The lottery, incentives and dividends.

Would you play the lottery if the winnings were taxed at 99%?  Do you think that most people would?  It seems like an easy question and an even easier answer, nearly rhetorical in fact.  Most people would not play the lottery if winnings were taxed at 99% because there is little incentive to do so.  Incentive plays a very large role in peoples’ lives.  So I ask you?  What incentive do your members have to use your credit union?

What is incentive anyway?  A quick glance at Wikipedia provides more value than your typical entry.  It divides different incentive into different types.  For now, though, I’m looking for a more down and dirty working definition like the one from  “noun 1. something that incites or tends to incite to action or greater effort, as a reward offered for increased productivity.”

Now we are getting somewhere!  Before your eyes start glazing over as you figure I am going to talk about member rewards programs or other stuff like that, let me keep your attention a little longer.  If someone asked you:  “what’s the fastest way we can increase our assets at the credit union?”  Among your answers might be to raise the dividend rate.  That is a time-tested, proven method.  The incentive is huge to your members if they can get a rate of return that is safe and higher than other financial institutions’ rates.  Well duh, you might say.  Please stay with me.  How many financial institutions are structured around giving the highest rate of return possible?  Aha!  Not many.

In fact, I would submit to you that ruthless cost cutting in order to pay a higher dividend is a lost art among credit unions.  Publicly held banks may be a little closer to it because they need to meet the expectations of shareholders.  Even then, however, the value isn’t being given in terms of rate of returns on deposits, it’s being given to people who hold the stock.

If anyone is doing cost cutting today, in my observation, it is for two reasons:  profitability in a down economy and finding money to meet increased regulatory burdens.  Even ING, the darling of higher interest rates on accounts years ago, understands this especially after having to pay out an astonishing penalty for OFAC violations.

Ok, so what’s the point, Rob, where are you going with this?  Yes, let’s move to the dénouement.  How many surefire ways do you know of to bring members in the door?  How many incentives have you tried that actually work?  We could just raise dividend rates willy-nilly, but that’s not sustainable.  It costs real money and doing so without being careful is a real, honest-to-goodness threat to safety and soundness (as opposed to fearful thinking threats like interest rate risk on car loan portfolios as credit unions have been doing for 50 years, but I digress).  So, how can you raise dividend rates without a threat to safety and soundness?  Enlightened cost cutting.  I’m not talking about taking an axe to your credit union budget randomly, I’m talking about reprioritizing your credit union so that one of the main purposes of its existence is to maximize dividend rates to its members.  I’m talking about retooling the entire organizations’ way of thinking around it.

Isn’t this just a different spin on those credit unions that amount to just being savings clubs for members?  That’s actually not my point.  Some of those credit unions are fine institutions but innovation and trying new things may not be on the agenda in that environment.  I’m not talking about preserving a status quo, I’m talking about gearing services, loans, employee levels and brick and mortar around the dividend rate.  There is so little competition around dividend rates right now, that an uptick in rates even at a modest level would produce more assets.  If you can safely raise dividends, it might make your members feel like they won the lottery.


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