Don't forget the underserved in your credit card strategy - they can be profitable and loyal
Randolph-Brooks Federal Credit Union has served its members for over 50 years. In becoming a $1.8 billion credit union, the credit union expanded membership beyond the original charter of active Air Force personnel and civilian employees from Randolph Air Force Base and Brooks Air Force Base. Over 200,000 members strong, Randolph-Brooks FCU has grown through enlightened leadership from the board of directors, stable loan growth, and a loyal membership. The cornerstone of this growth has been a continued focus upon the needs of the member. Expansion has led us into communities and SEG's whose potential members have modest means for repayment and/or blemished credit histories. Contrary to lending practices at most financial institutions, these "at-risk" members can be some of your most profitable and loyal members provided your staff educates them on basic financial principles. Low-income is a relative term, as some members with household incomes of $30,000 or more may have greater financial obligations (such as two children simultaneously in college or commitments to provide care for a disabled parent) than would a single member making $18,000 per year. Therefore, we will characterize low-income as a member who makes less than $1,800 per month, realizing that assumptions are being made about other obligations. But what we have seen is that most of the underserved lack formal financial education. Their incomes do not tend to rise over time and they tend to be payment sensitive verses rate conscious. One of the greatest loan demands from the underserved segment has been for our MasterCard. With no annual fee, a competitive rate, and a cash back feature of up to 1% for all purchases, our credit card has opened doors to a stronger relationship for members with modest means. Our success in extending credit cards to low-income members has been premised upon three factors. First, the board of directors and senior leadership reaffirmed their commitment to serving the underserved. Secondly, the credit union realized that extending credit cards can drive relationships that extend well beyond the initial loan. Third, the underserved will be loyal to your credit union if you're patient. Many of the existing lenders who solicit the underserved are pawnshops, check cashing storefronts and high interest rate finance companies. Gaining the trust of these potential members and changing their financial behavior can be garnered through a very simple approach: educate the members on basic financial principles. We differentiated ourselves from their current lenders through a grassroots effort of knocking on doors and personally sharing the benefits of membership. As trust was built, accounts were opened and loans were processed. Approving credit cards to low-income members enhances the relationship between the member and the credit union. We allow our loan officers flexibility in establishing credit limits for all of our members. If an opportunity exists whereby we can only extend a $500 limit on a MasterCard, we will process an approval and review the account after six months to see whether or not the limit can be raised. These types of approvals normally request that the members establish automatic payments. Coupled with a minimum monthly payment of 2% on the outstanding balance, most members find the repayment terms are manageable. Many lower income members lack fundamental knowledge on the importance of good credit, understanding interest rates, and budgeting. Educating members on the value of credit, explaining to them how to improve their credit and credit score, and the importance of paying their credit union can pay dividends. Once they recognize that they are getting the same rate and terms available to the rest of the membership, it not only increases their level of trust with us but also their loyalty. When our loan officers can approve loans at very competitive rates for members with thin credit files or modest means of repayment, our ability to retain these members for future loans is solidified. Our experience and data indicate that a disproportionate amount of credit card balances being charged-off each month stem from just a handful of members. These members often had relatively strong levels of household income and good credit scores at the time of loan origination. Conversely, a member whose household income is less than $1,800 and has a Fair Isaac score less than 650 represents a substantially lower percentage of the aggregate charge-off totals each month. Three reasons would support our experience why low-income members represent such a low percentage of charge-off balances. First, once an approval has been processed for a MasterCard (or any loan), low-income members begin to redirect their direct deposit and paycheck relationships away from fee-based banks and into our credit union. Once that takes place, we note that they begin to use our draft account and ATM/debit card on an increasingly frequent basis. Secondly, our evidence supports that once a direct deposit relationship has begun, members begin to refer to us as their primary financial institution of choice. This designation evokes pride and can often lead the member to actively encourage family members and co-workers to join the credit union as well. With a strong account relationship in place and being part of a member-owned institution, the third and most important evolution takes place which reduces delinquency and charge-offs: loyalty. Loyalty is by far the strongest hedge against loan delinquency. Members of modest means who are approved for our MasterCard are very appreciative of a fair offer because they are rarely presented with highly competitive offerings. Our collections department will patiently work with members of modest means who have financial setbacks to ensure that the loan isn't charged off. The members of our community charters have proven to be loyal and deserving of fairly priced products and services. Granted, lending to low-income members and households has an inherent risk. It has been our experience that with effective pricing, sound underwriting, and effective collection procedures, this market can provide a platform for enhancing membership and loan growth.