With Changing Mortgage Market, Examine Vendor Contracts to Recoup Lost Fee Income
Firm Assists Credit Union with Achieving Seven-Basis Point ROA Improvement
Recently released Q2 results for nation-wide credit union performance show that credit unions are continuing to experience reduced fee income, due to less activity in mortgage refinancing and the slowdown of first mortgage lending.
The hard numbers reveal that mortgage lending volume may decline 40 percent in 2014, and YTD first mortgage originations shrank from $31.2 billion this time last year to $17.5 billion this year (Source: Mortgage Bankers Association). While we are seeing some bright areas and improvement in mortgage – such as increased market share in first mortgage, and delinquency and net charge-off rates at their lowest since Q1 2008 – credit unions are still seeing lower performance.
With these changing trends in the mortgage market, one step toward recovery is to pick up income in other areas. While credit unions can take a traditional approach, such as offering a new product or more extensively marketing the ones they have, another option is to look to outside sources for assistance in identifying ways to reduce expenses and generate revenue.
Whether the problem stems from losses due to reduced mortgage income or increased compliance costs, firms that specialize in bottom-line improvement can identify places to create additional funds for a credit union. Two credit unions that have increased income have looked to Strategic Resource Management (SRM), an independent consulting firm that assists its clients with maximizing financial performance. After working with SRM, both credit unions saw significant returns in areas related to card processing.
One of those credit unions is TwinStar Credit Union, based in Olympia, Wash. It serves more than 100,000 members in the Pacific Northwest and has particular business focuses on developing collaboration strategies with other credit unions and reducing cost through volume purchasing.
After SRM completed its project with TwinStar, the credit union experienced a seven-basis point boost to its return on assets for the fiscal year, with potentially more savings still to come. Through the examination of internal company processes and experience-driven, data-based vendor-contract negotiations, SRM makes this impact by utilizing its industry benchmark database and expertise in negotiation and process management.
Initially, because TwinStar has a strong vendor-management due diligence process, the company did not think consulting with a bottom-line enhancement firm would be an area of opportunity.
“We previously said no, but I spoke with an account executive from SRM who explained how the savings process works,” said Scott Daukas, vice president and COO of TwinStar Credit Union. “If SRM could negotiate just one contract, it would be a worthwhile endeavor, and our commitment would only be one of employee time. I figured the research would either validate our negotiations or give us a new perspective.”
Daukas said they discussed which contracts TwinStar would like reviewed. He realized the credit union had quite a few large agreements that may have been using an outdated price point, when current market trends were taken into account. One area SRM identified for revenue enhancement was card processing and related activities.
“That was a contract we felt we negotiated very effectively, and SRM validated that,” said Daukas. “But based on our scale, SRM identified that there was opportunity to bring in volume-based incentives, like a reduction in fees or rebates to drive our transaction levels. We were astounded by the dollar amount.”
Daukas said that SRM is more credit union-focused than its competitors and that SRM understood TwinStar’s needs and the nuances to its industry. SRM President Brad Downs agrees that there are opportunities specific to credit unions where SRM can help identify opportunities.
“Unlike banks, credit unions have a clientele that is more consumer than business-based,” said Downs. “SRM is especially successful in producing dollars in the areas of retail-payment processing, so it is not unusual to see substantial success with our credit union clients.”
Teachers Credit Union, the largest credit union in Indiana, also experienced additional revenue through working with one of these consulting firms. In addition to traditional financial services, the credit union also offers services such as travel, real estate and insurance.
Todd Brown, Chief Financial Officer of Teachers Credit Union, began using SRM’s services almost five years ago.
“After SRM looked at our contracts, they were able to uncover a significant amount of money,” said Brown. “SRM assessed our card-processing vendor relationships and uncovered an area where we could make a significant amount of money.”
After examining card processing, SRM looked at other vendor relationships, including telephone expenses and ATM processing. SRM President Brad Downs said SRM may also explore contracts in areas such as armored car service, ATM, Internet banking, bill pay and telecommunications.
“SRM has been able to deliver the results they said they would, and we have achieved returns, which is the most important thing,” said Brown. “They came in and looked at our contacts, and within a short amount of time, they showed us where we could find savings.”
Brown said an important part of the process for his credit union is that SRM provided them with options, rather than pressuring them to make a decision to stick with or change a vendor. Brown said the decisions he made as a result of SRM’s review led to significantly increased income.
“I don’t think people realize how much money SRM can actually generate,” said Brown. “Just the first project made a huge difference to our bottom line.”
There is no risk to the credit union when it is considering hiring an expert that specializes in improving financial performance. The credit union does not have to budget for the firm’s work, and there is no out-of-pocket expense. That’s because all fees are derived from savings to the client.
“Once we moved to the engagement process, there wasn’t much of an investment of time,” said Daukas. “SRM was on-site for a couple of days working with our team and looking at contracts. After that, negotiations happened quite quickly, and we received a report within a few weeks.”
When a company is considering working with a firm, sales representatives will meet with credit union decision makers, who are, typically, C-suite executives. The representative may discuss initial vendor areas it would like to explore and assess and present the areas where it can make the largest impact. The range of expectations for the savings or revenue enhancement dollar amount will typically depend on the size of the credit union.
If the credit union would like to move forward with negotiations, it decides which vendor categories it would like reviewed. Information will be collected by the firm, along with a presentation of estimated savings or opportunities for revenue enhancement.
Because SRM is an independent firm, it objectively presents empirical results and explains the facts and figures to the credit union.
“One thing we appreciated was that SRM didn’t waste our time with contracts where we couldn’t significantly save money,” said Daukas. “We had them review 15 areas, and they came back with a proposal of four contracts where they could make the biggest impact.”
If the credit union wants to move forward with the opportunities presented, the firm will implement its findings with the vendors. The majority of the time, the credit union will stay with its existing vendor, but with a better, optimized contract. SRM will then track the savings with the vendor and present a report to the client. After the client agrees to work with SRM, the vendor exploration and savings-implementation processes will take an average of 90 days to deliver savings or revenue enhancement.
So when a historically reliable source of fee income, like mortgage re-financing, begins to decrease due to changes in the market, credit unions can turn to other areas of their balance sheets to generate a positive impact. By diving into areas of potential revenue or decreased expenses, credit unions can make up for lost fee income by taking a close look at and enhancing vendor contacts. Firms like SRM are some of the best resources for identifying these opportunities.
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