2021-02-11 American market & values of financial institutions

Opening a financial institution on US market is a great achievement and getting a licence is just a beginning. Many f.e. credit unions seek to grow and seize the opportunity to get more members in house and grow liability size of the book. More deposits, more ability to attract new products, more staff and better service. To support members and their hunger to get return on the money they did work on.

Every credit union has to spend money to get membership. It is said you might be spending 10% on marketing of the every $ you attract.

So lets say you want to attract $1,000,000 you have to spend $100,000 to get the chance to attract this money.

Later you decide to lend this money to borrowers to earn an interest spread. So you keep 8% of this money as reserves and lend thoose $920,000.

You lend it for 6% on current market and pay 1% to depositors. Finally you have 5% of this new loans non-performing. How does the calculation look?

ASSETS:

Loans given: $920,000

Loans non-performing: $46,000

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Loan book: $874,000

Reserves by CB: $80,000 (8% of deposits)

LIABILITIES:

Depositors: $1,000,000

Revenue from interest: $52,440

Charge-off: -$46,000

Costs of interest paid to lenders: -$10,000

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Net lending result: -$3,560

Costs to acquire customers: -$100,000

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Money left for employees, rent and such: $0

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Loss: -$103,560

Every collection agency has to understand this equation. Credit union did spend $100,000 to get customers and did lost $46,000 od non-performing debt.

Collecting all the money for credit union (usually impossible) will return to CU maximally $46,000. And whole $100,000 of marketing costs with this strict collection process will be lost. Final outcome minus $64,000.

What is even more challenging is, that with crazy bad collection the credit union might get only $9,200 back but loose all the deposits as members will be informed by unahppy collected members. And credit union will loose even more - 91,800.

Therefore the complaint collection is critical. So the collection effort does not cause more harm than good. Preferably to get back to CU 20% of charged-off ($9,200) and make those members to come back to credit union and keep using the service & reccomend to other people on the streed. Therefore to attract not $1,000,000 in deposits, but $1,100,000.