Banks want to offer short-term consumer loans but regulatory constraints make it difficult. Credit unions are piling into this line of business. It all translates into a rare opportunity for traditional nemeses to cooperate.
A group of six banks, including Bank of America (BAC) and TD Bank, has provided financial and administrative support to help CommunityWorks Federal Credit Union open in Greenville, S.C. The single-branch institution, which opened last month, plans to target low-income consumers, many of whom it expects to get through referrals from banks.
"These bankers are pretty honest that these are not markets they are in a position to serve," says Deborah McKetty, president and chief executive of CommunityWorks.
It's nothing new for a bank to help out a credit union, even though the two groups are frequently at odds. But it's another matter for a bank to pass along business opportunities to a credit union, says Jennifer Tescher, president and CEO at the Center for Financial Services Innovation. It seems to be a positive development in reaching underbanked consumers, although it may be difficult for CommunityWorks to make it work, she says.
"One potential downside is the business model," Tescher says. "Can the new credit union be sustainable by serving only those that [mainstream] credit unions can't?"
Many banks certainly don't think they can make the numbers work in this market.
"We just can't afford to do a lot of $5,000 loans," says Mike Coggin, a regional president at South State (SSB). "The economies of scale aren't there. These are folks we can't serve."
The $8 billion-asset South State (formerly known as SCBT and First Financial Holdings), in Columbia, S.C., has given money to the community development financial institution that spawned CommunityWorks FCU, Coggin says. Coggin also serves as vice chairman of the CDFI.
Credit unions, on the other hand, are coming around to the idea of making small-dollar loans. Many avoided the market for years, but the category has seen a recent surge of interest. Two credit unions, the $3.2 billion-asset Kinecta Federal Credit Union in Manhattan Beach, Calif., and the $2.1 billion-asset Municipal Credit Union in New York, on July 9 started offering small-dollar loan products. That followed the March announcement by 14 credit unions that they would join a nationwide pilot program to offer small-dollar loans.
From 2010 to 2013 the number of credit unions making short-term, small-dollar loans increased more than five times to 712, according to the National Credit Union Administration. The number of credit unions making payday loans rose by 12% to 573 in the same period.
(The NCUA's technical definitions distinguish between payday loans and "short-term, small-amount" loans, and the agency tracks them separately. State-chartered credit unions are not permitted to make the latter.)
The arrangement is more than altruistic for banks. Banks get Community Reinvestment Act credit from regulators, for example.
It's also a way for a bank to use a credit union as a minor-league baseball team, to develop prospects. South State may refer consumers with shaky credit histories to a credit union because they're not cost-effective for the bank. But once the consumer gets his financial legs under him, South State would be interested in his business, Coggin says.
"One of the most painful things to do in our jobs is to tell somebody 'No,'" he says. "Now, the answer is maybe 'Not yet,', instead of 'No.'"
Several banks have provided different types of help to CommunityWorks FCU, McKetty says. The $1.6 billion-asset CertusBank, in Greenville, and the $221 billion-asset TD Bank made direct financial contributions to the credit union. The $8.5 billion-asset First Citizens Bancorp., in Columbia, and South State provided financial support to CommunityWorks' CDFI. Bank of America and BB&T (BBT) have also provided different types of assistance.
TD Bank made a loan to CommunityWorks FCU to help it offer loans to low-income groups in Greenville, says Rob Hoak, regional president for TD Bank in the Carolinas. It also gave a $150,000 credit line to the CommunityWorks CDFI for mortgage programs.
Banks and credit unions do have some positive history together, despite their well-known squabbles.
Bank of America, Citigroup (NYSE: C), Capital One Financial (COF) and other banks have made investments in credit unions that are licensed as CDFIs, says Cathie Mahon, the president and CEO of the National Federation of Community Development Credit Unions.
When the $145 million-asset Latino Community Credit Union was founded in 2000, its first branch was located in a former Wachovia branch. Wachovia left behind the vault and teller equipment for the credit union to have, says Randy Chambers, the president of $659 million-asset Self-Help Credit Union. Both Latino Community and Self-Help are based in Durham, N.C.
The $38 million-asset Lower East Side People's Federal Credit Union in New York got similar help from Manufacturers Hanover Bank (now JPMorgan Chase) when it opened in 1986, Mahon says.
But even with help from banks, McKetty says she's run into resistance from other banks in the Greenville area. She stresses that they shouldn't worry about CommunityWorks stealing their customers.
"When some banks hear that there is a credit union starting and they don't understand our mission, they might view us as competition," McKetty says. "Then they hear that other banks are supporting us and they warm up to the idea."
Others remain unconvinced about handing over the business of small-dollar lending to credit unions. Fifth Third Bancorp (FITB) in January stopped making deposit-advance loans, a variation on the payday loan concept, amid heightened regulatory scrutiny. Fifth Third CEO Kevin Kabat has said the Cincinnati bank wants to re-enter the small-dollar loan market. Banks shouldn't simply cede that business to credit unions, Kabat told American Banker on Thursday.
"From my standpoint, clearly that's a client base that we very much feel like we should bank," Kabat says. "I was in that customer segment when I got out of college, and my family was in that segment and still are, and we bank them. We should be a part of that market."