Low-Income Communities Hold Untapped Gold Mines
Credit unions around the country are discovering that their strongest emerging markets may be their lower income members and communities, according to credit union executives and consultants.
Pablo DeFilippi, vice president of the National Federation of Community Development Credit Unions, acknowledged that while it may seem odd to consider lower income communities emerging markets since they have existed all along, an “emerging” market does not necessarily mean a new one.
“I think credit unions have begun to become aware of their lower income members and nearby lower income communities,” DeFilippi said. “They are an emerging market because credit unions have begun to understand how much of an impact they can have with these members and how many loans and products they need.”
DeFilippi credited the NCUA and, in particular, Chairman Debbie Matz for the recent growth of credit unions’ lower income members and communities. Prior to Matz's arrival, DeFilippi maintained, the NCUA did not consistently check to see whether a credit union might qualify as a lower income institution. Once the agency began checking, DeFilippi said, it discovered how many credit unions qualified and decided to make them aware of their status.
As a result, close to 3,000 credit unions received low-income designations – a development that in turn hiked credit unions’ awareness of low-income members and the opportunities they represented.
“I think there is much less of a tendency to look at the low income and judge,” DeFilippi said. “Being low income doesn't mean you are necessarily a bad credit risk or a slacker, or can't hold a job. It might mean that you hold two or three low paying jobs and struggle to make ends meet. It might mean you divide your time between working and taking care of a child or older relative, and thus are actually underemployed, at least in the job market.”
DeFilippi also argued that the low-income market is here to stay.
“Look around you – this economy is steadily becoming more of the haves and the have-nots,” DeFilippi said. “And that's not changing any time soon.”
Scott Butterfield, a Seattle-based consultant who works exclusively with small credit unions, agreed that lower income members might not appear to fit the mold of an emerging market, however in reality, they do.
“While the low-income market has been with us since the beginning, it is definitely emerging again as a viable option for credit unions to remain relevant in a hyper competitive market that is hell bent to outcompete the other to win over the prime credit, middle income market consumer,” Butterfield stated. “Smaller credit unions, and more and more larger credit unions, are refocusing on the emerging lower income market and finding opportunities to compete and win. In this market, smaller credit unions typically compete for used auto loans with the predatory ‘buy here pay here’ lots. This market produces high average loan yields, and when done properly, have relatively low loan loss rates. Fee income is also higher when serving this group.”
Butterfield also observed that individuals in the low-income market will need credit unions for a long time.
“Real wages aren't growing as much and more than half [of consumers], 55%, today have sub-prime credit,” he said. “From my perspective, the pool of the prime credit, middle income market is stagnant, and with rising competition, the emerging low-income market is expanding and represents the best opportunity for small and mid-sized credit unions to grow and regain strong relevance.”
Faye Crocker, president/CEO for the $15 million, 3,000-member Greater Abbeville Federal Credit Union, agreed. Crocker reported that the Abbeville, S.C.-based cooperative tapped into its burgeoning lower income markets when it reaffirmed its mission of providing affordable financial services to its predominantly rural and lower income field of membership in Abbeville County.
“We were designated low-income long before the wave of doing it [took place],” Crocker said. “And we reaffirmed that designation when we reaffirmed our commitment to our field of membership and the people who live here in Abbeville County.”
Crocker explained that the predominantly rural county had a population of roughly 25,000 people a decade ago, but that the population has since been falling.
According to the United States Census Bureau, the county's population declined by 1.8% from April 1, 2010 to July 1, 2014, and that its median household income from 2009 to 2013 stood at just under $36,000. Additionally, 21.6% of the population lived below the poverty line during that same period, the bureau reported.
“Young people leave because there isn't anything to keep them here,” Crocker observed, adding that most of the county's manufacturing base, which was built to support the carpet and fiber industry, shut down a long time ago. Now, Crocker said, the county's largest employers are likely the school system and a cable manufacturer.
These changes have influenced the cooperative's product mix, Crocker explained, in that the credit union has come to specialize in used car loans because so many of its remaining members commute to and from the county each day to work.
“Thirty-five percent of our borrowers are D+E paper, and they come to us because the only other options for financing are the car lots at outrageous rates,” Crocker said. “If you’re being taken like that, a 15% to 18% rate from your credit union can be life changing.”
The credit union's numbers reflected this reality. According to the NCUA, the cooperative posted a delinquency rate of 1.60% in June 2015, significantly higher than its peer average of 1.22%. However, Greater Abbeville FCU also posted a return on average assets of 2.72%, almost ten times the peer average ROA of 0.24%.
Crocker explained the delinquency numbers reflect the cooperative's membership.
“There is a difference between no pay and slow pay,” she said, explaining that many members routinely pay bills late in order to manage their cash flow, but that most will pay their loans back and seek help from the cooperative if it's too much of a struggle.
Some of the credit union's other numbers proved that point – the NCUA reported that as of June 2015, the cooperative's yield on average loans stood at 10.31%, roughly double the peer average of 5.74%. The cooperative's loan to share ratio also stood close to double that of its peers, at 92% versus almost 56%.
Crocker said the credit union plans to push forward with an approach of financial education and additional savings products to help its members move past mere financial stability to the setting and achieving of financial goals. Meanwhile, the cooperative's profile in the community is likely to rise – just two weeks ago, Crocker learned that a town located about 15 minutes away would soon lose its last remaining bank branch.
“We haven't decided to move into that space,” Crocker said. “But we already found out we have 500 members in that zip code, so we’re thinking about it.”