Measuring The Competition
What does the big bank on the corner have that the credit union down the street doesn't?
The Credit Union Journal asked a dozen California credit unions just that question, probing for the types of deposit and loan products along with bundled service packages the major money center banks and brokerages offer their customers that credit unions find to be the most competitive. Answers were far ranging, with credit union executives pointing to aggressive free checking offers, sophisticated sweep accounts, commercial services, trust services, and expansive branch networks all cited.
But many of those same executives refuse to be intimidated, and say that with few exceptions, their offerings can be and are every bit as attractive to consumers.
Below is a look at how credit unions view their place in the financial services marketplace.
'Crazy' Deposit Rates
CHATSWORTH, Calif.-Richard Romero is vice president of member services for Telesis Community Credit Union, whose field of membership includes anyone who lives, works or worships in the San Fernando Valley, Santa Clarita Valley or Ventura County. Romero said Telesis Community CU doesn't find its greatest competition coming from traditional, name-brand providers.
"The trouble is with Countrywide Bank, and other independent banks, who offer what we call 'crazy rates' on deposits. For example, if we are at 2% for two years, they are at 4.5%," he said. "These independent banks can offer rates like that because they have less overhead."
On the lending side, Telesis has to scramble to match rate specials on home equity lines. Romero said most of the major banks in the market, including Bank of America, Washington Mutual, Wells Fargo and Union Bank, periodically offer their customers a $10,000 loan with an introductory teaser rate of 0% for six months, or prime-plus-zero for a limited time.
"They don't mind giving an incredible teaser rate upfront for a few months. Either there is fine print, or they do it simply to gain the relationship. They are hoping the borrower carries the balance for two or three years, in which case they eventually make up for it," he said. "As a smaller institution, it is difficult for us to compete."
The Cost of 'Free' Checking
PASADENA, Calif.-Wescom Credit Union goes head-to-head with the big banks in five populous counties in the greater Los Angeles area-Los Angeles, Orange, Riverside, San Bernardino and Ventura counties. Brian Siegel, vice president of marketing and e-commerce for the $2.- billion, 213,000-member CU, said the competition can be fierce.
"Free checking is the obvious answer," he said to the question about what Wescom CU views as the most competitive offers in the market. "There is a push by all the major institutions to offer free checking. Washington Mutual has done a good job of advertising to make their free checking seem different."
On the investment side, Siegel said Wescom has investigated offering sweep accounts and similar products, but does not yet have definite plans.
"We recognize the importance of investments, and we are looking at what things we should offer," he explained. "We have a CUSO that allows us to offer investments, but we need to raise awareness. A recent survey found that was the product members were least aware of."
Wescom recently began writing three different types of zero-down real estate loan options, including an interest-only loan, which is designed to make the payment affordable, Siegel said. The CU developed the products in response to escalating home prices in the market that have made it difficult for people to purchase houses. Recent statistics show the median home value in California is 25% higher than just one year ago.
"These are the kind of things we need to do to stay competitive in Southern California and meet the needs of the market," he assessed.
A Large CU (A Small Bank)
SAN FRANCISCO-Patelco Credit Union may be the third largest credit union in California and tenth largest in the U.S. with $3.1 billion in assets, but it readily acknowledges it can be a challenge to match banks on some services.
Chris Oldag, senior vice president of lending for the 190,000-member CU, said commercial services and business banking are "second nature" to banks, but difficult and expensive for credit unions to support.
"Banks offer things like account analysis services we can't compete with," said Oldag. "They have personal bankers who act as outside sales people. These personal bankers make field visits to explore a company's business plan and find places where the bank can fill voids. Credit unions really struggle to compete with that level of service on the business side; but with consumers, we're more competitive."
Any credit union could hire the expertise to compete in business services, Oldag explained, but most do not have the data processing system to analyze business expenses related to financial transactions to show where they could save the business money.
Another area banks where have an advantage is equipment leasing, he said. The financing is owned by the banks, and, in effect, becomes the lease. For example, Pitney Bowes borrows money from Bank of America for its equipment. Oldag said Telesis Credit Union does some equipment leasing, but not many other CUs do.
When it comes to offering the more sophisticated brokerage services many consumers, especially the upscale members, demand, Oldag said Patelco has no problem providing competitive products because it has a relationship with Callahan Financial Services, Oldag continued. Through CFS, Patelco is able to offer its members the ability to trade in the stock market, and to offer those same members trust services, which have long been the domain of banks. Patelco also does some financial planning for its members, an area in which Oldag said most credit unions have yet to see much success.
Banks Stress Service
ANAHEIM, Calif.-For Partners Federal Credit Union, which serves employees at the Disneyland Resort, cut-rate auto and mortgage loans continue to drive competition in the lending department, according to Andrew Downin, vice president of marketing.
