Let the member do it

Self-service delivery channels keep costs low, service high

Moving members to self-service channels can reduce costs, improve productivity, and deliver higher service quality. But to make it work, credit unions must be willing to move beyond the delivery channels they've relied on for more than 70 years.

Pennsylvania State Employees Credit Union, Harrisburg, Pa., is reaping the benefits of self-- service banking. The $1.9 billion asset credit union uses its headquarters and one small branch to serve more than 270,000 members throughout its home state, the U.S., and the world.

For the past two decades, Pennsylvania State Employees has relied on self-service channels to increase its services and strengthen its financial condition. In 1991, the credit union had only $20 million in capital, or 2.75% of total assets. Today, its capital exceeds $180 million, or 9.5% of total assets.

At the same time, the credit union improved its ability to attract and retain another type of asset-employees. Credit union employees enjoy salaries and benefits that are more than $9,000, or 21%, higher on average than employees in peer credit unions (Table I).

Yet technology-related savings on labor costs add up to more than $6.1 million each year, which translates into a 26% savings over peer credit unions.

The credit union achieves these savings because self-service delivery channels allow employees to serve more members. Every full-time equivalent (FTE) employee serves about 622 members, compared with 407 members per FTE at peer credit unions, according to September 2002 National Credit Union Administration call report data. In other words, peer credit unions must have approximately 670 FTEs to serve the same number of members that 439 FTEs serve at Pennsylvania State Employees.

BRANCHES VS. VIRTUAL

Pennsylvania State Employees' executive leadership firmly believes in the self-service approach, which replaces the branch with high-tech member services.

To understand the differences, consider this hypothetical question. If you were forming a new credit union, which course would you take: the traditional branch operation or the less traditional, "virtual" operation?

For those who prefer the traditional approach, here are more questions:

* Where will you create your competitive advantage?

* Will contractors build your branches for less than your competitors' just because you're a credit union?

* Will suppliers sell you computers, office supplies, and other essential materials for less because you're a credit union?

* Will employees work for less?

* Will members accept lower dividends or higher loan rates?

Thoughtful answers to these questions will reveal the advantages of a high-tech approach. One advantage is that it allows credit unions to keep fees in check.

Credit union members traditionally have enjoyed low or no account fees. Pennsylvania State Employees' focus on member self-service and employee productivity has allowed it to restrain fees. Today, member fees account for 3% or less of the credit union's gross income, compared with 10% at peer credit unions.

DELIVERING VALUE

At Pennsylvania State Employees, members benefit from products that deliver solid consumer values. These products combine traditional credit union advantages with the new opportunities of self-service channels.

For example, the credit union still provides members an interest-bearing share draft account with no minimum balance and no monthly fees. According to the most recent Federal Reserve Board report to Congress on financial institution fees, only 0.9% of the banks and thrifts surveyed still offer free interest-bearing accounts. Members also receive free checks, which cost the credit union about $700,000 in 2002.

But Pennsylvania State Employees takes the member benefit several levels higher. In addition to eliminating monthly or minimum-balance fees, the credit union doesn't charge members for automated teller machine (ATM) use. Members receive 15 free ATM transactions per month regardless of whether transactions occur at a Pennsylvania State Employees ATM or a foreign terminal. Members can claim up to $4 per month in ATM surcharge rebates if they pay surcharges to other financial institutions. In 2002, Pennsylvania State Employees refunded more than $3.2 million in surcharges to members.

While these strategies leverage credit unions' traditional advantages for members, Pennsylvania State Employees takes a nontraditional approach to branch offices. Many credit unions may believe quality member service is defined by their willingness to respond to members' requests, including the creation of new branch offices.

This would be an expensive strategy for Pennsylvania State Employees. Responding to members' requests in this manner would force the credit union to operate branches throughout the state, because members live in every county of Pennsylvania. It also would increase the credit union's per-transaction cost because each face-to-face teller session costs about $2.50 per transaction, compared with just 50 cents at an ATM.

As an alternative to scattering branches, Pennsylvania State Employees gives members access to self-service channels that reduce costs for members and the credit union. To boost acceptance, the credit union concentrates on teaching members how to use self-service channels. Much of its marketing effort focuses on educating members about how to do business without traveling to a branch office. These efforts help members understand that once they learn to use self-service channels, they can go practically anywhere and still maintain their Pennsylvania State Employees accounts.

MAKING DEPOSITS FROM AFAR

Twenty-five years ago, Pennsylvania State Employees was a $6 million asset credit union. Deposits at ATMs were a critical factor in the credit union's growth to its current asset size of $1.9 billion.

The credit union uses the MAC/ STAR ATM Network. In Pennsylvania, most financial institutions using this network participate in "deposit sharing," which allows members to make deposits at nearly 3,200 ATMs around the state.

Pennsylvania State Employees absorbs transaction fees linked to members' use of foreign ATMs, so there's no cost to the members. Members get immediate availability of ATM deposits, so they don't experience a lag between the deposit and access to their funds.

