s effect on the credit union’sbalance sheet. Groups of memberswith a negative MNRC/M (the savers)provide funds for growth, while theMNRC/M for the entire membershipindicates the degree to which UWCUborrowers add to accumulated earn-ings. At UWCU, the overall MNRC/Mis the annual gauge of the cooperative’shealth, which directly benefits all of itsmembers. Although the MNRC/M can be auseful tool for measuring annualprogress in overall profitability, to in-clude fees in the calculation compro-mises its value as a tool for assessingyoung members’ revenue contributions.That’s because many fees, such as NSFcharges, are punitive. Presumably acomprehensive youth program with aneducational component would producemore-financially literate adult memberswho make better money managementdecisions. They would be more likelyto avoid punitive fees, thereby reduc-ing total revenue. Mostly for that rea-son, this article will use the following,even-simpler, formula:
Marginal Contributionper Member (MC/M)= Total Loan InterestPaid per Member– Total Interest &Dividends Earnedper Member
 With the help of two credit unions,the $36-million Point Plus CU (StevensPoint, Wis.) and the $92-million Space Age FCU (Aurora, Colo.), we’ll showhow the Marginal Contributions perMember (MC/M) can begin to shedlight on young members’ supposedunprofitability.
Overall marginalcontributions permember
Figure 1 shows the MC/M for allcredit unions by asset size for Januarythrough September 2007. As you cansee, for the most part MC/Ms risesteadily as credit unions become larger(except for the $1 billion-plus creditunions). It’s tempting to conclude thatthe positive correlation between credit
Young Members=
by Steve Rick and Philip Heckman
Although the MC/M of Space Agemembers now under the age of 18 isnegative, it’s not only what I expect,but what I hope to see. We have astrong emphasis on saving, and theseresults tell me it’s paying off. Ouryouth MC/Ms become more nega-tive as our young members approachage 18. Their share balances aregrowing as they develop soundsaving habits.—John Faries, Space Age FCU
$050100150200$250Overall$1,000+500-1,000200-500100-20050-10020-5010-205-102-51-20.5- 1.0$0-0.5Asset Range (millions)
Fig. 1
Marginal Contribution per Member
(Interest Paid Minus Dividends Earned)
union asset size and MC/M is due toeconomies of scale. But the MC/Mdoes not include operational expenses,so efficiencies are not a factor in thistrend. Rather, as credit unions becomelarger, they tend to offer more sophisti-cated investment instruments that at-tract more member deposits that makepossible larger, more profitable loans,and higher MC/Ms.Figure 2 shows how the overallMC/Ms of our sample credit unionscompare. Point Plus’s average membercontributes less net revenue than theaverage member of similar-size creditunions. And compared to peer creditunions, Space Age’s average membermakes an above–average contribution.
MC/M by current ageand by age when joined
Comparing MC/Ms for youth andadult members supports conventionalwisdom. Clearly, young members as agroup are a current drag on both creditunions’ bottom lines (Fig. 3). The factthat youth make such a poor showingcompared to their elders is hardly sur-prising. After all, adults have signifi-cantly larger deposit accounts andmillions of dollars in profitable mort-gages and vehicle loans.But by not probing deeper than thisgross measure of “profitability,” creditunions that dismiss the value of youthprograms do an injustice to the rev-enue contributions that youth make af-ter age 18. Figure 4, which comparesmembers by the age at which they joined the credit union, reveals thatthose who became members as youthdo indeed make a positive contributionas adults. At first glance, Figure 4 also seemsto reinforce the conventional wisdomthat spending on youth doesn’t providea sufficient return on investment. How-ever, that conclusion ignores the fact
$050100150$200Space Age FCU’s PeersSpace Age FCUPoint Plus CU’s PeersPoint Plus CU
Space Age’s “core members” arethe ones we captured as youth.Figure 9 shows that the dividendsthat Space Age’s adult borrowers inthe 20-25 and 30-35 age groupsearned are significantly higher forthose who joined before they turned18, compared to those who joinedafter. They not only look to us forloans, but they also make up thecore deposits that we lend out and,ultimately, need to survive.—John Faries, Space Age FCU
-$50050100150200$250Now 18+Now <18Space Age FCUPoint Plus CU
-$50050100150200$250 Joined <18 Joined 18+Space Age FCUPoint Plus CU
Fig. 2
Marginal Contribution per Member Overall
Fig. 3
Marginal Contribution per Member Overallby Current Age
Fig. 4
Marginal Contribution per Member Overallby Age When Joined
National Credit Union Youth Week
April 20-26, 2008
that adults of all ages who joined
age 18 include a wider, more financiallydiverse, range of individuals. Conven-tional wisdom begins to crumble whenwe examine groups of adult membersin narrower age ranges.
