Credit Union Industry's Secret Weapon: Innovation Through Collaboration
Many industry observers believe the credit union industry is at a crossroads. While "they" may have disagreements about the whys and the wherefores of the matter, nearly all industry participants are in agreement that credit unions must grow in order to survive. This means coasting along doing business as usual hoping the slowing mortgage market will pick back up or hoping that renewed interest in the stock market won't cause a runoff in deposits or hoping that darned inverted yield curve would just normalize...let's face it we know hope is not a very good strategy and raising overdraft fees another $2/item is not very innovative.
CUSOs are the byproduct of the credit union industry's collaborative spirit. NACUSO, the industry's trade association considers as its No.1 primary objective "to provide a unifying source of industry leadership for promoting collaboration and innovation." Their mission is to promote, encourage, and provide a forum for collaboration and cooperation among credit unions, CUSOs, and third-party partners to explore changing business models and opportunities for shared financial and operational CUSO services. CUSOs and the individual credit unions that help capitalize them demonstrate their industry commitment and leadership by their actions. These leaders challenge the status quo, they have a shared vision, they are willing to experiment to find out what works and what does not work and finally they act on their vision, after all somebody has to go first.
Ideas are easy, innovation is hard work. Innovation often costs money and involves risk. Innovation is problem solving. Innovators ask what if? Innovation is sweating the details and executing while ignoring the skeptics; where they perceive a problem the innovator sees an opportunity. Innovators have a sense of urgency. CUSOs essentially create a planning and problem solving partnership. No one individual credit union has to shoulder all the work of building new competencies, deploying capital, or assuming risk. CUSOs also create economies of scale by aggregating volume. Let's look at a couple of problems or perhaps based on your perspective, opportunities, as they relate to the societal need of serving the unbanked and the need for a low dollar short term credit alternative that would provide consumers a better less costly alternative than the current payday loan product.
Let's agree these are issues that would be hard for an individual credit union on their own to adequately address for a number of reasons. These consumers are widely misunderstood. Why? Because they don't look or act like you. If you are a credit union executive or board member, you have a bank account and likely have never used a payday lender. Additionally, you would have to understand the competition; in this case they are not banks, but rather check cashers and payday loan companies. Two industries that mainstream financial institutions helped create simply by ignoring certain needs of the consumer.
Often these consumers are lumped together yet they are really distinctly different. The unbanked consumer does not even have a basic checking account; he pays a check cashing company on average $17-$18 to cash his payroll check and uses cash or money orders to pay his bills. Some studies show that about one third of these consumers used to have a checking account, but ended up on the "naughty" list with Chex Systems. They walk in our branches everyday, apply for accounts and we turn them away based on valid risk criteria. Many would be candidates for financial literacy initiatives.
The payday advance consumer is actually savvier than most would think. They have a checking account in good standing; approximately 26% of them make over $50,000 annually and 42% of them are homeowners. Over 70% of them have taken the proceeds of their advance and immediately deposited them in their checking account because they had written checks that were about to bounce, they did the math and determined the fees they paid for the payday advance are less than the cost of the overdraft fees they would incur without the payday advance. They are financially literate. So what do they have in common? A couple things,
they are poor money managers and generally between the ages of 20-40.
Why should credit unions undertake initiatives that serve these consumer groups? First and foremost it takes us back to our roots and aligns us with the original philosophy and mission of the credit union industry. Second, you don't learn to drive a car by watching a movie or reading the manual, you actually get behind the wheel with an instructor and drive. By simply moving a consumer from unbanked status to "banked," we can demonstrate tangible and measurable results in improving financial literacy. By doing so we further distinguish credit unions from banks and can offer yet another point of differentiation in the ongoing attack on the tax-exempt status. Finally, back to the issue of growing your credit union, would you be interested in prospective new member relationships that are in the 20-40 age category? Since this consumer is less fee averse they also offer opportunities for new sources of fee income when offered a relevant alternative product or service.
I know of credit union leaders that are collaborating on forming a CUSO that will offer alternative financial services like a prepaid card that acts as a "bank account on a card" so you will never have to say "no" to a checking account applicant again.
What if when an applicant falls below your criteria on Chex Systems, rather than put them in the "turn down" pile you offer this alternative card based account? What if you never again heard from a SEG had who touted the benefits of membership in your credit union to a new employee only to have you deny his new employee an account? What if the cardholder could call an 800# and get a cash advance at half the rate of a payday loan and have the proceeds "zapped" to their card in real-time? What if like current "agent" credit card programs someone else assumes the responsibility for risk and compliance, but your credit union still receives a portion of the fees generated by the account? What if it didn't require any systems integration or complex implementation process? In short, you are converting "turn downs" into a recurring revenue stream and at the same time converting the unbanked to banked. Sound innovative? Sound revolutionary?