MANHATTAN BEACH, Calif. -- They say summer romances don't last, but $4.5 billion Kinecta Federal Credit Union and its subsidiary, Nix Check Cashing, are still going strong nearly one year after the credit union acquired the alternative financial services provider.
"The honeymoon isn't over because the respect we have for each other is mutual," said Kinecta CEO Simone Lagomarsino of Nix President Tom Nix, who also holds a senior vice president's position at the credit union.
"Tom is a man of great integrity, and we knew from the first time we sat down to talk about our vision that we were aligned in every way, and it's just gotten better, because we're truly aligned the entire way down the organization," she said.
Nix said he doesn't regret selling his family business to the credit union because the industry's philosophy of people helping people sums up his business approach, too.
But it's more than just a love fest with these two now that the businesses have been integrated. Kinecta is moving forward with new savings programs Lagomarsino and Nix say will revolutionize community banking and attract tens of thousands of new Kinecta members.
Bank of America's successful Keep the Change program allows customers to round debit card purchases up to the nearest dollar and transfer the resulting change to a savings account. Other institutions have created copycat products to encourage savings, but what about the unbanked? What are their options outside a home-stashed change jar?
To address that need, Nix is putting the finishing touches on Change For Tomorrow, which will allow check-cashing customers to set aside part of their check into a Kinecta savings account.
"We're really excited about this, because the whole key to legally servicing the underserved is getting them out of debt," Lagomarsino said.
"When you think about it, it's not something someone would feel good about, just depositing a dollar or 50 cents into a savings account, but when it's part of the check cashing transaction, they get that dignity back," she continued.
Nix said Change For Tomorrow will help his customers convert to traditional financial services because the program is subtle, controlled by the customer, and takes place in a trustworthy environment--the customer's own neighborhood.
"Anyone who comes to do business with Nix, whether they're buying a money order, sending a money transfer, buying a bus pass or even stopping in for directions, we're going to inspire them to become a member of Kinecta and leave part of that money in the change tray, which is their savings account and do it every time," Nix said. "We're proud to create a mechanism where people can save money in a safe place and be looked upon as a valued patron."
The program will be rolled out as Kinecta Express windows are introduced throughout the Nix chain. Two opened in May and two in June and that pace will continue until all Nix locations include the full-service counter space.
"We're bringing full-service banking to communities that haven't had community banking for 30 years," Nix said.
Kinecta is also a finalist in Los Angeles Mayor Antonio Villaraigosa's Bank on L.A. program, part of Gov. Schwarzenegger's Bank on California program. The program selects institutions to promote mainstream financial services to underserved areas. Kinecta has been selected as one of the pilot program institutions and could be chosen to offer the program permanently.
The credit union has also teamed up with A Better L.A., which attempts to steer young people away from violence. The program is led by University of Southern California football coach Pete Carroll. Kinecta plans to facilitate financial education classes, and train A Better L.A. program participants to serve as instructors.
"The idea being, that people will be more receptive to hearing about financial education from someone they can better relate to," Lagomarsino said.
Of course, it's easy to be complimentary and discuss exciting new programs when you're successful, and the partnership so far shows a lot of potential. Granted, like most California credit unions, Kinecta is experiencing its share of loan losses--it posted a $3 million net loss first quarter--but the loss was driven by a nearly $12 million provisions entry, four times the amount set aside this time last year, and fueled by problems with indirect auto loans and some variable real estate products, not payday loans.
Furthermore, payday lending isn't the CUSO's main business, accounting for only 18% of revenue, and representing less than 1% of Kinecta's loan portfolio, $3.5 million of a total $3.67 billion. Nix payday loans perform on pace with industry averages, Lagomarsino said, and even saw a decline in losses after the Kinecta purchase.
"This business is profitable for the credit union," Lagomarsino said. "Not excessively so, but it provides a reasonable margin."
Turns out, check cashing is what the majority of Nix customers are after, providing 65% of revenue. Other fee-producing services, like Moneygram transfer services, round out Nix's revenue stream, driving home the point that the CUSO is more about noninterest income than risk.
That's reflected on Kinecta's balance sheet. Yes, annualized salaries and benefits, as well as other operating expenses, are up this year, a total of $12 million higher than first quarter last year. But at the same time, noninterest income has almost doubled, up to nearly $16 million first quarter, compared to only $8.3 million during the same period last year.
Not bad for the first three quarters' worth of reporting, especially considering all the training, marketing and operational adjustments needed to merge an established $45 million operation, which includes 53 retail locations and 400 employees, into an established $4.5 billion credit union.
Even though Kinecta's capital ratio has dropped from a well-padded 9.4% during 1st quarter 2007 to a leaner 8% as of March 31, 2008, Lagomarsino said she hasn't second-guessed her decision for a minute.
"I have no regrets at all," she said. "We believe we're in the right position for the longer term, and being able to serve the people who are underserved and unbanked, we're in absolutely the right position. And being right there in the community puts us in the right place given the economic times. I have no regrets, not even a hesitation," she said.
Until last month, the Kinecta brand had only been softly rolled out to Nix customers, with the Kinecta logo shown only on in-store ATMs and membership documentation required for payday loan customers. However, Kinecta's new express windows will allow the credit union to leverage Nix's 53 retail locations, and the steady traffic they bring.
But, Kinecta won't push credit union membership on those who aren't ready, Nix said. Programs like Change For Tomorrow will ensure the migration occurs at the customer's own pace.
"We're making great strides at creating our vision of a one-stop shop where consumers have ability to choose which product best meets their needs within their own community," Nix said. "We want our customers to vote with their feet, so to speak, and choose whatever they want."
Nix customers have supported the credit union so far. Even though payday loans only account for $3.5 million on the balance sheet, Nix has delivered 15,000 new members in only 10 months. It helped Kinecta end the year with 14% membership growth, and according to annualized first quarter membership growth reporting, Kinecta is on pace of achieve double the membership growth rate of its peers for 2008.
The credit union's influence is being felt on the payday lending side of the business. Nix will soon increase its maximum payday loan amount from $260 to $400; however, it is also testing a still unnamed pilot program that deposits one-third of payday loan fees into a savings account after six months.
"We have yet another opportunity to encourage the savings habit, and allow customers to save their way out of the necessity for a payday loan, and move on to doing business with Kinecta," Nix said.