Analyst Examines Why CU Penetration Rates Are Flat

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The public doesn't care about the difference between banks and credit unions. Everybody wants the same things: good quality products at the right price as conveniently as they can get them.

That was the message from Gary Raddon, chairman of Raddon Financial Group, a financial institution consultancy. Raddon led an educational session on the final day of the California Credit Union League convention here. And the message came at the same meeting at which the league announced a major advertising campaign to educate the public on just what the differences are between credit unions and banks.

"There was a day financial institutions thought they could be everything to everybody, but that's not possible," he declared.

Despite shared branching, new branches and numerous conversions to community charters, credit unions are not growing appreciably, Raddon warned. According to Raddon Financial Group research, the percentage of households using the services of a CU in 2004 is 43%, compared to 42% in 1999. During that same time period, the number of credit union members has increased to 86.1 million from 77.5 million, but the rate of growth has declined each year since 2000.

The key, said Raddon, is for CUs to develop good expansion models-they cannot simply build a branch on every corner as banks have, because they don't have the capital banks do- and to narrow their focus on key growth segments.

Looking Ahead

The U.S. population is aging, and households are becoming more affluent, so credit unions must target "credit-driven households," he continued, defining the group as those 18- to 34-years old with moderate incomes.

"The credit-driven household of today is the upscale household of tomorrow. If credit unions serve those households today, there is a chance of getting the upscale households in the future."

The challenge of the future, he said, is loan growth. Raddon believes credit unions must exploit the strengths they have now. Consumers associate credit unions with consumer loans at good rates; while they associate banks with checking accounts and higher fees.

"The key is turning a loan relationship into a deposit relationship," he said.

Credit unions have to go beyond age and income-the traditional predictors of financial services use-and reach out to new ethnic groups, he said. Hispanics are projected to make up 16% of the U.S. population by 2010, and the percentage already is much higher in southwestern states such as California, Arizona, New Mexico and Texas.

Raddon noted that Bank of America has a program in place that allows U.S. residents to send money to family members in Mexico- even without a B of A account. Wells Fargo recently announced a six-year, $1-billion loan program that targets Hispanic-owned businesses.

"The Hispanic market is projected to have $900 billion in buying power by 2007. That's not small change, it's big dollars," he observed. "It has the attention of the big guys, but credit unions should be taking the leadership position. It's not just putting a few Spanish-language brochures in the lobby; it's about making a commitment. There is an opportunity there."

Another area of opportunity Raddon spotlighted was member business lending. He said 8% of CU members are small business owners, though most are funding their companies out of their regular checking accounts. Credit unions should target the small firms that fall under the banks' periscope, he counseled.

"Ninety percent of all businesses have annual sales of less than $1-million," said Raddon. "The average bank derives more than two-thirds of its net income from business banking. Only 5% of banks' households are commercial households, but those households produce 40% of banks' net income."

For a small business owner looking for a financial institution, banks' strengths are: professionalism, staff friendliness and knowledgeable contacts, he said. But, banks' weaknesses- which include high fees, high loan rates and low deposit rates-represent a potential opening for CUs.

"Banks want large businesses, or those that have matured. Leave those to the banks. Credit unions should go after those businesses in the start-up or early growth phase," he said.

On Feb. 14, 2003, the U.S. Small Business Administration expanded its lending program to allow greater capital access to small businesses, which dramatically increased the number of CUs that could participate in SBA loans. Prior to that date, 30 institutions controlled 40% of the SBA market. "Talk about having a monopoly," he said.

Looking Ahead

In the next five years, credit unions must accelerate new member growth and improve member retention, Raddon urged. By 2010, if there is an annualized attrition rate of 3%, there will be fewer than 8,000 CUs.

"Credit unions must be practical in their approach to the future," he said. "They need to make sure they expand into market areas that have growth potential. They must identify the key consumer segments they have and make sure they are meeting their financial needs. They need to look to ethnic markets and small business lending. Finally, they need to be aware of their strengths."

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