Collectively, credit union results are improving and that’s a positive sign. However, there are far too many of us who are not growing and are frankly just trying to survive.
To survive in a more and more unpredictable environment and to thrive in economically difficult times, credit unions must reinvent themselves. Internally, credit unions have to wisely leverage internal and external resources and encourage creativity and collaboration. Externally, they must learn how to serve changing consumer demographics in a hyper-competitive financial environment.
Scaling Up Microfinance
I recently attended a conference (in my capacity as senior consultant for the National Federation of Community Development Credit Unions CU Breakthrough Team) that exemplified the spirit of collaboration and innovation. The Scaling Up Microfinance conference is one of the Capacity Building Initiatives funded by the U.S. Department of the Treasury's CDFI Fund and organized by the Opportunity Finance Network and the National Federation of Community Development Credit Unions.
The advanced training workshops are for certified Community Development Financial Institutions — including loan funds and community development credit unions—involved in microfinance or small dollar lending that seek to increase capacity and serve more people. The workshop exposed microfinance CDFIs to best practices in the field and provide them with tools to determine appropriate strategies to scale. The workshop focused on:
- Business model innovation
- New products and services
- Technology to improve performance
- Talent management
Perhaps the greatest takeaway from the conference was the success stories shared by credit unions and loan funds. Amazing examples of collaboration, innovation and yes… growth and profitability.
Opportunities for Credit Unions
Today, nearly 2,000 credit unions have received their Low Income Designation from the NCUA. To qualify for this designation more than half of a credit union’s members must live in census tracts that have a median family income below 80% of the Area Median Family Income or individual income less than 80% of Area Median Income for a single individual.
The fact the NCUA recently approved nearly a thousand new credit unions for LICU status underscores the impact the Great Recession has had on consumers, and also the realization that this is the primary market segment of a big chunk of our industry. Many of these newly designated credit unions are pursuing the CDFI certification through the Federation so they can tap into resources to expand access to affordable financial services in LMI communities, as well as to increase opportunities to collaborate with other CDFI’s, such as Loan Funds.
Who are these consumers? They tend to be less educated, lower-income and have larger families. They use Small Dollar Credit products such as payday loans, title loans and pawn loans to pay utility bills, rent and general living expenses (i.e. food, fuel, etc.) During the past 12 months, nearly 13 million Americans with income less than $75,000 used a SDC product at least once. Many of these people are our members and employees and they need our help – and we need their business.
Adapting to serve this group – with the products and services they seek – presents new opportunities for credit unions:
- Products and services that serve a growing demand
- Target market in which smaller credit unions can compete and win
- Higher loan yield and fee income
- Increased membership growth
- Increased opportunities to collaborate and partner (i.e. community partners, CDFIs, SEGs)
For some, microfinance products, small balance consumer loan and transaction services may be just what the doctor ordered for smaller credit unions struggling with membership, loan and revenue growth. What’s in it for the larger credit unions?
A lot! From the potential to scale these products, using the opportunity to connect with consumers and teach them a better way; connect with an entire new market that perhaps has developed below their radar screen; partner with local non-profits and local goverments involved in economic revitalization projects; set themselves apart in the market place as financial institutions committed to their communities, etc.
Perhaps it may also be an opportunity to communicate and leverage brand? After all, aren’t we all looking for ways to differentiate how we are clearly different and better?
Loan funds are specialized lenders with high loan demand and are often looking to partner with financial institutions as they have limited lending capital. Credit unions have a lot of liquidity these days and with return on investments at a historic low, what better time than now is there to do loan participations with these specialized lenders that understand these markets? There are a growing number of partnerships between loan funds and credit unions that demonstrates how effective these collaborations can be.
Is This Right for You?
Four things to consider about serving this market:
- Is my credit union a LICU? If yes, you are already serving a group that is using SDC products and services from other providers.
- Is my credit union consistently growing membership? If no, serving this group may be your best bet to tap into a growing segment, compete and win (for smaller credit unions, it beats competing with the larger credit unions for 1.75% new car loans).
- Is my credit union consistently growing loans? If no, serving this group may create opportunities for used auto loan and small balance loan growth. Most people who work are dependent on having a reliable used vehicle to get to work.
- Is my credit union consistently profitable? If no, serving this group typically generates much higher average loan yield and non-interest income. There are hundreds of smaller credit union best practices out there, who usually fly under the radar, but have successful business models for serving this group. True, they typically have higher operating and loan loss expenses. However, these expenses are more than offset by significantly higher average loan yield and fee income.
If you’re struggling for consistent growth and profitability, I hope you will consider learning more about the growth and revenue opportunities for serving this market. The work can be very rewarding and presents significant opportunities for collaborating and innovation.
Here are some resources: