Recently, I was made aware of a credit union who was written up by a NCUA examiner for not having any branch accounting strategies. This was the first time that I had ever heard of a credit union being written up for not having a branch accounting policy/procedure.
Branch accounting, in general, is a consultant’s dream. (Or conversely, a nightmare.) There are dozens of strategies that credit unions can consider; below you will find some considerations and pitfalls for a branch accounting strategy.
Administration/corporate branch (and/or other pseudo-branches)
If a branch accounting strategy is of interest, and the desire is a true representation of income/expenses by branch, there needs to be a discussion related to corporate/administration expenses. Should corporate income/expense be allocated to all branches based upon the percentage of members associated with each branch (or another strategy)? Or should corporate income/expense be allocated to its own branch for the purpose of reviewing these dollar amounts independent of each physical location?
Credit unions historically have also considered pseudo-branches (i.e. a branch configuration for a non-physical location) to assign members to. Ultimately there are other methodologies that can be used to group members together for analysis and review, but some credit unions have been a huge fan of creating a branch or cost center for specific areas of their business.
For example, a credit union may desire to assign all members who open their membership online to a branch that is only for members who joined online. But there are challenges with this strategy because even though the member joined/opened their membership online, this may not truly indicate how the member wishes to do business with their credit union. They may simply have wanted to open a membership online over the weekend when the credit union lobby was not open for business.
The pseudo-branch concept is also a struggle for many because it is difficult to answer the questions that would require a member to be reassigned (see more about reassignment strategies below). For example, when is an online member no longer considered an online member? Is it when the member performs more in-person/teller transactions than digital transactions? Is it when the member comes into a branch to work with a loan officer for a new auto loan? There are many different variables to consider and most credit unions are not getting very aggressive with defining and then following the rules. Other pseudo-branches that have been considered by credit unions are a call center branch or a self-service member, which indicates the member conducts the majority of their transactions on their own without the assistance of a credit union employee.
If I were to create a pseudo branch for self-service members, I may use the following outline for my policies and procedures:
- All members who join and fund their membership from online/mobile/self-service tools will be assigned to the pseudo branch for self-service members.
- Each month an analysis will occur to determine how many non-self-service members perform more transactions on their own (ACH, online banking, mobile banking, plastics, etc.) without the need of a credit union employee. If the member performs X% of their transactions using those tools and performs no in-person transactions, this member would be assigned to the pseudo branch for self-service members.
- Each month an analysis will occur to determine how many self-service members perform more transactions with a credit union employee. Therefore, if the member’s in-person transactions account for X% of their transactions, this member should be reassigned to the branch where their activity occurs the most.
And every month the analyses outlined above would need to occur to ensure that the appropriate members are assigned to the pseudo-branch for self-service members. As soon as the “chain” and the operations of analyzing the membership do not occur, the value of having the correct members assigned diminishes.
Branch reassignment strategies
Many credit unions who pursue some portion of their operations for branch accounting, consider reassigning member branches. The most common branch reassignment strategy is to reassign members based upon where they conduct their business (i.e. predominantly in-person vs. online). But there are other reassignment strategies to potentially consider.
The second most popular strategy for reassigning members is based upon where they live. But often, credit unions struggle with this because either their branches are too close together to truly draw a hard line in the sand for which branch a member should be associated with, or because the credit union believes that members conduct business with branches that are closer to their place of employment rather than their residential address. Other branch reassignment strategies are possible, and the options are endless.
Because the branch associated with a member can be maintained, there at least needs to be a conversation related to data governance. There should be an ongoing review of all member branch maintenance performed by employees to ensure that there is no maintenance that is skewing the results of the overall branch’s performance.
In a recent conversation with a credit union, it was discovered that a loan interviewer was adjusting the branch associated with the membership for every loan they interacted with. Although the intentions were there to adjust a member’s branch presence based upon a recent interaction, this maintenance did not meet the credit union’s standards for the branch that is associated with the membership. Therefore, it is incredibly important to understand your credit union’s current operations.
The branch that is assigned to a member may not be the only resource for understanding the habits of a member. For example, if a credit union desired to understand which members are using self-service tools more often than in-person tools, that can easily be done without reassigning a member to a specific branch. You could simply study the number and dollar amount of transactions being completed by members and determine if they happen to be using self-service tools more often than in-person tools. Arming yourself with this information may simply alter your business plans and budgets of the future because you may find that more members than you think happen to be using the self-service tools that your credit union offers.
In the end, your credit union needs to consider whether you wish to have a financial statement for every branch and every segment of your business that you may consider a cost center. There are multiple strategies that are available and sometimes it does not necessarily need to include a branch definition. Sometimes, a simple study of how your members interact with existing tools may allow your credit union to have some fruitful conversations on where dollars are being spent and made.