The New Economy Forces Industry Leaders to Adapt
The economic environment over the past few years has produced rapid changes. Some changes have brought opportunity, others have brought hardship and tough times and some will continue to force credit unions to adapt.
While some reports from economists have indicated the Great Recession has ended, CUNA senior economist Steve Rick said that the economy is entering what he calls a "new abnormal environment." Rick described this new environment in CUNA's annual 2010-2011 E-Scan.
"We're going to have very low interest rates for a very long time," he explained. "We're entering a new era of thrift. Consumers are saving more, unemployment rates are going to remain higher and household income is stagnant."
The current economy is what Rick referred to as a hysteresis. As an example Rick compared what happens to play dough to what happens to a balloon when you poke your finger into it. With a balloon it bounces back. With play dough, there is a hole that stays when you remove your finger. The current economy, he said, is like the play dough.
The "Mid-Year 2010 Economic and Financial Outlook" put out by Southwest Corporate Federal Credit Union also indicated that the recession will have a long-term lasting impact on the economy and the credit union industry.
"Opportunities continue to exist [for credit unions,] but it might require many to recognize systematic and organic changes that have occurred due to the depth of the most recent recession, their impact on consumer spending behavior and the nature of products and service that credit unions must be in a position to deliver," the report said.
The report indicated that while personal spending rose five of the past six months many are still holding back when it comes to spending because of the weak labor market, rising commodity prices and declining household wealth.
"The recession might have had a greater impact on the consumer than what most believe," the report said. "The depths of the decline, the corresponding loss of jobs, household wealth and overall malaise could have altered future consumer spending behavior that could be realized over the next decade."
The report also supported Rick's prediction of prolonged low interest rates. The economy is now in its 19th consecutive month of a protracted low-rate environment, and the report added that there are few underlying signs that a meaningful rising rate environment will occur in the next six to nine months.
To survive the long, stagnant recovery period, Rick recommended that CEOs look to keep operating expenses in line and look for more efficient ways of operating.
For larger credit unions with strong capital, Rick said to take advantage of the negative big bank attitude and be aggressive. With the increase in bank branch closings, he said that now is the time for credit unions expand and buy up those branches at rock bottom prices.
According to Mark Condon, senior vice president, business and consumer publishing at CUNA, credit unions need to pay attention to the changes going on in the middle class in order to come out of this period of economic instability in a good position.
"During this period there are changes that are long term in the making, and they are very important changes. There are so many that are effecting what is the bread and butter of credit union membership. And those changes are going to continue," he explained.
The major change affecting the middle class, Condon said, is its disintegration. Neighborhoods are increasingly becoming split into lower and upper class sections he said.
Looking at job growth, the sectors that are experience growth are lower-to-moderate income areas, Condon said. The high paid union manufacturing jobs that used to make up credit union membership are basically gone, he added. Credit unions, he said, can't limit services to just the middle and upper class.
The change, Condon said, forces credit union CEOs to look at where future borrowers are going to come from. He recommended CEOs look at the current demographic of their membership and look at the demographics of their community, state and region to see what demographic group growth is coming from.
The next step, he added, is to look at how to reach that demographic and examine if it is going to enable the credit union to continue to keep its bottom line.
HarborOne Credit Union in Brockton, Mass. recently opened a financial education center to expand upon its Multicultural Banking Center the credit union opened in 2007 to provide low- and moderate-income residents with financial information. The new center, HarborOne U, expands the reach of the banking center to small business owners, women and young adults.
"We've had remarkable success. The center helps people and it helps the credit union image. It's intended for a totally different class than upper and middle, but we even have people in affluent communities come up to us and say they love what we're doing," Leo MacNeil, senior vice president of community outreach at HarborOne.
Even though HarborOne U has only been opened a month, MacNeil said that he thinks it could be replicated in more affluent communities as well. The banking center, he said, has been profitable since its opening in 2007 by the amount of business that has been brought into the branch located in the center, which he added the majority has been from immigrant and minority ethnic groups. With HarborOne U, Maureen Wilkinson vice president, director of HarborOne U, said that while it is open to everyone the majority of classes target woman because research has shown the credit union that woman are more often in charge of financial decisions in a household and more likely to seek out information. The majority of consumers visiting the center, she added are non-HarborOne members, but they are likely to become members after visiting.
Other credit unions regularly visit HarborOne U and the Multicultural Banking Center to learn about how it operates.
Condon said that examining credit unions and competitors is important right now as well.
"You need to do a scan of what competitors are doing too," Condon said. "You need to look at trends in your competition nationally not just locally. Look behind traditional providers as well."
Condon used Wal-Mart as an example of a competitor that credit unions should be keeping an eye on. While the company doesn't have a bank charter in the United States it does have one in Mexico where it is going after the banking needs of low-income customers.
"A lot of people are not paying attention to what they are doing, but eventually they will bring the experience they have gained in Mexico to the United States," Condon warned.
Rick also said that credit unions need to look beyond the local area and even the United States for economic indicators. "Think more globally. Look at the Euro Zone debt crisis. What happens in Europe doesn't stay in Europe. It is because of what is going on in places like Greece and Italy that mortgage interest rates are the lowest they have ever been," Rick explained.