LOS ANGELES — Small credit unions can boost their lending with new products, better differentiation and by knowing when members are ready to buy their next vehicle.
During a panel discussion at the California and Nevada CU League's annual meeting last month, two credit union CEOs and a representative from CU Direct Lending offered a variety of strategies small credit unions can use to build their loan portfolios.
While loan growth has been on the rise for the credit union movement as a whole, small credit unions continue to lag behind their bigger brethren in this and other areas. The league's Shapiro Group specifically works with smaller credit unions to help them rise to the unique challenges posed by their size.
Payday Lending Alternatives
One option credit unions are sometimes loathe to look at but that can offer real opportunities — both for the credit union and its members — is payday lending with a credit union twist.
Eric Bruen, CEO of $24 million Desert Valleys FCU in Ridgecrest, Calif., said payday loans "are not the worst thing in the world."
"They fill a gap," he noted. "What credit unions need to realize is they have the ability to offer a better alternative."
In its first year, a payday loan program produced more than $12,000 in income for Bruen's credit union, and it filled a need. "Those members would have taken out payday loans anyway," he observed.
Desert Valleys FCU followed closely the NCUA Short Term Small Amount Program, which dictates a number of specifics: loan principal must be $200 to $1,000; maximum maturity of six months; no more than three loans every six months; minimum credit union membership of one month; maximum application fee of $20; concentration not to exceed 20% of the CU's net worth and a maximum interest rate of 28%.
"We help people build credit for the future rather than just stay in a payday lending cycle," Bruen explained. "The cost of getting a short term loan from us is less than the standard payday loan."
The Desert Valleys loan has a $20 application fee, collected only if approved, a 28% interest rate, a term of six-months and a $500 set amount. Bruen said the CU uses the loans as a platform for a deeper relationship, beginning with pre-approval for a starter credit card. The card has a $75 annual fee, an 18% rate, no rewards and $300 limit.
"This card has high demand, and we do not have to be generous," he said. "Then, we have a second credit card program to move them out of the starter credit card."
The whole idea of the short-term loan and the starter credit card is for Desert Valleys members to improve their credit score, Bruen said, adding those members will be going to a payday lender if the CU refuses them. To make sure they get their loans from the credit union, it simplified the approval process: no credit review if members have a 90-day active and positive account history, and a minimum direct deposit relationship of $800. The latter representing the minimum the CU figured would allow a borrower to make the $90 payment each month.
The Results
In the first year Desert Valleys did 213 loans, with average monthly rolling balances of $31,912. The program brought in $4,260 in application fee income and $8,535 in loan interest. The CU gave $230 in fee refunds, had just $502 in losses, for net income of $12,063.
"The total dollars at risk compared to a single car loan," Bruen pointed out. "We did no advertising beyond word of mouth."
One advantage some credit unions can leverage is their relationships with their sponsor groups.
Christopher Bruno became president and CEO of $26 million McKesson Employees' FCU in 2009. The San Francisco-based credit union has one location, while its sponsor, McKesson, has 400 offices throughout the country. Loan growth in 2011 was negative $2.3 million.
"A big key is differentiating yourself," Bruno said. "We had a captive audience, but our relationship with corporate was not doing well. We put a couple executives on the board and started promoting the credit union."
The CU also implemented online banking and began taking online loan applications. "Technology enhancements were a key factor in giving the credit union national reach," Bruno recalled.
Another deceptively simple improvement: When onboarding new employees, MEFCU takes that opportunity to review their credit report and assist them in improving their overall financial health.
"When you review someone's credit report, you can see if they have a high-rate credit card," Bruno said. "It is phenomenal what people do not take advantage of."
The CU currently offers mortgages, home equity loans, auto loans and Visa cards. Bruno said in October 2014 it had $7.3 million in total loans, "so we are doing very well."
"With differentiation built up, we will have a strong 2014 and a very good 2015, as well," he predicted.
Eric Cotter, VP, automotive product and innovation for Ontario, Calif.-based CU Direct, said credit union members are projected to purchase 25 million cars in 2014, with a $550 billion total market size.
"Despite all the shopping sites visited, and all the hours spent researching, 93% of car buyers complete their loan paperwork at the dealership and 66% are given only one loan option," Cotter reported. "How many people say they are going to go to a car dealer for answers because they trust that dealer? They trust their credit union."
CU Direct's philosophy is to offer the insight to help consumers focus their decision and pick one model. Cotter said the company's research has found new vehicle buyers consider 2.9 models 16 weeks out, and narrow down to one model days from purchase. This leads to the key question: How to put the credit union in front of these buyers at the right time?
"You have to know your members," he said. "Innovation is not magic, it is knowing the customers so well you can empathize with their problems. We believe in contextual advertising — integrated with relevant messages."
