I received a great comment on an older post about USAA. As I answered it I realized that I’d written an entire new post in the subject, so I’ll just put up the answer here and link back to the other post. I’ll also add in feedback from USAA’s staff.

Here’s the entire comment before I break it down to answer individual points:

I’ve been a member for almost 40 years and I’m becoming increasingly dismayed by USAA’s push to expand without considering whether this provides any value to traditional members. In short, I am concerned with the drive to add ever more numbers to USAA’s membership with only tangential relations with the military. As an auto, home and umbrella insurance purchaser, I feel the pool is being diluted. I also think advertising should be limited to attract NCO and commissioned officers, not bought on network broadcasts. I think the value of USAA’s financial services are, in general, not any better than credit unions and stock/mutual fund companies. I’ve never gotten a home loan from USAA because their rates are not competitive, and my banking is with Navy and another Credit Union. The cost advantage of USAA insurance over its competitors, even factoring in the refund check, is narrowing–and USAA is beginning to be out competed in markets it should have a natural lock on. As for claims services, USAA is slipping there according to friends’ reports–I haven’t had the displeasure of having to file one.  

I loved the USAA of the 70s and 80s, was OK with the expansion in the 90s and now detest the trends this century. My loyalty is waning.

Thanks for your comment!

I’ve only been a member for 32 years, but these questions have been asked of USAA before and their staff have put numbers on the issue. I’ve filed my notes from their last two blogger conferences, and here’s what they’ve told us.

I’m becoming increasingly dismayed by USAA’s push to expand without considering whether this provides any value to traditional members. In short, I am concerned with the drive to add ever more numbers to USAA’s membership with only tangential relations with the military.

Over 20 years ago, USAA’s membership was not growing enough to support the fixed cost of running the insurance business. The military had greatly expanded in the 1980s to finish the Cold War. However starting in 1991 after the First Gulf War, the U.S. military drew down by over 25%. (In my own blunt assessment, not the words of USAA’s staff: the veterans of the larger WWII and Cold War military were dying of old age faster than young members of the smaller drawdown military were signing up.) By opening up the membership in 1996, USAA hoped to spread their fixed costs across a larger membership. That would hold down premiums while helping to defray the costs of new services.

After the initial surge of new members, other problems emerged. At USAA’s 2011 conference, one of the staff told me that the new membership qualifications (and exceptions and loopholes) made the decision more complicated than it needed to be. Even their own staff had trouble parsing the various categories and questions. Growth still wasn’t rising fast enough to support the expanded services that a larger association could support. To cut through the confusion, membership was clarified to “Former officers and enlisted who separated and were honorably discharged.” That later expanded even more to “All military and veterans who have honorably served and their families.” It’s simpler and it saves employee labor to process new membership applications. Even better, it expanded the eligible membership to about 60 million people.

Growth still didn’t happen as quickly as they projected, so USAA has spent most of the last decade on an extensive marketing campaign to spread the word about their expanded membership criteria. Growth has happened more quickly up through 2010. One USAA staff supervisor said that since membership has reached nine million, USAA is throttling back the expansion campaign to allow growth to proceed at a more measured pace.

I also think advertising should be limited to attract NCO and commissioned officers, not bought on network broadcasts.

In the late 1990s, most of the membership campaign was by direct mail and print advertising. Over the last few years, USAA has moved to TV, Internet ads, and social media. The overall cost of the latter marketing campaign has actually been lower because the ads were funded by cutting back on the printing & postage. (When’s the last time you received a USAA letter in the postal mail?) It’s not only cheaper than print but it’s reaching a wider audience. In 2011 the audience awareness of USAA was up 40%, awareness of services and other programs was up 20%, and awareness through their website and social media is up 80%. USAA’s recent partnerships with sporting events (the NFL, the Army-Navy game) and affiliations with veteran’s organizations are also paying off. These have helped spread the word to USAA-eligible veterans at minimal marketing cost to USAA.

As an auto, home and umbrella insurance purchaser, I feel the pool is being diluted.

Here’s the interesting result: in general, the newer members have been better than the older ones. The new members of our Boomer generation have about the same expenses as existing members, but USAA’s fixed costs are spread out over a larger population. Everybody wins.

The younger members have been an even better deal. Young drivers might pay higher premiums, but their accidents are actually costing less because they’re driving cheaper vehicles. They have smaller homes and less personal property to repair after a natural disaster. Surprisingly, they even have lower default rates on credit cards– especially when compared to the rest of the Millennial demographic. USAA’s revenue is up while their expenses and their claims are down.

