Two Bottom Lines Enhanced: The CU's & The Member's
Expansion into underserved markets has become a profitable and easy way for one credit union to expand its business, according to its CEO.
"Why serve underserved markets? It's fun, there's less competition, and the margins are better," said Bill Myers, CEO of Alternatives FCU, Ithaca, N.Y. "It really is good business. This is a huge growth area. If you serve someone well in an area where no one else serves you get serious loyalty."
Credit unions that shy away from these markets need to see the positive side of the unbanked. Where some might see "low-income" and an implied downside, Alternatives sees "upward potential income." When some see "renters" he said CUs should be thinking "potential first-time homeowner."
The key, Myers suggested, is in identifying niches. "Don't design a better checking account because you can't start with what's already there and make it better when nothing is already there," he explained. "Don't pay higher rates. Don't charge less for loans. Instead, ask potential members how they see the world and then find ways to solve their financial problems."
One of the problems credit union people come across in trying to serve these markets is in not understanding how the people in these markets view, understand and relate to their world.
"We've created an economically rational system. Overdrafts are not economically rational, but it is the way people do things. It may not make sense, but that's the way it is," Myers observed. "With immigrants from third-world countries and Latinos, they do not trust financial institutions, so a personal referral is the primary driver of these markets."
Grant Helps Fund Effort
Alternatives FCU was awarded a grant to research how people build wealth and financial security and how credit unions can contribute to those efforts. The result was the definition of the credit path-the continuum between poverty and self-sufficiency.
There are four basic steps along the credit path with some variables that can allow a person to skip certain steps or require one to "do over" other steps.
The first phase is the transactor. Consider them the "unbanked" or the "prebanked," though some transactors actually do have some sort of relationship with a financial institution.
"Transactors are not entirely outside the financial world," Myers said. "They may need coins for the laundry, or they need to cash their checks, buy money orders to pay their bills. They need access to payment systems."
Typically, transactors live paycheck to paycheck, have no savings and work on a short financial time horizon. Myers related how he was trying to counsel a potential member as to why it made more sense in the long run not to go to the payday lender since it's actually more expensive. The person's response: " 'But it's Wednesday, and I've got two children and I won't get paid until Friday, and that's 12 meals I have to come up with between now and then.' It's not that transactors don't understand that it's more expensive to live this way, it's that they don't feel like they can afford to think long-term when the short-term needs are so pressing."
Reexamining Idea of Fees
Credit unions can help without looking for compensating balances and charging fees for services instead. "You are never going to charge enough fees to be as expensive as a payday lender," Myers said. "You can charge a fee, offer them the service, make money on the deal and save them money, too."
The next step on the credit path is the Saver. Transactors are only able to become savers when they are able to "see the vision" that allows them to consider the future on a longer time horizon.
"This is the most important step," he said, noting that this is when the person makes the decision to move forward, expand that time horizon and get some financial education. The product of choice, of course, is a regular savings account and, Myers offered, "credit unions do very well with this."
It's the third step that's often the most tricky for people because it's a double-edged sword: borrowers. The key is to build the credit score without borrowing your future, he advised. Those who stick with productive credit-credit that builds a platform for future borrowing, credit that reduces expenses, increases income (such as for education) and evens income flows-can make it to the next step, while those who get bogged down in non-productive credit (predatory loans or simply using too much credit without good reason) often end up in bankruptcy and starting over at the transactor level.
'How Strong Is Your Marriage?'
The fourth and final step along the credit path from poverty to self-sufficiency is becoming an owner. Call it the asset goal. "Homeownership is an important part of the American Dream," Myers said. But other things are part of being an owner as well, such as business ownership, education and, down the line in the future if all goes well at ownership state, stock ownership and other investments.
"I've described the path as linear, but most people exist in several parts of the path at once. You can be an owner, and then get divorced and have to claim bankruptcy," Myers observed. "It's why I've often wished we could ask on loan applications 'How strong is your marriage?'"
And while the credit path is descriptive of the necessary elements to move forward financially, it is not causal. Simply opening a savings account and getting credit will not automatically, ultimately lead to homeownership, he said.
Why is understanding the credit path important for credit unions? "Moving members along the credit path is what distinguishes us from predatory lenders," Myers suggested. "The credit union should have the goal of moving members forward. Predatory lenders have a vested interest in the transactor cycle."
To help members move forward, a credit union has to identify the member's need-regardless of whether the credit union can meet that need or has an existing product that should suffice.
The hard part is acquiring accounts. Remember the old days when banks offered free toasters? "VITA [Voluntary Income Tax Assistance program offered in partnership with the IRS] is out toaster," Myers said.
Alternatives provides free income tax assistance, which gets people in the door. They do not have to be members, but it gives the credit union a chance to help members and non-members alike-and potentially gain new members along the way. "Most of them do join the credit union."
Another difficulty: pricing. Myers suggested looking for profitability over the life cycle versus the point in time, but it only works if the credit union has a good mix of people.
An earlier speaker had noted that it's easier to go after one million-dollar loan instead of 10 $100,000 loans, but Myers turned that on its head and suggested, "I'd rather go after 10 $100,000 loans that all have the potential to step up to million-dollar loans in the future."