Washington - A Special Report for Credit Union Journal readers by Jim Jerving, Correspondent
When President William Jefferson Clinton signed the Credit Union Membership Access Act (HR 1151) on Aug. 7, 1998, there were great expectations for both membership growth and market share.
HR 1151 was a historic victory against a well-funded banking lobby that sought to restrict both credit union growth and limit membership.
While the industry came together in a national “Campaign for Consumer
Choice,” it was a triumph of trade associations, leagues, and credit unions working together for a sustained period of time as one cohesive voice before Congress and the American people. There was no doubt where credit unions stood.
It was also a continuous unity that has not been witnessed since 1998.
Like so many legislative battles, though, much of the hard labor took place in anonymous committee rooms. The margin of victory in some cases was only one vote, recalls Larry Blanchard, SVP-special projects with CUNA Mutual Group, who coordinated the campaign.
“We had 74 million members at the time, if we had lost, we would have lost the ability to grow,” he said. “We would have dwindled to 40 million or so. If credit unions couldn’t bring in groups; credit unions wouldn’t be able to grow.”
Blanchard’s reference is to the crux of the fight for HR 1151. The enormous effort and its significant consequences all revolved around the letter “S.” Could federally chartered credit unions serve multiple groups with the same common bond, or just one group? Credit unions and banks had been tangling over that issue for most of the 1990s, and in 1998 the Supreme Court supported a lower court ruling in favor of banks. HR 1151’s singular goal was to open fields of membership.
In the decade following HR 1151 the expectations for growth in market share and membership remained strong. After interviews with credit unionists for this report, however, most agree that these expectations remain largely unmet.
“HR 1151 wasn’t meant to save us, it was meant to give us an opportunity,” said Tom Glatt, CEO of Continental FCU in El Segundo, Calif. “We didn’t take the opportunity.”
The Tough Issues Examined
This report focuses on the following:
Why has credit union membership growth slowed in recent years?
* Why has market share remained at low levels? For example, why do credit unions have only 2.1% of the nation’s mortgages even though there are 90 million members?
* And looking ahead, how can credit unions gain marketshare as well as members in the years to come? How can credit unions remain relevant to the American consumer?
The past decade was a whirlwind for credit unions and a difficult time to adjust. There was, of course, a restructuring of the financial services industry. Consumers began to have multiple choices beyond traditional financial institutions, with new retail options from Vanguard, Merrill Lynch, and Fidelity to name only a few; as well as mortgage companies. And then there were all the new Internet-based options. Consumers were just as likely to finance big ticket items at retailers as at a bank or credit union.
Point of sale financing has become popular with time-pressed consumers for automobile purchases. It no longer made sense to go back and forth to the credit union and the dealer with paperwork when everything could be completed at the car dealership with one-stop shopping. Most credit union auto lending growth is taking place through indirect lending.
In fact, membersand many employeeswould be stunned to learn that auto lending is no longer first in the lending portfolio. Real estate lending now has that honor. Progress has been made on the credit union balance sheet. During this time period, credit union assets, savings, loans and capital more than doubled as shown in the table, below left.
During that same time period, the number of credit unions dropped from 11,652 to 8,443 and membership increased from 73.5 million members to 89.5 million members. But the rate of membership growth has slowed considerably in recent years as the table below indicates. A case can be made that if one holds that new members brought in by indirect car loans constant, membership growth has been treading water, or declining, in recent years.
Members Doing Business With Banks
As the table on the facing page shows, marketshare remains lackluster even though about 90 million Americans are members of a credit union. Non-revolving loans, which are primarily auto loans, have the largest market share at 14.8%, followed by total shares and deposits at about 8.8%, credit cards at about 3.1%, first mortgages at 2.1%, and IRAs at 1.2%.
What accounts for the disconnect? And how can credit unions have so many members using so little product? The simple fact is that many members choose to do most of their business with banks, according to Bob Hoel, a Fellow with the Filene Research Institute in Madison, Wis., and winner of the 2008 Herb Wegner Lifetime Achievement Award.
“We have members who like us but do more business with banks; 44% of our members do more business with banks than at their credit union,” said Hoel. “There is a disconnect with likeability and where you do business. A vast majority of members do some business at a bank.”
