Even during the best of economic times, mid-sized credit unions struggle to expand. For such credit unions, spurts of high growth occur rarely and unpredictably, and they are difficult to sustain. During the worst of times when loan demand dips, smaller to mid-sized credit unions face an even steeper climb, while their larger counterparts have the scale to significantly leverage resources with strong bargaining power that enables the pursuit of growth strategies despite economic downturns.
Breaking out of the middle
The $64-million question asks how mid-sized credit unions break out the pack to gain market share. I don’t believe they will get there with a safe 3- to 5-percent annual growth when their larger competitors are growing at a 50 percent faster rate. I don’t have a beef with larger credit unions. I am continually inspired by the great work larger credit unions do for their members, communities, and even many smaller credit unions. Some of my clients are large credit unions, and many of my friends lead large credit unions. But the fact is, large credit unions usually dominate consumer loan and membership growth in their communities. Good for them.
But what about your credit union? Do you have the strategies you need to break out of the middle, positioning your credit union for longer-term growth and viability? Do you have a plan to get to scale so you can more effectively compete and gain market share? Or are you just happy to make it through another year with mediocre loan growth?
I don’t believe that mid-sized credit unions can rely on the fact that they are “full-service” financial providers. Without greater scale, that message – along with friendly, personal service and great rates – is not enough.
Three successful strategies for mid-sized credit unions
First, have an honest assessment – vision, mission, member value, differentiation. Ask yourself and challenge your group on “why” your credit union exists and why anyone should care. Next, consider these unique strategies.
Culture. Filene’s “Thriving Midsize and Small Credit Union” study identified a significant number of midsized credit unions that are thriving, with assets, loans, and membership growing at rates faster than their asset peer group. The study compared the top performing 10 percent (Stars) of the study group to the bottom 10 percent (Laggards) of the group. The study identified nine key characteristics of the Star performers. The number one characteristic was that Stars are highly effective lenders. There are many factors that make Star credit unions more effective lenders, and key among these is a strong lending culture. These credit unions have aggressive lending attitudes. The board and management strongly believe that the credit union’s primary purpose is to meet member-borrowing needs. This culture and passion for lending permeates all levels of the organization.
Winnable markets. Strong growth and long-term viability depends on your ability to identify markets where you can clearly compete and win. In my experience, mid-sized credit unions are struggling to leverage service and rate differentiation to the “over-served” market (i.e., top-tier credit, middle-income borrowers who can go wherever they want to for a loan). Today, some of the fastest-growing mid-sized credit unions are pursuing the following winnable markets:
- Credit challenged – 56 percent of consumers have subprime credit! In 2013, CFED (Corporation for Enterprise Development) reported state-by-state population counts with subprime credit. The numbers are astounding, ranging from a low of 43 percent to a high of 64 percent. This is important. If your lending pool is limited to prime borrowers, you have eliminated more than half before you have looked at one loan.
- Emerging markets – The Hispanic and immigrant populations are growing at an amazing rate. Smart credit unions are creating strategies and even reinventing themselves to effectively serve these markets. They know that for most of these markets, predatory lenders are the only competitor.
- Millennials – I listed this group separately, however I believe a majority of this group can be found in the credit challenged and emerging market groups above. Credit unions who find ways to lend to this group (e.g., first auto loans) will be embraced.
Different products. For many of us, our prime loan-growth strategy revolves around loan refinances, which means we have frequently become the lender of second resort. It is difficult if not impossible to achieve big growth and/or earnings with this strategy. Changing financial-use patterns, demographics, and credit standing have fueled a robust Alternative Financial Service market. Products such as payday loan alternatives, pre-paid cards, micro small-business loans, and subprime auto lending are in high demand and represent an $80-billion per year market. For many successful credit unions, competing with these products is easier and more profitable. Average loan yields and fee income is higher, and the goodwill is great because they can save members a great deal of money. Making this move, they are no longer solely competing directly with mainstream financial institutions.
Why it matters
The competitive challenges for serving prime credit consumers with traditional products and services have never been greater for credit unions. The good news is that more credit unions are shifting and reinventing themselves to meet the rapidly changing demographics and markets. Today, these credit unions are thriving, with best-practice growth and profitability rates. Further, they are finding greater purpose and relevancy.