Analyst: Expand Investment Options, Don't Keep It Secret
Credit unions need to act now and offer investment products and small business services, one analyst is urging.
Gary Raddon, chairman of Raddon Financial Group, told attendees at NACUSO's annual conference here when the CU movement decides to do something, it does so decisively.
"Credit unions were aware of online bill payment five years ago. Bank of America didn't turn the light on until two years ago," he said. "Credit unions were aware of the value of debit cards 10 years ago; long before Visa and MasterCard jumped on board. Any area where credit unions saw a way to service their members, they acted on it."
Now, if credit unions are to be successful in selling investment services, they must fight the perception among consumers that credit unions have a "narrow range" of products.
"They must show they are as good as anybody else," said Raddon.
The key consumer segment for CUs to make inroads with is 18- to 34-year-olds with an annual household income of $30,000 to $99,999, which he called the "credit-driven" households. The credit driven households are important, he said, because upscale (annual income of $100,000-plus) and older households often have established relationships with traditional, full-service brokers.
"If credit unions do not have the credit-driven households today, they won't have the upscale households tomorrow. That is the migration of these households," he explained. "And if credit unions don't have an account with the upscale households, they aren't going to get that business. It is difficult to sell those upscale households once they've been lodged with a broker for a few years."
The bad news for CUs is that not many consumers get their investment products and services through their financial institutions. A recent Raddon Financial Group study found traditional brokers are the investment providers for 23% of households, mutual fund companies 19%, insurance companies 12%, discount brokers 1%, followed by CUs, banks or savings institutions at 8%.
Worse news: the 8% figure for CUs, banks and savings institutions is down from 12% in spring 2001-just three years ago.
If there is good news to be found, it is that younger households see value in developing a financial plan. "The opportunity is with this younger group," Raddon declared.
Certainly, there is room for growth. Only 2% of credit union member households use investment services at a CU.
Raddon said some credit unions have investment service rates as high as 12% due to a focus on this market over a number of years.
The U.S. Small Business Administration opened the door for CUs to get into business lending on Feb. 14, 2003, when it expanded its lending program.
Prior to that date, 30 large financial institutions controlled 40% of the SBA market. Currently, approximately 1,500 credit unions are eligible to join SBA's lender network-a 30% increase in the number of firms that can offer small businesses access to capital.
"Now, the big financial institutions look at credit unions as taking away their business," said Raddon. "Credit unions have competed well for many years on the consumer side because they do a better job than banks. The big banks don't care as much about consumer business, but commercial is their area."
The 'Micro' Target
The target market for CUs looking to expand their member business lending portfolios is the "micro" businesses, he said. Micro businesses are divided into two groups: less than $500,000 in annual sales, and $500,000 to $1 million in annual sales.
However, Raddon cautioned, credit unions must be aware that 75% of micro-businesses are not profitable. As a result, CUs cannot give away services for free.
"If a credit union is fee-income averse, this market might not be for it. Fee-averse is fine on the consumer side, but don't let it carry over to the commercial side."
CUs should focus on offering good deposit and loan rates at competitive fees, Raddon counseled. This way, they will be "hitting banks in their weakness."
"As credit unions move into other types of business, they should never lose sight of the consumer," he said. "Know the consumer, because the consumer will drive you."