"There still are some zero-percent and 1.9% financing offers on cars out there in the market," he said. "They are not as prevalent as a year or two years ago, but we have to keep an eye on them."
In the white-hot Southern California housing market, Partners is forced to compete with-among others-Ditech and Greenlight, two direct-to-consumer mortgage lenders that, like Partners, are headquartered in Orange County.
"Both Ditech and Greenlight are coming out with new mortgage products every day," said Downin. "We're trying to come up with equally appealing products to position ourselves with our members."
Downin reported Partners has no problems attracting deposits because of the unsettled nature of the stock market in recent months. Like the members of many other credit unions, PFCU's members remain hesitant about sinking more of their savings into any type of investment that represents risk.
Perhaps as a result, the credit union has enjoyed recent increases in the penetration rate of members who hold checking accounts, a figure that has grown to 62%. Downin said Partners Federal was a "pioneer" when it began offering free checking with no minimum balance in early 2002. "But now, Washington Mutual and Wells Fargo, and to a lesser extent, Bank of the West, are really pushing free checking like they never have before. Of course, what they want is the fees, such as NSF fees, that checking brings."
"Overall, it seems like banks are trying to compete more on customer service," he observed. "This really started with Washington Mutual. Banks are trying to look more 'non-bank.' Perhaps it's because they've gotten such a bad rap lately."
Competitors' Inherent Strength
HOLLYWOOD, Calif.-The banking industry sometimes has an innate advantage simply because of the name involved, noted Roy MacKinnon, VP-marketing with First Entertainment Credit Union.
Beyond that, MacKinnon cited financial planning, investment services and business lending as the areas where credit unions trail banks.
"Some credit unions offer financial planning or investment services through their CUSOs, but people might think first of Bank of America or Wells Fargo," he pointed out. "With business lending, most credit unions are behind on the game; mostly because regulations prohibited it for so many years."
Another area of concern to MacKinnon remains real estate lending for the credit union community in general. He said many smaller CUs have missed out on real estate lending opportunities in the last five to seven years. With interest rates rising from their historic lows, and the mortgage refinancing market drying up, the window of opportunity could be closed.
MacKinnon believes banks have no advantage over CUs in loans or deposit products. "We are the market leaders clear across the board. Nothing comes to mind where the banks do something and we say, 'How can they do that?' We have the same products as the for-profits."
In contrast to that positive evaluation, MacKinnon offered this warning to other credit unions: "Banks have closed in on the rates credit unions are offering," he said. "Credit unions don't have the rate advantage they enjoyed 10 years ago. Credit unions must differentiate themselves by service."
Forced Into The Slow Lane?
SAN BERNARDINO-Arrowhead Credit Union is one of the market leaders in the fast-growing "Inland Empire" region of Southern California.
Ken Facer, senior vice president of finance and risk management for the $744-million, 136,000-member CU, said the "typical" deposit products are the same at banks and credit unions, although not all CUs offer the banks' main product-checking accounts.
"Checking is not a prime product for credit unions," he said. "As long as banks have the household checking account, credit unions will be the secondary financial institution."
Credit unions are more than competitive with banks in CDs, because credit unions offer better rates, Facer said. Many CUs do real estate loans, so he does not see an advantage for banks in that area.
Where Facer does see a problem is in an area traditionally regarded as a CU strength-auto loans.
"Banks are doing more lending through dealers than credit unions," he said. "Many credit unions don't do indirect car lending. If they do, they use a third party, such as CUDL."
Very few CUs have access to trust products, which gives a big advantage to any financial institution that has a brokerage, Facer asserted. "Whether through direct ownership or a third party, a brokerage gives the ability to service people instead of losing their business to someone else. It is the same thing with insurance products- a big advantage for a financial institution that has them."
Historically, CUs have been regarded as "better" than banks because of car loan and savings rates. According to Facer, credit unions beat the banks on everything but convenience.
"As more shared branching takes place, we can add more convenience without building more brick-and-mortar facilities. The best thing is, banks can't compete back, because a shared branch goes against their whole culture, not to mention regulatory issues."
Trust In Name, Not The Service
SAN DIEGO-Kenneth Horton, chief financial officer for California Coast Credit Union in San Diego, said three products come to mind where banks and trust companies have an advantage: trust services, asset-management services, and business services.
Regarding the former, he noted that some CUs have begun to make their way into trust services via a CUSO, but those are in the minority. "For older members, trust services are very important," he said.
Likewise, asset-management services tend to be used by older members who have built up net worth over the years. Horton said banks have people who actively manage the portfolios of their customers under pre-agreed parameters-making trades when the securities hit a low or high point.
More credit unions are getting involved in business services, but meeting members' needs is not always easy-especially given the entrenched competition at many banks.
