As our nation's economy struggles to gain momentum, many of America's credit unions continue to feel the ripple effects from the recent financial crisis. Looking beyond today's challenges, however, the credit union industry seems poised for a new era of growth. By offering new products and exploring new approaches, credit unions can simultaneously improve services for members, enhance consumers' satisfaction, appeal to a wider universe of potential members and increase the lending that helps strengthen America's economy.
We must remain vigilant, of course, about the financial concerns afflicting the credit union system. Delinquencies and loan losses will likely continue to increase in 2010, and credit union failures will probably rise again. The number of credit unions downgraded to CAMEL 4 and 5 almost doubled during the recession-and those credit unions hold more than 5% of all insured shares. Many of the 7,600 federally insured credit unions, while still adequately capitalized, will record negative earnings and thus drain their capital.
Yet even if we're not fully out of the woods, far-sighted credit unions can look ahead toward better conditions-and position themselves to ensure their future strength. I see four opportunities that offer promising pathways for growth.
Online Services. The expansion of online services presents an enormous opportunity. Offering a wider array of online capabilities will reduce expense ratios, which traditionally tend to be high because of credit unions' high-touch nature. Moreover, online services will appeal to a new generation of tech-savvy consumers, who expect more than face-to-face transactions at a teller window.
Credit unions lag behind banks in online services, especially in the areas of portfolio management and bill payment. However, a recent study found that credit unions that offer online services have significantly higher consumer-satisfaction ratings than similarly equipped banks. To encourage credit unions to embrace online services, the NCUA will be hosting an online seminar next month with the CUNA Technology Council to discuss best practices in member-service technology. To register, go to ncua.gov.
Payday Loan Alternatives. Appealing to those who need access to short-term loans can attract new members-especially those who might otherwise fall prey to payday lenders, who often charge triple-digit interest rates. The demand for alternatives to payday loans is huge as is the opportunity to protect vulnerable consumers from payday predators.
The NCUA's staff is now working on a proposed rule that would make it more attractive for credit unions to offer payday-loan alternatives. By making short-term loans, credit unions can fill a niche in the marketplace, attract new members and help prevent the hardships caused by payday lending.
Member Business Lending. The effort to increase or remove the cap on member business lending offers significant growth potential. At a time when businesses need access to capital-and when banks remain reluctant to lend-momentum is building against the arbitrary and outdated cap, imposed by Congress in 1998, on the percentage of assets that credit unions can lend to members seeking business loans. Lifting or removing the cap would lead to the creation of an estimated 110,000 new jobs each year.
Few credit unions may now be near the cap of 12.25%, but the very existence of this cap is an impediment to credit unions' development. They face a disincentive to build the infrastructure to pursue business lending if they know that its small scale will never justify the investment. I've made that point clear in several recent meetings with Treasury Department officials. I've underscored that, if the cap is raised or removed, the NCUA will revisit our regulation to ensure that any credit unions increasing business lending must do so in a safe and sound manner. Responsible member business lending will channel capital toward small firms, thus helping create jobs.
Supplemental Capital. Credit unions should be allowed to raise capital in ways beyond simply retaining earnings. Today's interest-rate conditions create a paradox. Healthy, growing credit unions-because of their inability to bring in supplemental capital-are effectively penalized for taking in new deposits. That paradox occurs because new deposits end up lowering institutions' capital ratio. That lower ratio, ironically, could become a weakness that, by law, must be remedied through Prompt Corrective Action.
Credit unions should not have to turn away eager consumers. Allowing credit unions to gain access to supplemental capital, thus helping relieve the pressure that new deposits put on their capital ratios, was the topic of a letter I recently sent to the chairman of the House Financial Services Committee, with the caveat that any credit unions seeking supplemental capital must meet certain benchmarks of safety and soundness.
Together, these opportunities could promote strong growth, and help propel the industry past a significant milestone: increasing its numbers from 92 million members today to 100 million by 2015. Achieving the 100-million-member mark by mid-decade would reflect Americans' growing appreciation of what credit unions uniquely offer: not only financial security for depositors, but financial assistance to members.
Consumers increasingly recognize that strong, well-managed credit unions remain a high-quality, low-cost choice. Credit unions offer a unique value proposition: not a for-profit interest in the market overall but a not-for-profit commitment to their members individually. Helping credit unions serve their members and their communities, with the low-cost services that families want and with access to the business loans that our economy needs, is the surest way to help promote savings, build thriving communities and invest in a stronger American economy.
Debbie Matz is the chairman of the National Credit Union Administration. She can be reached at 703-518-6301 or firstname.lastname@example.org