The success of your credit union is intimately connected to the technology you choose and how it's applied. When it comes to credit unions operating as financial institutions versus technology institutions, the lines have become increasingly blurred. Credit union CEO's are progressively finding themselves operating more like CTO's. This may be an unwelcome amendment to their job description, but the nature of the business requires this balance to be found. A dangerous mistake that an executive who is not comfortable with technology can make is the mentality of “if it’s not broken, don’t fix it”. This can be a risky tactic, as ‘broken’ technologies are not always easily identifiable. Your credit union core system may work, but it could be creating inefficiencies that are not quite as obvious.
Is your credit union core software doing its job by creating more efficient processes, and not just simply 'working'? Consider these ratios as KPI's (Key Performance Indicators) of how your credit union's technology and architecture are keeping up with demand:
- Efficiency Ratio – The first tenet of technology used in business tells us that if we automate an already efficient operation, our efficiency will grow exponentially. The efficiency ratio is a key metric when it comes to measuring a technology’s effectiveness. It tells us how much operating expense is needed to create each revenue dollar. The lower your efficiency ratio, the better. The right technology should help your credit union achieve an efficiency ratio at or below 70%. This would mean it takes $0.70 to generate $1.00 of income. A 70% efficiency ratio is possible and would put your credit union in the top 10% of all credit unions nationally.
- Loan to Deposit - The loan to deposit ratio or LTD is calculated by taking the total amount of loans funded over a specific period of time and divide it by the amount of deposits received over the same time period. If the ratio is too high, the credit union may not have enough liquidity to cover unforeseen monetary requirements. Conversely, if the ratio is too low, the credit union may not be earning as much in interest income as it could be. A healthy LTD ratio is a direct reflection of the vitality of your credit union. Your credit union's software should be able to easily run reports that help produce your LTD ratio.
- Members per Employee – This is a relatively straightforward comparison of the number of members to the number of full-time employees. If your technology is successfully doing its job, you need less staff to address more members. If you find you are hiring more staff in addition to expanding your technology arsenal without seeing membership growth, then something is amiss and should be investigated. 383 members per employee is the credit union average... the right technology can help you double this number without compromising the quality of member service.
- Loan Originations per Employee – A large portion of credit union revenue comes from lending. If your members aren't borrowing from you, you need to re-focus your strategy. Identify technology gaps by measuring loan originations per full-time employee. With the variety of loan channels now available and the proper use of modern technologies, like electronic document flow and e-Signature, your credit union should be able to increase the number of new loans, without increasing the staff numbers. The average credit union originates roughly $1,000,000 per employee.
- Return on Assets - ROA tells us how profitable a credit union is relative to its total assets. It indicates how efficient management is at using its assets, especially technology and people, to generate earnings. Divide the CU's annual earnings by its total assets to derive the percentage. Financial institutions strive to record an ROA of 1.5% or above.
- Net Income per Full-time employee - This is a very useful metric that takes into account some of the intangibles that are more difficult to measure. By determining your Net Income per Employee, you are given the opportunity to take notice of real revenue drivers like staff knowledge of the technology you employ, member relationships, and reputations built by strong team members.
- Cost of Technology per Member - There are many different facets of technology required to smoothly operate a credit union and the truthfully, technology is expensive. Aggregate the total cost of your credit union's technology, including up-front and re-occurring charges, and divide it by your member base. The purpose of investing in technology is to improve your member's overall experience and you should know what this is costing you per member. Many credit union core software vendors will calculate the cost of their technology per member... Be cautious with this approach. The per member cost can easily sound appealing before you realize you aren't being sold a 'complete core package' and will need multiple 3rd party integrations.
When evaluating core technology, there is more to consider beyond its usability. KPIs will help your CU understand how the core is propelling growth, and other areas in which there is room for improvement. By applying these metrics to your credit union operations, you can gain valuable insights into how efficiently you are using the assets you have as well as where you are suffering from imbalances, and use that information to create better, more targeted strategies.