One interesting aspect of the new younger members is the value they place on membership. The “Mine Was Earned” ads are promoting a sense of honor and legacy (and better member behavior) that’s dropping right down to USAA’s bottom line.

In short, USAA doesn’t need more members like you and me. They want more members like our kids. In my opinion, USAA might be impatiently waiting for our kids to inherit our assets so that our heirs can expand their lifestyles, buy more USAA products, and raise even more future USAA members.

I think the value of USAA’s financial services are, in general, not any better than credit unions and stock/mutual fund companies. I’ve never gotten a home loan from USAA because their rates are not competitive, and my banking is with Navy and another Credit Union.

I hear you. I only carry USAA’s auto insurance and a credit card. Our home, rental property, & liability insurance is with another (smaller, more financially fragile) military insurance company. Other brokerage firms hold our investments. USAA actually stopped insuring Hawaii homes for a number of years due to concentration risk. Other banks and credit unions offer more products (like business checking). Vanguard and Fidelity certainly have cheaper mutual funds and brokerage commissions.

USAA’s Scott Halliwell explained why. (At the 2011 conference, I talked one-on-one with him for over an hour.) He cheerfully acknowledges that USAA won’t compete on the price of their investing or mortgage products. More importantly, they don’t want to. They’re offering consolidated financial services with a company that understands the military and its families. They’re supporting people who move every few years, who call way outside of business hours from countries with unpronounceable names, whose spouses deployed before having the chance to complete exactly the right paperwork required by the letter of the law, whose pay might be messed up, and who just want a company that they can trust. USAA has learned that its members (especially those on active duty) want to do all of their business with USAA instead of with a patchwork of a half-dozen other financial service providers. They want the convenience of one-stop shopping with a company that they trust.

Scott says that USAA’s services are priced accordingly. Members pay rock-bottom rates for the vehicle & property insurance (and the customer service) that remains the core of USAA’s business. The rest of USAA’s products and services are literally open to anybody, not just USAA members! The banking & investment fixed business costs (and their rising regulatory costs) are spread out over an even larger population. This keeps their prices lower than the majority of the actively-managed investment industry– which, sadly, isn’t saying much about the rest of the industry. While it’s not as cheap as the giants like Fidelity or Vanguard or Schwab, it’s certainly a cost-effective way to consolidate their banking & investment services.

Over the last decade, my spouse and I have refinanced our home and our rental property nine times. We used Navy Federal Credit Union, Pentagon Federal Credit Union, USAA, Bank of America, and a local bank. PenFed was by far the cheapest interest rate and the lowest closing costs. However their service was so bad that I could not believe that they were licensed to do business in Hawaii. I easily spent twice as much time processing their paperwork (and dealing with their mistakes) than any of the others. (Bank of America was no prize-winner either.) USAA didn’t offer the lowest interest rates or the cheapest closing costs, but they were by far the best on customer service.

During the last year I compared USAA’s CD rates (and customer service) to NFCU and PenFed. My father has Alzheimer’s, and I’m the conservator for his finances. I have my own accounts with all three organizations, so I expected it to be easy to open accounts for my Dad and then put some of his assets into CDs.

The worst company was his own bank. He’d been with them for 25 years and yet they still wanted “know your customer” documentation. Each CD required a multi-page paper form, and I won’t go into the details of the conservator paperwork that they expected. Their rates were 0.5%-1% below the competition. It was a horrible, protracted, and unsympathetic experience.

PenFed was almost as bad, maybe because I had higher expectations. While their website is a fast and easy way to buy a CD, it was almost impossible to open an account for my Dad. They did not respect the probate court’s appointment letter and PenFed didn’t even understand basic conservator vocabulary. I made two attempts with two different supervisors and gave up in disgust.

By the time I got to USAA I had greatly lowered expectations. However they did the whole process over the phone (backed up by secure e-mail scans of my documentation) and they processed the funds transfer from Dad’s brokerage account in real time. Later they even fixed one of my mistakes to update the CDs as “transfer on death” to Dad’s beneficiaries. USAA’s CD rates are slightly lower than PenFed, but PenFed clearly didn’t want Dad’s money. USAA’s customer service was far above & beyond any other banking company, and their CD rates were only second to PenFed.

The cost advantage of USAA insurance over its competitors, even factoring in the refund check, is narrowing– and USAA is beginning to be out competed in markets it should have a natural lock on.

