Change in the Wind Reveals Which Business Deposits Are Primed for Growth
While Sound Credit Union's business services program has been in place since July 2007, a litany of bank mergers and closures in the area has helped propel its business deposit portfolio over the last year.
"We haven't had to heavily market our program," said Carl Roer, vice president of lending at the $536 million CU in Tacoma, Wash. "Our excellent branch network has also allowed it to grow naturally."
Since 2009, business accounts have grown from 350 to 600, totaling $7 million, said Jenny Tharp, operations manager at Sound. The organic growth even came without a business development person on staff, a move that has also helped to keep costs down, Roer added.
Noticing that there was a dearth of data on business deposits at credit unions, CU Business Group LLC put together a survey to find out what products and services were currently being offered and which ones were likely to be provided over the next three to five years. The survey was sent to 470 credit unions, including Sound CU, and nearly 50 responded, said Larry Middleman, president/CEO of the business services CUSO in Portland, Ore.
"We wanted to have some meat behind deposit services," Middleman explained. "There's a lot of business lending data out there but not much on business deposits. Most credit unions put together a basic program. It may run well and do great, so then the question becomes, 'What's next?'"
CUBG's business deposits benchmarking survey is set to be unveiled at the CUSO's annual conference Aug. 23-25 in Portland. Middleman provided Credit Union Times with some early highlights, including the top business deposit services offered by CU respondents. Merchant bank cards topped the list, followed by business ACH origination and business online banking. Rounding out the ranking was a near tie between sweep and cash management and account analysis, then business remote deposits, with positive pay being the least offered service.
Middleman said the CUs that provided data came from all over the country and had a mix of asset ranges above and below the $300 million threshold. Regardless of their differences, credit unions generally take three to five years to build a business deposit program, he added. Some of the factors that may help with expansion are a sophisticated product mix, enlarged as appropriate over time, and a staff that is knowledgeable about the offerings.
That expertise is critical for services such as remote-deposit capture, named by survey respondents as the top product they plan to offer over the next three years. Middleman said the cost to implement RDC varies, with some licenses costing as much as $1,000. But the most important expense, he said, is training staff to be able to provide ongoing technical support to business members.
"That's what's stopping some credit unions," Middleman said. "But it's so critical because credit unions can't offer the branch networks like a Bank of America or a Wells Fargo. Part of my preaching is, 'Every day we don't do this, we're a day behind the banks [that are offering RDC.]'"
Roer said Sound has taken notice of the importance of RDC. The CU is reviewing proposals from a handful of vendors and is considering rolling out the service at the end of the year. It would complement its current lineup, which launched July 2007, said Chris Shenkel, vice president of branch operations at Sound.
Most of the survey's respondents said they offered business deposits and loans at the same time, Middleman said. Business checking and merchant accounts are typically among the initial rollouts. But with other operational priorities to attend to, that's usually where it ends. While there is a significant amount of fee income potential with business deposits, there could be some stagnation as a program matures. Middleman said that's the perfect time to ramp up with things like RDC, ACH origination and online banking.
Business members tend to have more products and services and higher balances than other members, according to the benchmarking survey. In the survey, CUBG collected data on what CUs averaged in those three categories and then looked at the top 25%. Those who scored highest in each category were named the top performers. Middleman said the goal was for CUs to be able to do peer comparisons against that mark, not just the average.
Unlike other credit unions in its region, Sound has been fairly conservative over the years, said Jenny Tharp, operations manager. The larger deposits are parked in high yield money market accounts because of attractive dividends, she said. High yield checking accounts are also appealing.
Roer said people from businesses are looking to credit unions because of bank mergers, such as Washington Mutual's takeover of Chase. He added that a number of community banks have been taken over or have gone out of business.
The opening up of more market share could mean more revenue streams from business online banking, Middleman said. However, he added, a CU may have to spend in the five figure range to have capabilities such as accounting and payroll, a reality that may exclude some smaller CUs. Positive pay, which allows businesses to review checks and transactions before they post to an account, is a much more sophisticated offering and was the least offered service among survey respondents. Middleman said the service is typically ideal for larger entities like city and county offices.
Even though sweep and cash management and account analysis get a lot of press, there are alternatives, Middleman said. A CU could pay interest on a checking account, eliminating the need to sweep into an interest-bearing account. Business online banking is a viable option for credit unions that don't want to invest in an account analysis system, he said.
Tharp said although an examiner is likely to focus on business loans, deposits programs are also screened for risk. "They want to know about the risk rating systems," she said. "There's a lot on auditing issues."
Middleman acknowledged that there are risks on the deposit side. "When you're offering ACH origination, does it carry certain levels of risk, even potentially monetary loss to the credit union? There needs to be a focus on risk management."
While deposit programs tend to run on business from mom and pop operations, CUs do sometimes encounter businesses with 50 employees, two or more locations, and an ongoing need to move money around. That's a more complex realm, Middleman said, and the goal is to have the expertise in place to keep up with all of the moving parts. Commercial banks may have the advantage because they have the staffing and technology for monitoring, he said.
"Where is this on the senior management priority level?" Middleman said. "If it's high, the credit union will work to get the expertise needed."
At Sound, the priority level of adding layers to its deposit program depends on whether it makes financial sense and, more importantly, builds on what the CU already has to offer. Sound figured business members wanted credit card processing from a dependable source that didn't charge a lot of hidden fees, Roer said. The credit union's business services and loan program, launched in 2007, includes a vendor partnership that adheres to both criteria. Fifty members are using the service and the alliance continues to grow.
Deposits are growing faster than loans and total balances are growing, Roer said. However, the credit union has had to put on the brakes in some instances. "We're seeing a lot of people who want to do startups," he said. "That's high risk. Because of the economy, we've had to turn some people down. The credit union is managed conservatively. We're taking the same approach with deposits."