By Bill Handel, Vice President of Research and Product Development, Raddon Financial Group

The credit union industry strives to provide members with the best possible service. Many credit unions make a significant investment in training front-line staff to exceed member expectations. In addition, many credit unions provide a significant rate-based benefit to members in hopes of increasing member loyalty and establishing a strong primary financial relationship with the member.

But, does all of the time and money spent on elevating the member experience really pay-off? For every dollar a credit union spends on member loyalty, what return can it expect?

Until recently, it has been difficult to assess the financial gain or “lift” generated from member satisfaction. In a study conducted over the summer of 2006, Raddon Financial Group (RFG) surveyed 93,000 members representing 117 credit unions to examine the concept of member loyalty. To provide a consistent means for comparing and benchmarking a credit union’s relative member loyalty to that of other credit unions, RFG created a proprietary metric called the RFG Loyalty Index.

The RFG Loyalty Index is based on these four factors:

1. Members’ willingness to give the credit union all future loan business

2. Members’ willingness to give the credit union all future deposit business

3. Overall member satisfaction with the credit union

4. Members’ likelihood to recommend the credit union to friends and family

Independently these four measures do not truly assess member loyalty. For example, a member can be “highly satisfied” with a credit union, but hold a majority of their accounts and balances with competitors and would defect completely for a slightly better rate. Tying all these factors together to create the RFG Loyalty Index produces a more accurate measure, suitable for benchmarking and trending.

To measure the value of member loyalty, RFG set-out to answer these questions:

1. Does higher member loyalty translate into higher loan and deposit balances?

2. What correlation exists between loyalty and service satisfaction?

3. Is there a correlation between financial performance and member loyalty?

Question #1 (Does higher member loyalty translate into higher loan and deposit balances?) is answered in the following table. RFG found that credit unions with a high RFG Loyalty Index control a much higher percentage of their members’ deposit and loan balances; the most significant increase is found in comparing credit unions with low loyalty to credit unions with a high RFG Loyalty Index.

In question #2 (What correlation exists between loyalty and service satisfaction?) RFG also discovered a strong correlation. Credit unions with a high RFG Loyalty Index have 64% of their members indicate they are very satisfied; credit unions with a low RFG Loyalty Index only have 51% of their members indicate they are very satisfied.

The last question is the most important: Is there a correlation between financial performance and member loyalty?

To answer this question, RFG needed a reliable measure of a credit union’s financial performance. RFG used the RFG Performance Index, a percentile ranking of over 565 credit unions based on a combination of earnings, growth, efficiency, margins, fees and balances. Each credit union was ranked using the RFG Performance Index. When analyzed side-by-side, RFG found that credit unions with a high RFG Loyalty Index also had a high RFG Performance Index, scoring in the top 90th percentile of all credit unions analyzed. Credit unions with an average RFG Loyalty Index score also had average financial performance, scoring in the 50th percentile.

The RFG study points to a clear correlation between member loyalty and the financial performance of the credit union. The more loyal a credit union’s members, the higher a credit union’s earnings will be. With this conclusion, it may be fair to suggest that all credit unions should focus on improving member loyalty; but how?

So What Drives Member Loyalty?
For each credit union the answer is different. Most credit unions believe they are unique organizations, serving distinctive markets and serving a collection of members unlike any other. This is especially true when it comes to how a credit union’s members perceive the credit union. Improving member loyalty takes an understanding of what drives loyalty within a credit union’s unique market and member base. Pricing or the breadth of products offered may be the most considerable driver of loyalty for some credit unions; for others it may be leading-edge electronic delivery channels or offering the most convenient branch locations in the area. For some credit unions, loyalty may be generated through their employees’ interactions with members to create a positive member experience. RFG has found many different combinations of factors work to build member loyalty for a credit union. RFG recommends credit unions conduct a member survey to really understand what truly drives member loyalty for their organization.

RFG conducts this type of research for over 250 credit unions each year through the CEO Member Survey program. Among other things, RFG’s member surveys show credit unions how to improve member loyalty by evaluating 20 unique service quality attributes. For more information about RFG’s member survey programs, call 800.827.3500 or visit http://www.raddon.com/survey.

About the Author
Bill Handel is the Vice President of Product Development with RFG. Bill graduated from Kenyon College in 1980 with a degree in Economics. He has worked in the financial services industry since that time, primarily as a consultant in the area of product development and management. Since joining RFG in 1990, he has developed several unique programs to assist financial institutions in the management of their product lines. To contact Bill, call 800.827.3500 ext. 364 or email bhandel@raddon.com.

About RFG
RFG has been providing research-based solutions exclusively to the financial industry since 1983. RFG understands the industry and knows how consumers interact with financial institutions. By using best practices in research, analysis and trends to create member intelligence, RFG plays a key role in helping credit unions manage their member relationships and their organizations.