SAN DIEGO-It has been a busy year for Anne Legg, who received her MBA in May, saw her master's thesis win a CUNA CFO Council competition, and later become a CUNA Councils' white paper.
Legg, whose day job is VP of marketing at $183-million Cabrillo Credit Union here, attended graduate school at National University while she served as chair of the CUNA Marketing & Business Development Council from 2008-2011. "No, I didn't sleep much," she quipped.
The thesis-turned-white paper is titled "Creating a New Credit Union Sustainability Business Model." In it Legg explores both the strengths of CUs and the challenges they face, and searches for a solution to the latter.
"I decided there has got to be a better way than to keep doing what we are doing now," she told Credit Union Journal. "Blue Ocean Strategy says look for ways to do your business in an uncluttered marketplace. We have local management, local knowledge and we really try to improve the community we serve."
One of Legg's inspirations was Michael Porter, a Harvard business professor and a "marketing guru." Porter advocates a shared value business model, which says a business must be a value to society and a value to corporate performance.
"When you think about it, most businesses try to make value in public performance: making money," Legg said. "Porter suggests taking that and tying it to making society better. I said, 'That's it. That's where credit unions need to be.' At that point I started creating a shared value business model for credit unions."
As Legg analyzed credit union, she noted operating expenses are higher than net interest margins, earnings often are negative, there is a loss of income from recent regulations, and there is low industry awareness. But CU strengths, she concluded, make them clearly the best financial alternative for consumers.
Legg mapped out two products she says will be a benefit to each CU's community and members:
* Peer Secured Loan. Legg described the first product as part microlending and part small business loan. The model examines a credit union's depositors for likely candidates, secures certain deposits in a CD, and then lends the money to a small business.
The goal is to lend to people who need small amounts, such as $5,000 or $10,000, she explained. "Many small businesses could be started by people who have a great idea and just need some start-up capital. The risk is mitigated by making the loan term short: 24 months. The pricing would be less than a credit card and higher than the standard secured loan."
According to Legg, what is accomplished by the peer secured loan is the depositors benefit the community by turning a deposit into a small business loan, the depositors get the benefit of a rate higher than a standard CD, the depositors choose which small business their money goes to help, and the credit union earns interest income relatively securely.
Similar loans made in India have demonstrated a very low default rate because of the community element, she said. Peer secured loans usually have a quick turnaround time: in some cases as fast as 48 hours.
A Good Fit
"Porter's vision was if small businesses are established they create jobs, they create demand and so forth, and help the community in many ways. These small loans do not fit the business model of large banks, but they fit nicely into who we are and what we are. Our roots are in being financial cooperatives, and these would work similar to the way grocery cooperatives tie food producers to the community."
* Giveback Auto Loan. This product targets members with "C" credit. Legg said despite their low credit scores, roughly half of the Cs are high performing, meaning they are keeping up with their payments on their debt.
"They are not going to default, but they really need a loan," she said.
The giveback loan, as the name implies, gives back if a borrower keeps up with payments. In Legg's model a loan is made to a C member at the interest rate the CU applies to those with similar credit scores, but if over a four-year term the borrower has no delinquencies and no late payments, the rate is essentially lowered. But the payback is done in cash, and not until the end of the term.
In essence, she said, it is the reverse of giving a cash-up-front incentive.
"This can add loans to a credit union's portfolio, and it creates a position in the marketplace," she said. "The A people can go anywhere, they are going to get the best rates and they get offers from everybody. C members don't have a lot of options. Half of these Cs are a good group, but many banks won't touch them because they are Cs. Credit unions can give them a better loan, and because they have an incentive waiting at the end of the term it can reduce losses. It helps the community by getting more people into cars and keeping them in their cars so they can get to their jobs."