“Filene research shows that members perceive credit unions as friendly, but not as sophisticated as banks,” said Hoel. “People aren’t aware of a credit union’s full range of products and services, or they have an outdated image.”
Research by Tom Davis came to similar conclusions. Davis is CEO of NACUSO; he is also an industrial psychologist and CEO of Davis & Company. Davis conducted focus groups on what consumers want from their financial institution and found that they want good service, convenience, advocacy, and credibility.
According to his findings, credit unions rate highly with service, but convenience was not as high. “We don’t have a branch on every corner as a bank.” Advocacy was ranked high, as credit unions are perceived as having their members’ best interests at heart.
“In perceptions of credibility, members ranked their credit unions low,” said Davis. “Members trust us, but the trust from doing car loans doesn’t superimpose onto other more sophisticated products like mortgages and retail investments, we have only 2% of the mortgage market originations.”
“For example, if a member came into the credit union for a mortgage loan, they would want the loan officer to explain several different types of loan programs related to their circumstances and situation and the advantages and disadvantages of each,” he continued. “Then be able to make a recommendation on the best program for the member. The perception is that we as credit unions do not have personnel with the knowledge and expertise to do this.”
Davis said that credit unions would do well to develop and implement a “credibility strategy.”
“That includes leveraging positive word-of-mouth and favorable testimonials related to the knowledge, expertise, and professionalism of the staff, including an awareness of competitor offerings and how the credit union value proposition is superior,” he said.
There’s also an emotional context to this strategy, according to Davis, and one that is frequently ignored by financial providers.
There is an emotional outcome associated with each of the rational components of the desired member experience, Davis told Credit Union Journal. For example, if the staff is able to demonstrate credibility, that will result in a feeling of confidence in the staff by the member. If the staff provides superior service, that will result in feelings of being valued by the member.
“If members are able to make a decision, they will have a feeling of confidence, comfort and relaxation,” said Davis. “They will have a chance to have the stress taken out of their day and get a feeling of trust. This is the core of what people want from their financial institutionconfidence, comfort, trust and security.”
Having a positive experience and feeling good as a result of this experience is at the core of what people want from their financial institution, according to Davis. “We need to structure the emotional piece to the member experience,” he said. “It is just as importantpossibly more importantthan the financial piece. People tend to make decisions based on emotions.”
Mortgages: The Nightmare
In seeking answers for the disconnect in market share and the slowing membership growth, mortgage lending serves as a window into credit union operations. The missed opportunities during the past 10 years are echoed in other areas of credit union operations, according to several analysts.
Federal credit unions were given the ability to offer 30-year mortgages in 1978. Thirty years later, they have only 2% of the nation’s mortgage’s market, while 53% of member households own their homeshigher than bank households. Granted, part of the reason is that many credit unions sell off a large percentage of their fixed-rate real estate loans.
It is also true that many members are still unaware that their credit union offers mortgage lending. But that only accounts for part of the poor showing. The major reason is the lack of developing relationships, according to Bob Hoel.
“Much of the success in mortgage lending is in building relationships with real estate agents and other key influencers,” said Hoel. “Many credit unions have not worked the street in developing relationships. We are relatively passive in developing relationships.”
Dan Green, EVP and COO with Prime Alliance Solutions, Tukwila, Wash., agrees that credit union mortgage loan officers need to get out of the back office. He has been a credit union mortgage lender for more than 20 years.
“You need to get in front of the member any way the member wants to originate the loando it face to face, online, at home,” said Green. “A good mortgage broker will take the loan anywhere; he will meet you on your terms.”
Brokers and real estate agents go hand in hand, they are both developing relationships all of time, said Green. Brokers control 30% to 40% of the mortgage origination market and are paid on 100% commission, so they are a great fit with Realtors. When real estate agents refer a buyer to a lender, it is typically not a credit union.
“Credit unions take the business when it walks in the door; we don’t go out into the community and get it,” he said.
Another issue is that a mortgage transaction is a completely different product than a car loan in duration; it can take 12 months from the beginning to closing, said Green. And credit unions tend to view mortgage lending as one market, when it is multiple markets. Credit unions need to decide which market to concentrate their efforts, he said.