"These three areas certainly are a challenge for us, and for a lot of other credit unions," he said. "We've talked on the board level about these issues, but have not yet implemented any changes. Member business lending might be the closest to action of the three, but we still are in the talking stages."
California Coast CU, which has 65,000 members and $700-million in assets, is not having problems making loans, but it is struggling to bring in deposits, Horton said. Not only is the competition stiff for one- and two-year certificates, members are not willing to invest money in intermediate- or long-term savings because they are afraid the Federal Reserve will pull the trigger on an interest rate hike and they'll be "stuck."
Mortgages also are a challenge, said Horton. He noted that Ditech, which does significant advertising, offers a mortgage with just $395 in closing costs. "In response, we've created a low-closing costs loan to compete."
More Competition On Price
SAN DIEGO-Kevin Moyle, creative services manager for USE Credit Union, said Bank of America, Bank One and other large money center banks in the area are competing more on price than in previous years-making it difficult for CUs to offer the best loan rates.
"Credit unions historically try to take care of our members through our rates," he said. "In recent months, the cost of funds for banks has been so low, they can offer great rates. Our challenge-and it's an easy one for us-is to offer better service. We close loans faster and do things the behemoth bank on the corner can never do. Speed and level of service is how we distinguish ourselves."
As for products, Moyle said USE has been introducing things the banks "haven't even thought of." In 2003, for example, USE began offering a cash back auto loan to compete with low-rate loans on the market.
"At a bank, someone might get a good rate, but at USE, we have a strong relationship at great dealers, so people will get a better deal on a car by working with our credit union. Our members get smoking deals on a negotiated price, both purchase and lease."
With home prices in San Diego reaching "astronomical" heights, and the cost of funds at historic lows for months, Moyle said USE has had to work hard to match the creative mortgage programs being structured by competitors.
He said the credit union developed two programs for first-time buyers: a 100% loan-to-value program where the member pays only the closing costs, and a 103% loan-to-value program that gives the member cash back to pay the closing costs.
"We've had to develop these products to compete with similar products by banks, and we've had to price them competitively," he told The Credit Union Journal. "We knew we couldn't survive on refinances alone, so we had to develop home loan products. We recently developed six new home loans, including loans for members with less-than-perfect credit, loans with no PMI, and others. Those are the kinds of creative financing going on right now, in response to banks and brokers like Ditech and Quicken loans."
RIVERSIDE, Calif.-When Mark Hawkins, president and CEO of Riverside County's Credit Union, was asked what products his CU found most competitive, he responded: "We don't look at it quite that way."
"We don't do things in response to banks," he said. "We are not in competition with Bank of America for the Fortune 500 companies. We work with businesses in our marketplace, and there are a lot of institutions that the banks don't seem to be interested in."
According to Hawkins, RCCU's membership is growing 15% a year, and the credit union works hard on building its local reputation. "Sometimes, the perception of the small, locally-owned credit union is better than the big bank," he observed.
SAN DIEGO-Geri Dillingham, executive VP-member relations for North Island Financial Credit Union in San Diego, said on the business services side, there is nothing in the market with which credit unions cannot compete, except for physical presence and some overall perceptions.
"We are not finding any product shortfalls," she declared. "In the delivery channel, we have 12 branches in San Diego County, compared to some banks with 50 or 75 branches, so we don't have the perception of having a branch on every corner. Credit unions also trail in advertising dollars, which helps create these perceptions. Washington Mutual is always on television talking about their service leadership, and we can't tell our story in the same way."
According to Dillingham, North Island Financial's strategic niche for small businesses is those with $1 million to $5 million per year in sales. She described these businesses as "large for a credit union, small for a bank."
Dillingham said North Island is able to offer the kinds of services businesses are accustomed to getting from banks-including analyzed checking, cash management services, payroll services, merchant credit card services, courier services and sweep accounts-but acknowledged only a handful of credit unions offer such a menu of sophisticated offerings.
North Island Financial is among those credit unions that have recently received approval from the U.S. Small Business Administration to offer government-guaranteed, business-related loans to its members through the 7(a) loan program. "This way, we can cover both loan and deposit needs for small businesses," said Dillingham.
One Sweeping Issue
BURBANK, Calif.-Rick Jarrar, vice president of lending for Burbank-based Lockheed FCU, agreed there are not many items on the product and service menu with which credit unions cannot compete.
But there is one thing he said that does come to mind.
"Both banks and credit unions have become very competitive with each other," he said. "Credit unions are restricted in offering things like sweep accounts, but other than that, not much. The exception is cash management services such as trusts or wealth management. A credit union needs a good-sized member base to market to, and expertise such as trust attorneys and brokers well versed in all types of investments.
"Unless the credit union is large, it might not be able to afford the expense," he noted.