MADISON, Wis. (7/29/13)--At the base of a member's credit union relationship lies the promise of surplus--whatever a credit union earns in excess of its expenses is to be used on behalf of or returned to members, says a new Filene Research Institute report.
Beyond deposit-based dividends, members extend implicit flexibility to boards and managers about how that shared surplus should be used, said the report, "Patronage, Loyalty, and Credit Unions' Shared Surplus," by Daniel Cote, a professor at HEC Montreal.
Most members don't think of the surplus as theirs, because most credit unions don't talk about it that way. However, credit union leaders, as stewards, should think about that surplus and how it should be used to grow, to deliver value to, and to strengthen the cooperative, said Filene.
The report was produced in partnership with Credit Union Central of Canada, and challenges readers to consider how practices like patronage dividends, incentive programs, and strategic use of the surplus can engender loyalty and strengthen the credit union.
The first part examines the academic research behind loyalty, including Cote's own thinking about how a "new cooperative paradigm" can invigorate credit unions that cultivate loyalty.
The second part analyzes how three Canadian and three U.S. credit unions use their surpluses--in very different ways--to return value to members.
The report says the implications for credit unions are:
Shared surplus is a productive way to think about member value, economic or otherwise. The simplest way to return shared surplus is in extraordinary dividends, but just as valid are the approaches where the surplus is deliberately reinvested in a layered loyalty program that promotes patronage or even in a service delivery model that reinforces the brand.
Credit unions should pay more than lip service to loyalty. In a competitive environment, credit unions have a strategic advantage of being able to use surplus profits in a way that generates loyalty. Loyalty programs from both the literature and the report's case studies serve the needs of members and of the credit union as an institution. Members benefit from an improved value proposition, while the credit unions improve their competitive position and create incentives that are good enough to change the behavior of their members without eroding their profit margins.
Rewards-based loyalty programs are not costly to operate. The main component of the budget to set up and maintain such a program is tied to the cost of rewards themselves. More salient are the design behind the program and how a patronage- or loyalty-based program will encourage deeper interaction with the credit union. Some of the case studies describe large, sophisticated credit unions, but others show that being small does not prevent running effective loyalty or rewards programs.
To access the report, use the link.