“Understand who you are servicing, first-time buyer, low-income, moderate income, upper income,” said Green. “Which segments do we service best? Which do we concentrate on? Understand your local market in your community.”
Mortgages: The Dream
According to those interviewed for this report, mortgage lending is one of the best opportunities for credit unions in 2008 and 2009 in spite of the subprime mess. In fact, because of the subprime disaster, credit unions have a unique advantage to help their members because of their reputation for trust and the fact that they avoided questionable lending. Reliability and trust is a currency that will be highly valued in the post subprime environment.
“This is a dream opportunity, because the mortgage market is in disarray,” said Hoel. “With all of the chaos and perceived chaos, people can still go to the credit union and get a good deal on mortgage, but we need to get out and work with a real estate team.”
Brokers and real estate agents are looking for reliable sources of funds as the subprime crisis brought home the realities of funding sources that fell through at the last minute as well as less than ethical players in all facets of the mortgage market.
“This is the perfect time for credit unions to seize the opportunity for relationships with mortgage brokers, building contractors, real estate agents, financial planners, tax accountants, lawyersanyone who has influence with a buyer,” said Green.
The number of mortgages being made in 2008 backs this up. More than $600 billion in resets will be made in 2008 and 10% of consumers who took out subprime loans could have qualified for conventional loans, according to Green.
Originations and housing starts will be flat in 2008 but will pick up in 2009, according to the Mortgage Bankers Association, as shown in the table above.
This is an opportunity for credit unions since consumers are looking for lenders they can trust. They are wary of mortgage brokers who don’t have the buyer’s best interests at heart. But, it will take a cultural change for many credit unions requiring a more assertive posture in the community.
Mortgage lenders need to get out of the office and into the community, develop relationships and hustle for the business. This is a business strategy for all areas of the credit union, not just mortgages.
Pricing Related To Lack Of Membership Growth
Pricing mishaps, especially in deposits, have been detrimental to membership and market share growth, according to some industry experts. A case can be made that credit unions have historically under priced or ineffectively priced their products and services. (CU Journal, “The Big Margin Squeeze,” July 10, 2006.)
Researcher William Jackson found in his research for Filene Research Institute that credit unions do not generally price in a profit maximization manner, especially in comparison to banks.
Jackson wrote that commercial banks tend to lower their rates on their deposits faster when market rates are falling than they raise them when market rates are rising.
In his research, Jackson found that credit unions do not “exhibit this type of profit enhancing behavior. Credit unions adjust savings rates downward at the same speed as they adjust them upwards.”
Brian Hague, President/CEO of CNBS, Overland Park, Kan., and a noted economist, believes that the lack of membership growth is directly related to credit unions maintaining share rates near historic lows as shown below, left.
“What I believe this chart tells us is that the lack of membership growth is related to the fact that credit unions have kept share rates near the historic lows that were priced when the Fed funds rate was 1%, even as the Fed funds rate rose to 5%,” said Hague. “Note that since 1982, each time the Fed funds rate was lowered, the credit union share rates followed suit, but when the Fed subsequently began to tighten, share rates remained at the floor, creating a series of downward steps in share rates.”
Marketing The Credit Union Story
If Oscar Wilde were alive today and looking to finance his American vacation home in Greenwich Village, he would likely not seek a credit union mortgage. Many consumersand sadly membersare unaware that credit unions offer mortgages and sophisticated products and services.
It is true that financial services marketers face a tough challenge; most consumers see little difference between banks, credit unions and countless other financial services providers. That challenge is further compounded by having to operate in a highly regulated and conservative financial environment.
Before HR 1151, credit union marketers served SEGs and it was a closed market with few competitors. Marc Schaefer, CEO of the $1.1-billion Truliant FCU in Winston Salem, N.C., has a unique vantage point on the HR 1151 story.
His credit union was originally AT&T Family FCU and was sued by the ABA and four North Carolina banks when the credit union tried to add a furniture factory to its field of membership.
This was the lawsuit in which NCUA was actually the defendant that was at the core of the Supreme Court ruling that eventually led to HR 1151.
