When assessing the health and growth opportunities of their credit union, boards should pay attention to an often overlooked and typically underappreciated metric: efficiency ratio, the balance of expenses to revenue.
On those occasions when efficiency ratio does enter the conversation, many organizations tend to focus only on one half of the equation—reducing expenses to improve performance. But that’s just the easy play. Credit unions with vision recognize the most sustainable strategies rely on using efficiency to grow revenue.
Banks traditionally have prioritized efficiency ratio, making it a critical scorecard metric. As a result, publicly owned banks strive for an efficiency ratio around 0.55
(meaning it costs 55 cents to generate $1 of revenue), while credit unions average a 0.66 ratio and have a 0.81 median, according to CUNA economists.
Efficiency naturally commands less attention when credit unions experience strong, consistent earnings and boast solid capital. But persistent earnings pressure, tightening margins, and considerable regulatory and compliance burdens have placed a premium on new growth strategies.
The best strategy involves a thorough, cross-departmental effort guided by a consultant that identifies a handful of objectives that promise the most significant return.
Credit union executives set parameters for the project, which optimally lasts three months, then refine the proposed changes, enact implementation strategies, and work with the consultant to ensure completion.
But executives don’t do the heavy lifting. Instead, they entrust staff to devise solutions that generate better results.
The consultant focuses a select group of employees on a handful of critical operational processes in which they’re not directly involved and teaches them how to identify possible improvements. Results include optimized lending processes, enhanced new account openings, and streamlined teller procedures.
The payoff lies in improved member satisfaction, employee teamwork and morale, and consistency across delivery channels.
Imagine the compounding bottom-line impact of financial services representatives having more time to engage members in sales conversations instead of inputting data into multiple platforms, or being able to close car loans faster and get checks into members’ hands more quickly than the competition. And think about managers having more availability to coach and motivate their staff to higher levels of service and production.
Consider these examples of efficiency initiatives:
►A $500 million asset credit union failed to carry 20% of loan applications through the pipeline and didn’t process many others. The vice president of lending wanted to add six employees to handle the heavy volume. Instead, the existing staff analyzed its output, re-engineered the process, and realized a 60% increase in closed loans.
►The account opening process at a $250 million asset credit union required 155 steps and took as long as 57 minutes. The credit union eliminated 33 of the most laborious steps, trimming 40% of the time. Staff engaged members in better conversations, their cross-sell ratios improved dramatically, and their onboarding steps realized significant improvement.
►The procedures at a $900 million asset credit union required teller supervisors to spend almost 500 hours a year counting incoming cash, and found just $10 in outages. By eliminating that monotonous act, supervisors could spend more time coaching their tellers to generate more referrals and offer better service.
Simply by paying greater attention to the drivers of efficiency ratio, credit unions have realized sustained bottom-line financial and service improvements.
PAUL ROBERT is the chief consulting officer for FI Strategies, LLC, which facilitates organizational efficiency initiatives through its Process Analysis & Optimization program. Contact him at email@example.com or 636-578-3280.
This article initially appeared in Credit Union Directors Newsletter, which provides strategic insights for policy makers.