MC/Ms of similar-ageadults who joined asminors
Figures 5, 6, and 7 compare theMC/Ms of adult members in three nar-row age groups by whether they oncewere youth members. Conventionalwisdom predicts that the adult contri-butions of former youth members neverexceed that of their age-mates who joined after age 18. And three of the sixcomparisons shown in Figures 5, 6, and7—where the green bars exceed the redbars in each Space Age pair—supportthis assumption.But consider former Point Plus CUyouth members. They defy conventionalwisdom by out-performing their age-mates in
all three age groups
(Figs. 5, 6and 7)—where the red bars exceed thegreen in each Point Plus pair. In otherwords, MC/Ms of like adults show thatyoung members are a significant rev-enue source for Point Plus CU, betterthan their age-mates who don’t join un-til later. As Point Plus CU’s experienceattests, youth can be worth pursuingand serving.Figures 8 and 9 go a step further bydisplaying the income and expense fac-tors that go into the Point Plus andSpace Age MC/Ms. Figure 8 shows that,in all three age groups, adults who joined Point Plus CU as youth (redbars) are better
than theirPoint Plus peers who don’t join untillater (green). And Figure 9 shows thatnearly all adults who joined eithercredit union as youth are better
than their fellow members of the sameage. The challenge is to identify thefactors that cause these effects and learnhow to influence them.
What MC/Ms suggest
Preliminary marginal contributionanalysis leads to the following conclusions:1.
Exploring youth “profitability” furtheris desirable
. First of all, MC/M compar-isons among more finely sliced membersubgroups over time will help zero inon what specific programs are mosteffective in raising more “profitable”members. For example, how wouldgraduation from a youth educationalprogram affect the MC/Ms of adults of the same age?Second, this preliminary MC/M analy-sis reveals nothing about what might beinfluencing adult financial behavior. Forexample, did the adult members who joined the credit union as youth do sobecause their parents have influentialcharacteristics in common?Finally, it’s important to make a distinc-tion between individual and groupMC/Ms. A positive and growing overallMC/M is the sign of a healthy credit
$050100150200250300350400$450 Joined 18+ Joined <18Space Age FCUPoint Plus CU
$050100150200250300350400$450 Joined 18+ Joined <18Space Age FCUPoint Plus CU
$050100150200250300350400$450 Joined 18+ Joined <18Space Age FCUPoint Plus CU
To remain viable a credit union needscontinuing streams of core depositorsand quality borrowers. Space Agerelies heavily on indirect lending.Many of these borrowers have aloan and a minimum par balanceshare account at the credit union, andthat’s it. This generates a marginalcontribution that’s much higher thanwe get from our “core members”alone. Although that’s nice to see, it’svital that we figure out how to getthem to move their deposits to us. Inthe meantime, these indirect borrow-ers provide the resources to offer theproducts and services that attract andretain youth, the core depositors whoview Space Age as their PFI [primaryfinancial institution].—John Faries, Space Age FCU
Fig. 5
Marginal Contribution perMember (Adults 20-25)by Age When Joined
Fig. 6
Marginal Contribution perMember (Adults 25-30)by Age When Joined
Fig. 7
Marginal Contribution perMember (Adults 30-35)by Age When Joined

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