Why haven’t credit unions done a better job of marketing the credit union story?
“We have done a good job of keeping what we do secreteven to our members,” said Schaefer. “We haven’t done a good job of selling the value of member ownership to our members. The single biggest cause of failure to grow and gain market share is that we fail to capitalize on member-ownership. People would like to connect with their financial institution. Member ownership gives back the value they expect.”
Truliant surveys every fifth member for feedback on service. “We ask the members why they feel part of the Truliant Credit Union,” said Schaefer. “They tell us, It’s the way you made me feel; It’s the way you treated me.’”
In a commodity-driven financial marketplace, Truliant has found several ways to differentiate. When it advertises a loan rate, 50% of its members qualify, unlike many baitand-switch advertisements. Even though it costs Truliant more than $8 million annually, the credit union doesn’t offer a courtesy pay or overdraft protection programs; members are offered a line of credit.
“We differentiate by giving back in low fees, low loan rates and high rates on savings relative to the competition,” said Schaeffer. “We let our members know what it means not to sell our credit card portfolio, because rates tend to change when you sell your credit card portfolio.”
Marketing To Young Adults & Attracting Deposits
Another marketing challenge credit unions face is capturing deposits. One means of accomplishing this is capturing the savings market from aging baby boomers, according to Filene’s Hoel.
“Banks have been doing a better job at reaching baby boomers,” said Hoel. “It isn’t just rate; it also includes reaching out with staffers. Most seniors want someone who is a long-time employee. Seniors want to keep their savings in the community.”
Hoel predicts that there will be a big market for signature loans, real estate loans, and second homes for baby boomers. “Reverse mortgages will expand dramatically in the next 10 years,” he said. “There will be a big opportunity for Latinos and young adults, unless we recognize that they are special and take a special marketing effort, we won’t succeed.”
“We should appoint marketing managers for key segmentsyoung adults, baby boomers, and seniors,” continued Hoel. “The big savings opportunities are with the baby boomers and seniors.”
Credit unions and most financial institutions have had difficulties in attracting young adults to their doors. The credit union message of self help, cooperation and education has appeal to young people, according to Daniel Thorpe, president of Boom Creative, who developed a viral marketing campaign for the $2.6-million Tulip Cooperative Credit Union in Olympia, Wash.
Thorpe created a video of a young counterculture woman, named Onyx, who lives simply, but is attracted to the credit union ethos as shown in this video on YouTube: http://youtube.com/watch?v=kmvPeTufF4w
“I don’t make a lot of money, but the money I have I put into a cooperative credit union,” said Onyx. “Tulip puts power back into the hands of people who would normally feel dispowered.”
The video spot played well in Puget Sound area in Washington as well on YouTube, and in local theatres. It resonates with young people because the credit union message is as genuine today as it was a century ago.
Excess Capital Blues
At the end of 2006, the capital level of U.S. credit unions was 11.6%, 460 basis points higher than the 7% “well capitalized” mandate. Economists and others have long been suggested that credit unions were over capitalized; this was one of the factors contributing to slow growth and low market share.
Research published in 2007, “Is the U.S. Credit Union Industry Overcapitalized? An Empirical Examination,” a Filene Research Institute Study by the University of Alabama’s Dr. William E. Jackson, suggested that credit unions are overcapitalized.
Jackson concluded that U.S. credit unions are overcapitalized by 30% to 40% or between $25 billion to $33 billion. Jackson concluded that almost all credit unions are overcapitalized to some extent.
“Overcapitalization in the U.S. credit union industry is a severe waste of resources that penalizes credit union membership and leads to major inefficiencies in the overall U.S. financial system,” said Jackson.
Jackson compared risk factors for 1990 when the net worth ratio was 7.6%, and the risk factors for 2006. He concluded that 2006 was less risky.
“Many credit union executives have also realized that their capital management policies are much too conservative and that capital is not a free good’,” said Jackson. With the efforts and cooperation of credit executives and regulators, the current situation of overcapitalization in the U.S. credit union industry will likely improve.”
