How Merger With One Tiny CU Has Led To A BIG MARKET
It began with the absorption of one tiny, $300,000 credit union. Today, SCE Federal Credit Union has found underserved communities to be so worthwhile-including to its bottom line-that it has invested in physical branches in four different low-income communities.
Along the way, SCE FCU has learned some valuable lessons about serving such markets: confronting some stereotypes that have proven true, while revealing others to be false.
George Poitou, SCE FCU's chief operating officer, noted the credit union serves four separate underserved fields of membership. The first was Boyle Heights-one of the poorest neighborhoods in the Los Angeles area. A small CU in Boyle Heights was in receivership when NCUA asked SCE FCU to take it over. The process already had begun when Congress passed HR 1151, the Credit Union Membership Access Act.
Soon after passage of the landmark legislation, SCE FCU became one of the first credit unions in the United States to add an underserved FOM when it adopted Boyle Heights. The neighborhood branch opened July 12, 2000, in a historic building.
Four Underserved Markets
The credit union's other underserved FOMs include the east San Gabriel Valley, the west San Gabriel Valley, and Lynwood, Calif. SCE FCU soon will be opening a branch in Duarte that will serve the west San Gabriel Valley, and another in Lynwood. The Lynwood branch is slated for a January 2005 opening, and when it comes online all four underserved areas will have a branch.
Asked why SCE FCU adopted the underserved FOMs, Poitou replied, "The first half of the answer is because that's what credit unions are supposed to do, and we believe in that wholeheartedly. The second half is because it's good business," he told The Credit Union Journal. "California's population is now 40% to 45% Hispanic, and the Hispanic population is growing rapidly. Hispanic buying power is estimated at $600 billion. And, once a financial institution convinces them of its trustworthiness, these people are very loyal."
SCE FCU recently changed its logo, branding and tagline to let the residents in the adopted underserved communities know it is available to more than just Southern California Edison employees. Poitou said it did not make sense to change the credit union's name, because it represents thousands of dedicated Edison employees over the years.
The CU's new logo highlights the fact there is more diversity, he continued. The new tag line is: "Your financial choice in the community." Many of the marketing materials are in Spanish.
SCE FCU is seeing more loans than savings in its underserved areas, Poitou said. The Boyle Heights branch currently has $9.5 million in loans, compared to $5 million in savings. The credit union supplies money to the Boyle Heights branch at cost of funds to allow the branch to make these loans. Products range from $200 personal loans to business loans.
The credit union accepts Mexico's Matricula Consular identification card from people who have no U.S.-issued Social Security number. This allows SCE FCU to do small loans for people with no established credit. The CU reviews its payment books, cancelled checks or payment history with small local merchants to establish their credit worthiness.
"A lot of times, if they live in the community and work in the community, that's good enough for us to give them a $250 loan," said Poitou.
According to Poitou, SCE FCU is not interested in offering check cashing or wire transfers as a separate business. The credit union offers these as part of its overall menu of services. SCE FCU would rather people become members, open a checking and/or savings account, and take the financial education classes it offers. Non-members are allowed to do only one wire transfer. After that, they must join.
"We have regular financial literacy education classes, which are offered in conjunction with community organizations," he said.
Stereotypes: True or False?
One stereotype about expanding into an underserved market that has proven to be true, according to SCE FCU, is that credit unions must break down the fear of financial institutions held by many of the residents of these communities. Poitou said they often don't know how to behave in a financial services atmosphere because they come from countries where financial institutions are not trustworthy.
A second stereotype it has similarly found to be true, said Poitou: "More underserved folks have special needs," said Poitou.
On the other hand, the underserved FOM experience has taught SCE FCU that "underserved" does not necessarily mean dirt poor-as many believe.
"These people may be good at the business they are in, but not good at the business of their business-the financial management side," he explained. "But some have money. In Boyle Heights, 60% of the people own their homes. We make home loans and auto loans to these people."
Another stereotype that has been proven false is that every underserved person just came over the border, is not working, and is collecting welfare. "This is not true," Poitou said. "Most are hard working, productive members of their community."
When measuring profitability of the underserved segment, SCE FCU only considers the people who use a particular branch to be dedicated to that branch. The cost of funds at the branches that serve the underserved areas is lower because those members often don't have the high-rate CDs found at other branches. They primarily have checking accounts and small savings accounts. This is not to stereotype, Poitou cautioned, as not all of the people are poor. Some have CDs and money market accounts, just not as many as at other branches.
"The underserved branches have a positive bottom line, and benefit the credit union as a whole," he said.
Presently, no members of the board of directors come from the underserved FOMs. Poitou said the board is sensitive to the community, and has established a community outreach committee. This committee meets with local leaders and hears recommendations about the community's needs and wants.
Poitou had several pieces of advice for any credit unions considering adopting an underserved FOM. First of all, he said, the CU must become part of the community. For example, the manager at SCE FCU's Boyle Heights branch is the president of the Boyle Heights Chamber of Commerce. The credit union is very involved with Lucille Roybal-Allard, the member of Congress for the district that includes Boyle Heights.
Second, a CU has to be committed to helping the community. "Simply putting one person who speaks Spanish into a branch is not enough," he counseled. "A half-hearted commitment will fail, and it won't be the fault of the community. A credit union must dedicate strategic resources from the board of directors and the CEO on down."
Poitou invited executives from other CUs to telephone him directly if they have any questions about adopting an underserved FOM.