The ATM channel has become Pennsylvania State Employees' second-largest deposit channel following direct deposit (Table II). In 2001, ATMs collected nearly 2.1 million deposits totaling nearly $2 billion. While there's a deposit interchange fee for using another institution's ATM, it's still lower than the cost of a live teller transaction.

Relying on ATMs for deposits, however, can create other concerns. For example, there was a possibility that some MAC/STAR financial institutions might drop the deposit-sharing program, which would reduce access for members.

While a few institutions did so, a larger threat to the ATM deposit program came from fee increases. At the beginning of 2002, the MAC/STAR network increased the deposit interchange fee from $1.10 to $2.25 at offpremises ATMs. Assuming the same transaction levels, the 100% fee increase shaved more than $2.5 million from Pennsylvania State Employees' bottom line in 2002.

Aware that changes in network participation or fees could pose a threat, Pennsylvania State Employees considered alternatives to ATM deposits in strategic planning meetings for several years. The result is UPost@Home, developed by the credit union's card services and information technology (IT) staffs.

UPost@Home allows members to contact the credit union online to have deposits they've mailed to the credit union posted immediately. That gives members immediate availability to funds they deposit by mail, just as they have with ATM deposits.

When Tom Ruback, card services vice president, initially proposed UPost@Home, Pennsylvania State Employees executives were skeptical due to the risks of providing immediate availability to mailed deposits. But when they compared UPost@Home to the ATM program, offering immediate availability made sense for the credit union.

Through ATM deposits, the credit union already offered immediate availability to funds it didn't receive for four to six days. Cost comparisons showed that even with the cost of advancing funds to members, the credit union's UPost@Home cost is about $1.16. With the ATM deposit interchange fee increasing to $2.25 at off-premises ATMs in 2002, converting members to UPost@Home helped shepherd members into less-costly service channels.

Comparisons are similar when weighing the advantages of other selfservice programs. Executives sometimes joke that the credit union's motto could be, "Let the member do it."

For example, Pennsylvania State Employees' internally developed home banking software enables the credit union to offer a free online banking service called psecu@home. In addition to performing standard transactions, credit union members can retrieve copies of share draft images and member statements, which are accessible online for more than two years.

They also can use the online service to purchase share certificates and process stop-payments on outstanding checks.

Pennsylvania State Employees recently added online deposit images, an e-mail alert system to notify members when certain account activity occurs, an OFX server for Quicken/Money integration, and an online payroll distribution module that lets members allocate their payroll among accounts.

All self-service programs are available 24 hours a day, seven days a week, thus extending high levels of member service. At the same time, self-service options reduce demand on employees who otherwise would perform these functions.

MORE LOANS, BETTER SERVICE

Lending is another example of how Pennsylvania State Employees successfully has created self-service systems that boost employee productivity while improving service quality.

The credit union introduced an online consumer loan application in 1998 with a system developed primarily by internal IT staff.

A year later, it rolled out an interactive version of the program, which responds to members' applications in 30 seconds or less. Pennsylvania State Employees currently is working on the third version of this software, which it plans to deploy in 2003.

William Zysk, credit services vice president, notes that more than 46% of Pennsylvania State Employees' monthly consumer loan volume flows through the Internet. Members use the Internet for 70% of their first mortgage and home equity applications.

The system's success has helped create a continuing improvement in both employee productivity and loan volume.

The credit services department has reduced its staff size through attrition despite the growth in volume (Table III). In 1996, staff processed nearly 44,000 loans. In 2002, the credit union processed 65,000 loans with a 20% smaller staff.

These gains were achieved while improving member service levels. The new lending system shortened the issuing time for approved loans from one to two days to one to two hours. In the local mailing area, members routinely receive approved loan paperwork the next day.

Members who received the 20,000 auto loans Pennsylvania State Employees issued in 2002 received a CUNA Mutual Group Loanliner package that included a negotiable draft. Members receive everything they need to activate the auto loan in that first mailing without having to seek preapproval or work with the credit union to create a plan in advance.

The member's signature on the check forms the contract, guarantees the title for the credit union, and meets other requirements.

When the loan draft clears, a member services representative uses another program to post the draft in two to three minutes.

Before the Pennsylvania State Employees developed the system, the process took 10 to 15 minutes to book the loan and then handle the payment process, title work, and other necessary steps.

ADAPTING THE SELF-SERVICE MODEL

Like other self-service programs, online lending works because it offers clear benefits to members and the credit union.

In the future, self-service channels that deliver the same combination of value and convenience will continue to play an important role in Pennsylvania State Employees' success.

While Pennsylvania State Employees' efforts prove that an automated credit union can experience significant success, it's impossible to predict what every credit union of the future will look like.

Instead, the branch-less, high-tech model Pennsylvania State Employees developed is an example of what credit unions can achieve by offering excellent member service through self-service delivery channels.

Greg Smith is CEO of Pennsylvania State Employees Credit Union, Harrisburg, Pa. Contact him at 717-777-2300 or at gsmith@psecu.com.

Copyright Credit Union National Association, Inc. Mar 2003
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