Why is this important to membership growth and expanding market share? With an excess of capital, credit unions could be investing in technology, facilities and other growth opportunitiesespecially during a time of low growth and low market share. As the previous section on savings rates indicates, credit unions could do well to offer market savings rates. A strong capital position also allows credit unions to pursue risk-based lending. Higher capital levels can also support higher asset growth which can expand market share.
Seeking Risk Takers & Innovators
When considering risk and financial services, a lending conference of a few years ago that featured a presentation given by lending guru Rex Johnson serves to instruct. Johnson, of Elgin, Ill.-based Lending Solutions, Inc., and leader of the University of Lending, encourages credit unions to take more risk.
He cited a police officer with 20 years of service, who earned more than $90,000 annually and had direct deposit with his credit union.
The police officer applied for a car loan, but was turned down because his credit score was 500. He paid 23% APR to a finance company and made regular payments on his car loan. Johnson argued that his credit union should provide him a refinancing loan since he is a good risk. Johnson said the credit score is just a tool and should never be the only factor in determining the loan.
How often is this example still repeated today, he asked the crowd of lenders at that meeting and others.
The financial services industry is, by nature, a risk-averse industry. In a highly regulated environment, those who take risk are not rewarded. People who are attracted to credit unions are typically not risk takers or innovators. Credit unions by their charter and structure lack incentive for innovation and risk.
“Credit union staff are not incented to take risks; the stakeholders have more to lose by taking risks and nothing to gain,” said John Gregoire,” president of ProCon in Madison, Wis. “With that kind of culture, it is highly unlikely that you are going to take risks needed for innovation.”
“If you are a real risk taker, you don’t look for a job at a credit union,” observed Gregoire. “A real risk taker would be considered odd at most credit unionsyou wouldn’t fit into most cultures.”
Credit unions do have a regimented approach to work, but there are signs that the culture may be changing. Filene Research Institute’s i3 group, in Madison, Wis., for instance, is charged with developing innovations for the credit union industry. For the past four years it has developed creative business models, many of which have been field-tested in U.S. credit unions. Yet, credit unions are still reluctant to innovate, even with the i3 innovations available for the taking.
Credit unions are running at a fast pace just to keep up, to find resources, according to Denise Gable, Filene’s chief innovation officer and leader of the i3 Group.
“You have to have somebody who is a champion for the process of innovation,” she said. “Today, we’re seeing an increased interest from members who want to help co-design your business. Innovation requires risk, some disruption and sometimes the death, or elimination of something.”
There is a role for directors in a culture of innovation. “Stay open to risk, and find comfort in a world of ambiguity,” Gabel said. “It may be that management will bring forward an idea to innovate saying, we think it will do this, but we don’t know for absolute certain, we will have to test it. Management and the board will have to assess the level of risk and make the appropriate decision.”
Collaboration As Competitive Advantage
The cooperative business model offers a competitive advantage but it still isn’t the dominant theme in the credit union industry. Of the 8,463 credit unions, only 2,100 participate in CUSOs. And those that do participate tend to be the larger credit unions, while the smaller credit unions, that could most benefit, tend to pass on CUSO participation.
Credit unions are small to begin with,” said NACUSO’s Tom Davis. “Even with our small number we are fragmented. By and large the industry is doing things individually. We have less than 6% of the financial assets.”
As the chart below illustrates, in terms of share among the financial intermediaries, banks hold $10.8 trillion in assets; thrifts $1.9 trillion, and credit unions $760 billion.
If cooperation is part of the credit union ethos, why aren’t we seeing more cooperation?
“The cooperative model is not part of U.S. history,” said Davis. “We are an isolationist country. Our values are independence and self-reliance.”
During the next one to five years, the cooperative and CUSO model could help to slow the inevitable mergers and acquisitions in the industry and give people an alternative, according to Davis. “If a $150-million credit union merges with a billion-dollar credit union you lose points of contact in the community,” said Davis. “Mergers are not inevitable for smaller credit unions. Working together in a collaborative spirit with others is an alternative.”
A group of credit union leaders met in August 2007 under the auspices of Filene Research Institute at the Wharton School for the Collaboration Colloquium to take a frank look at why credit unions need to collaborate on a large-scale basis. The research findings from this collection of leaders, academics, and consultants resulted in the following:
* Information technology and trust are the two key enablers to collaboration.
