I recently had the pleasure of rediscovering my hometown. While some things never change, many things have – including the number of credit unions dotting the street corners. Having started my career in Utah, I was familiar with each of the credit unions I spotted. All are good brands, with expanded membership charters, serving the community at large. There is no shortage of electronic signage and banners communicating each credit union’s “unique” value proposition.
Unfortunately, many of these branches were built during a time of economic growth and expansion, and I assume many were betting on long-term continued growth. The effects of the economic slowdown have reduced the number of qualified borrowers being pursued by these credit unions. Lower demand, fewer qualified borrowers and close proximity of a large number of community-focused credit unions make for a highly competitive and hotly contested market. And my hometown is just the tip of the iceberg. Many credit unions located in cities across the nation are struggling in similar marketplaces. How can credit unions compete and thrive in this market? It depends on the strategy.
The over-served versus the under-served
The business strategy required to compete for the over-served (borrowers who can go anywhere and demand the best rate) stipulates great rates, high convenience and service that is different and better than the competition. For most, this model generates a lower average loan yield, lower operational expenses and usually lower loan losses. After all, serving the over-served tends to be less risky – if you can get them. It has been my experience that many who compete for the over-served tend to have lower margins and mediocre growth.
The alternative strategy is to increase service to the under-served: those hardworking individuals in lower income-brackets typically buried under the weight of less-than-perfect credit. Except for predatory lenders, competition to serve this group is weaker – even though the under-served market has grown significantly during the past five years.
The business model for drawing in the under-served is different: when properly managed, the under-served strategy generates significantly higher average loan yield and fee income. Typically, this higher loan yield and fee income compensates for a higher operational and loan-loss expense. Best practices among my clients who serve the under-served have average loan yields in excess of 9 percent. This is significantly higher than the yields generated by the over-served market and, when managed properly, is more than enough to compensate for higher expenses. Serving this market does cost a little more, with increased one-on-one time with the member, counseling and, yes, extra collection efforts. Just like any other credit union strategy, success in serving the under-served requires planning, expertise and risk management. There are scores of successful credit unions, large and small, run by leaders who will tell you that this model also generates strong, consistent growth and profitability.
It should also be mentioned here that the under-served strategy creates opportunities for secondary capital and exemption from the MBL cap as part of the NCUA’s Low Income Designation, as well as U.S. Treasury grant dollars of up to $2 million that can be used for loan loss reserves, operational expenses and capital. The NCUA just announced that 1,000 additional credit unions now qualify as Low Income Designated, and perhaps your credit union is one of them. As communities nationwide continue to struggle with high unemployment and economic uncertainty, the NCUA made the unprecedented move of proactively informing credit unions leaders that median incomes for consumers had dropped and they now qualified for LID benefits. Of the 7,357 federally insured credit unions in the United States – more than 2,100 are now low-income designated.
Take a look around
Who are your competitors, who are you competing for and what is your strategy? If you find yourself struggling to grow and turn a profit in a highly competitive market, you might want to take another look and consider your local under-served community. Who knows? You might just find an opportunity to more effectively differentiate, compete, grow and win. And for those of you like me who want to look beyond the financial benefits of any given strategy, you might find that the social and individual impact is both rewarding and closely aligned with traditional credit union values, values that made our movement what it is today.