In 2008 when my teen daughter started her driver education classes, I verified that USAA was far ahead on pricing. She learned the same thing when she insured her own car last year. Maybe the cost advantage for older members is narrowing because we’re less desirable than younger members.

But your comment raises a good point about where to compete. I had an interesting discussion with their banking VP about business checking. In general, the financial industry’s regulatory costs have nearly tripled over the last decade. The rest of the banking industry is making up for the higher costs with a staggering array of customer fees and penalties. In addition, the industry has chosen to offer some products as “loss leaders” in the hopes of locking customers in to other products with much higher profit margins. USAA has avoided as much of that as possible by simply not attempting to compete unless there’s a membership demand. They’d rather keep low pricing on their core member services than attempt to enter other banking areas that may or may not support their expenses.

It’s been nearly two years since I became aware of the membership demand for USAA business checking, and the company has finally figured out a way to offer it to the members who want it without asking the rest of the members to subsidize it. They’ve made great strides in other member services, too, such as Auto Circle and Home Circle. I suspect that all of their member services (not just the ones which you and I happen to use) are more robust than the rest of the industry.

As for claims services, USAA is slipping there according to friends’ reports–I haven’t had the displeasure of having to file one.

USAA’s mistakes have annoyed me plenty of times over the last three decades. A friend recently required medical treatment after a vehicle accident, and USAA certainly spent a lot of member money on HIPAA paperwork & postage while tracking her progress. I’m also seeing frequent complaints about the estimates of claim damages and the choice of repair services.

I wonder if my perception is a reflection of our own human tendencies to pay more attention to problems than to “business as usual”. There are certainly more members, so there are more opportunities to complain. Bad news also spreads much faster these days, which could raise the visibility on formerly hidden problems.

I won’t attempt to defend USAA’s record on claims services– they can always do better. However they’re doing pretty well with J.D. Power’s independent ratings. While they could improve, I suspect that their customer satisfaction is ahead of the pack of the other insurance companies.

Since we haven’t had to file a claim in decades, either, we may not see the customer service benefits of being able to rapidly process claims or offer new technology for more tailored service. I know that USAA’s mobile claims processing paid off for property owners during last year’s natural disasters. Today USAA can literally send out a payment for a vehicle insurance claim before the owner gets back home from the scene of the accident.

However when I look at the good things that USAA has done for me and my family over the years, they’re ahead on points. I’m certainly not willing to spend more money with other insurance companies in the hope of improved claims services. I’d rather save money on the cost of business as usual.

I loved the USAA of the 70s and 80s, was OK with the expansion in the 90s and now detest the trends this century. My loyalty is waning.

I think that USAA values our customer loyalty as much as any large corporation is capable of that behavior. Again, they have one of the Fortune 500′s highest rankings on employee satisfaction and very high customer-service ratings. At least 25% of their newer employees are military veterans, and USAA actually puts their new staff through a mini “boot camp” to help them understand the challenges that their active-duty members have to contend with every day. When it comes to understanding my issues, I think USAA already shares a common culture with its members.

However instead of despairing over USAA’s service, I’d suggest that you should investigate other companies. With apologies to the old Lee Iacocca commercial, “If you can find a better insurance product: buy it.”

FTC disclosure: USAA has paid for a portion of my transportation, food, and lodging costs at two blogger conferences. You might wonder whether that would affect the objectivity of a financially independent retired Navy nuclear engineer. Instead it’s subjected their staff to hours of brutal interrogation, raised cynical questions about their math skills, and inspired outright skepticism of their high employee satisfaction. As a geezer long-time member I’ve been especially inquisitive about their retirement calculators and their financial products. At least one executive was ambushed with hostile questions about providing business checking to USAA members, and I’ve stalked several more execs through followup phone interviews. We bloggers also drank all of their coffee, ate all of their breakfast burritos, abused their WiFi bandwidth, and made fun of their underwear vending machine. I’ve attempted to balance the scales by distributing omiyage of Kona coffee and chocolate-covered macadamia nuts, which may only call into question the objectivity of their employees. But I enjoyed the conferences so much that I’m hoping to repeat the experience!

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Related articles:
USAA blogger conference: initial report
USAA blogger conference topics
More news from the USAA Blogger Event
Answers to USAA’s questions
USAA: Military Transitions, Home Circle, Auto Circle
USAA’s retirement planner and financial goal-planning tools
Personal finance, mobile banking, and mobile wallets

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