In an op-ed that appeared in the Milwaukee Sentinel on Sunday, September 18, 1932, Edward A. Filene reported on how 1,700 “Poor Men’s Banks’” had benefited the working class. In the op-ed, Filene outlined the credit union movement’s success in developing thrift as a means of meeting financial emergencies and how it had educated masses of people in the management and control of money. The Great Depression and the rapid expansion of credit union charters that followed, proved that the “Poor Men’s Bank” business model worked. Filene believed and advocated that serving the poor and financially undeserved was good business.
We don’t use the term “poor” much anymore and I suspect it makes some of us feel uncomfortable. Today, the modern term for struggling consumers is low to moderate income. Reaching out to the low income community is called community development. The number of low to moderate income consumers is expanding. On September 13, 2011, the New York Times reported that 46.2 million people are now below the official poverty line. The highest number in 52 years. It’s interesting to note that 52 years ago, there were 9,646 credit unions and that number was growing rapidly.
Community development in action
Last week, I visited a community development credit union in East Harlem, NY. I met with Glamis Haro, Lending Manager at $8 million Union Settlement Federal Credit Union. I wasn’t in the office five minutes before Glamis had me by the arm for a walk around her community. Glamis is proud of her community and couldn’t wait for me to see firsthand the need, as well as, the progress taking place in developing their community. During our walk about, Glamis explained how the credit union is offering development services to educate and serve its low-income community. Similar to Filene’s model, the credit union’s focus is teaching consumers how to manage and control their money, save for financial emergencies and improve their credit worthiness. The credit union offers relevant development services one of which is called “Borrow and Save”. This development product helps low-income people reduce their dependence on borrowing by providing an alternative to payday lending. Borrow and Save was part of a pilot program in partnership with the National Federation of Community Development Credit Unions. The Borrow and Save product is designed to break the payday loan cycle. The loan is different with a longer repayment term, but most importantly includes one-on-one financial counseling and a forced savings feature. Another development program worth noting is the credit union’s microenterprise small business services. This program provides basic business education, (i.e. how to create a business plan, credit repair, etc) basic business checking and small microloans to help get small businesses off the ground. The program helps members generate additional income to support their low wage jobs. In the past year, the credit union originated approximately $125,000 in small micro business loans. Not, bad for a credit union its size. During my visit, Glamis shared incredible stories about how these programs have impacted the lives of their members and their local community. Bottom line, Union Settlement FCU is relevant in the lives of its members and its local community. From a financial perspective, the credit union is very well capitalized and loan losses are below its NCUA peers. Doing the right thing is good business for Union Settlement FCU.
A business case for community development and serving the underserved
The Union Settlement story demonstrates the potential credit unions have during challenging economic times. Community development, especially the right development products and services create an opportunity for credit unions to remain relevant in their local communities and the lives of their members. Relevance that is more than competitive rates, personal service or convenient locations. Meaningful community development is more than writing big checks and sponsoring the Chamber of Commerce’s annual golf tournament. After all there are plenty of banks standing in line do that. Community development is providing resources where they are needed most, for the most good. Community development creates opportunities for smaller credit unions to tap into existing loan demand, resulting in higher loan yields and fee income. For larger credit unions, community development creates opportunities for a greater platform to leverage brand for clearer differentiation, community recognition and growth.
Consider these high impact community development options
There is no shortage of credit unions providing financial education in some form or another. However, it’s important that development products accompany the education to support improving consumer behavior. Credit union’s should be prepared to provide custom products to serve the consumers they are educating. Here are a few options to consider for a viable community development program.
1. One-on-one, personalized adult financial education that includes financial planning, budgeting and credit management
2. Certified financial counselors in high member contact positions
3. Development products that make sense for the underserved market, such as;
- Alternative payday loan products that encourage personal savings and responsibility (similar to the Borrow and Save Program)
- Individual Development Accounts (IDA’s) to promote dedicated savings for housing, education and microenterprise development
- Credit rebuilder loans that support rehabilitation and future access to traditional loan products
- Microenterprise small business programs that provide technical assistance, education and access to small balance microloans
- Overdraft products that are not predatory to people who are the most vulnerable
- Deposit products with minimum deposit requirements and terms that address the unique needs of the underserved
- Loan pricing that rewards continued good behavior
Skeptics will argue that serving the underserved with development products is just too risky and contributes little to bottom line objectives. It’s true that poorly managed programs create unreasonable risk and can become unprofitable. But isn’t that the case with any of the products and services we provide? Today there are scores of community development credit unions that have successful, sustainable programs. Most of these credit unions fly under the radar and don’t seek public recognition, yet they continuously beat their peers with greater profitability and growth. Done correctly, community development programs represent an opportunity for small credit unions to grow and for larger credit unions to more effectively demonstrate how they are clearly different and better than their local competitors. Edward Filene would call this good business.