One of my Facebook friends is a passionate storm chaser. This time of year, Ed Turk, president of Heritage Community Credit Union, is out chasing storms. I enjoy following the pictures of funnel clouds and colorful radar maps, and of course vicariously experiencing the thrill of the chase. There is just something about it – managing the risk for the ultimate reward of seeing nature at its most dynamic and powerful.
Traveling as I do, I spend my fair share of time thinking about things. On my mind during my most recent trip were the dark storm clouds gathering in North Carolina and my pending topic at the small credit union round table: how to grow loans when you are a small fish in a big pond. The combination got me thinking about a “perfect storm” I believe is brewing and worth chasing for small to mid-sized credit unions.
The perfect loan storm
I believe a number of things have recently come together to create a perfect opportunity for credit unions to lend and grow. It’s direct and in keeping with our credit union roots. The following facts are in play, and were key in the development of this near-perfect situation.
Fact 1: A majority (56 percent) of consumers have sub-prime credit. Depending on where you live, you may have an average in the higher sixties. For the most part, these consumers are shut out of the non-predatory mainstream credit market.
Fact 2: Regardless of bad credit, consumers still need reliable transportation to get to work. For the nearly two-thirds of credit impaired consumers, this means financing a used car at a predatory “buy here, pay here” used auto lot at rates between 25 and 40 percent. Many of the people in this category have good job time, non-documented credit (i.e. rent, utilities, etc.), the capacity to pay, and a little bit of savings – after all, the predatory auto lender is probably going to require a down payment of some kind.
Fact 3: Younger consumers (coveted millennials) need a financial institution to give them a first chance. Many are looking for someone to agree to grant their first loan. Millennials are credit- and income-challenged. Unfortunately, some made the mistake of applying for a bank credit card to get the free-beach-towel-with-the-almamater-screen-printed-on-it and it didn’t turn out well. They lack adults in their life who will (or can) co-sign for their first loan. Credit unions who truly want to serve Millennials will find a way to grant them a loan.
Fact 4: Alternative Financial Services are the dominant lenders serving these groups. It’s big business: in excess of $100 billion annually. “Buy here, pay here” used auto loans are the largest group within the alternative market category. For the most part, these lenders are left unchecked (regulatory and competitively), and that makes for a booming used auto market.
Fact 5: There are scores of credit unions – small, medium, and large – that are demonstrating how successful serving these underserved markets can be. They are typically growing loans (directly) at a double-digit pace, with higher average loan yields of 8 to 10 percent and loan loss ratios near or below their peer groups. They have learned (or been reminded) that most consumers will not bite the hand that feeds them. Sure, they have extra ways to mitigate the risk, but they will tell you they gain palpable loyalty.
Fact 6: We have been here, done this before. Credit unions were founded on the principle of providing affordable access to credit for tens of millions of consumers who were ignored by the banks and considered too risky. Credit unions found ways to grant loans to those considered unbankable, and not only survived but thrived in these markets.
Fact 7: While loan growth has been strong overall, there are far too many credit unions that have flat or negative loan growth. Smaller credit unions are trying to compete in the low-rate, indirect wars, lacking the scale to truly compete and win in that market. Ultimately, I believe most credit unions go away because of their inability to grow profitable loans. The largest credit unions are responsible for the majority of all credit union loan growth. Smaller credit unions must find (and defend) a loan niche where they can compete and win.
Let’s do some “disrupting” ourselves
The opportunity is ripe for credit unions to disrupt the alternative financial services market, compete, and win in a market that is (currently) overlooked by mainstream financial institutions.
These facts are coming together at a time when many are again questioning credit union tax exempt status, and credit union relevance in the overcrowded market focused on serving the overserved.
Millions of hardworking (and younger) Americans need credit unions today more than ever. They need affordable access to credit, and a path to asset-building, a better credit score, and responsible financial behavior. I believe this is a perfect opportunity for credit unions to return to their roots and find profitable ways to serve this group.
Just like my storm-chasing friend Ed, we need to prepare for and mitigate the risk. But where there is risk, we’re likely to find abundant reward. And, in this case, the reward can be substantial:
- Higher consumer impact that is material
- Loyalty that is worth more than 25 Basis points
- Referrals from friends, family, and coworkers
- Higher average loan yield to drive strong earnings and fuel growth
- Loan growth from a market where you can compete and win
And who knows, you may make that one change that will ensure your brand will be around for another 50 or 75 years. Now that is worth chasing!