* One question credit unions need to consider when approaching large-scale collaboration efforts: Are we ready and willing to be the junior partner in an alliance?
* The vendor community needs to create attractive price points in order to suck credit unions into collaboration efforts.
* Collaboration is a phased process that occurs in steps, not leaps.
* Credit unions need to identify and promote success stories in collaboration.
* CUs need to orient boards to the notion of “strategic risk,” or in other words the costs of being risk-averse may be more risky than taking calculated risks such as large-scale collaboration.
* Egos can get in the way of collaboration.
* The last five years have been tough for credit unions, perhaps these hard times will cause credit unions to seek out change and collaboration in a more proactive manner
The Hyper-Opportunity’ For Innovation
Randy Karnes, CEO of CU*Answers, a Grand Rapids, Mich.-based data processing CUSO, asked the participants at the Collaboration Colloquium if they can inspire a new wave of innovative collaboration before it is too late. He noted that shared branching networks and EFT networks for ATM, debit, or credit transactions have been successful. Shared service collaborations in mortgage originations, indirect lending and call centers also play a role in supporting credit union collaboration.
But these examples have not revolutionized credit union business Karnes said. Collaboration tends to be defensive, when the organization is failing or seriously struggling.
“Why not push for innovation at a whole new levelnetworked business structure,” said Karnes. “The credit union industry needs hyper opportunity, and it needs it now.”
Karnes proposes a process of developing networks through vendors who design solutions that allow credit unions to keep their individual identities while building connections between other organizations.
The challenge for the vendor is to achieve this without being a traditional middleman that adds little value.
The Caisse Populaire Example
The possibility of a networked and fully integrated business model has worked in Quebec, where the caisse populaire has six-million members and total assets of $138 billion. It is the largest financial institution in that province and the sixth largest in Canada. Each caisse is managed independently, but all share IT and other services. The central federation handles planning, product development, marketing, human resources and other services.
In the U.S., more small and medium-size credit unions will turn to organizations like CU*Answers for data processing and other services.
For example, CU*Answers was performing bookkeeping for 31 credit unions for $150 a week as of August 2007.
Karnes said that such a network model would be a “core strategy” and essential for long-term survival. He cites the example of a Wells Fargo bank with offices across the street from a local credit unionall over the U.S. That local credit union is disadvantaged unless it too has the benefits of being part of a national networked system.
“We have to be an industry that believes in open capacity,” said Karnes. “Instead of merging, networking can increase our competitive difference.
Not all view collaboration as the prescription for credit union survival and relevancy. Collaboration as a back office expense makes sense, but it isn’t a growth issue, according to Gregoire. “Real industry success is demonstrated not by expense control, but by growth.”
“For the top performing companies to succeed, it wasn’t through collaboration,” he said. “Large collaboration isn’t in your economic interests. It isn’t in your genes to work.”
Gregoire cites the examples of State Employees in North Carolina or Orange County Teachers in California as among the top four credit unions in the country. Their success is in serving the needs of their members very well.
“When I talk to top CEOs their overriding thought is serving their members, much of their success comes from distinctiveness. You stake your claim to the market by providing some form of distinctiveness and guard that. If credit unions were successful at collaboration, we would have a national brand; credit unions have continued periodic attempts at brand collaborations going as far back as the Rose Bowl floats.”
For More Info On This Story
* CUNA Mutual Group: www.cunamutual.com
* Continental FCU: www.continentalfcu.org
* Filene Research Institute at www.filene.org
* CUNA at www.cuna.coop, click on the Research & Statistics tab for data in this story.
* Davis & Co., www.daviscompany.net
* NACUSO at www.nacuso.org
* Prime Alliance at www.primealliancesolutions.com
* Mortgage Bankers Association, www.mortgagebankers.org
* Corporate Network Brokerage Service, www.cnbsnet.com
* Truliant Federal Credit Union, www.truliantfcu.org
* Tulip Cooperative Credit Union, www.tulipcu.coop
* Lending Solutions, www.lendingsolutions.com
* Pro-Con Group, www.theprocongroup.com
* CU*Answers at www.cuanswers.com
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