Credit Unions Seek New Business Growth Opportunities
There is nothing new about generating new revenue.
Take it from credit union executives and experts who say generating new revenue is about getting back to basics, taking on more risk, looking for untapped markets and exploring technology options to attract millennials and Generation Z.
Although car loans keep the revenue engine humming for most credit unions, Mark Lynch, senior program manager for the National Credit Union Foundation in Madison, Wis., pointed out during CUNA Mutual Group's seventh annual Discovery Conference last month that credit unions are missing a big opportunity to sell car loans to members with less than stellar credit.
Part of the Foundation's research was to identify those members that need a car but have low credit scores.
“One of the things that really shocked us is that the majority of people below, say, [the age of] 45 have a credit score of around 630,” Lynch said. “You then look at the loan portfolios that credit unions have and we find that many credit unions are not wanting to do loans below that [credit score]. That bascially means that if you look at the range of people, you find around 55% of our members or potential members have credit scores below 640. So that means credit unions are missing out not only on serving an important part of the population who needs these loans, but they are missing an opportunity to do good business.”
If managed carefully and appropriately, Lynch said the Foundation's research shows providing car loans to members with low credit scores could yield a net rate of return as high as 10%.
A two-year pilot study conducted by the Foundation and the Filene Research Institute included the participation of 10 credit unions that made 7,605 loans worth $101 million. The average loan was $12,000 to consumers (average age 37) with an average credit score of 585. The average term of the loan was 53 months with an average interest rate of 11.7%.
The net income generated was $3.7 million, according to the pilot study.
“The other thing that we found from the pilot was that income generated from these types of loans was much higher than income generated from members that had stellar or very high credit scores,” he said.
However, credit unions should have two distinct policies for high score members and low score members. In lending to low credit score members, credit unions also need to have a dynamic risk-based lending program to cover higher loss rates and a strong underwriting process to gather more information to determine the member's ability to repay the loan. Credit unions also need to closely monitor the performance of the loans and immediately communicate and work with members who are showing signs of payment lapses.
For Gary Wahlgren, vice president of lending for the $557 million USF Federal Credit Union in Tampa, Fla., finding revenue generation opportunities is all about getting back to basics by taking a closer look at the details.
“These are things that sometimes aren't always right on the surface. You forget about them because you have turnover and no one's really thinking about it,” Wahlgren explained. “In this case, we really tried to dive into where the efficiencies are that we can get associated with lending.”
At the end of 2014, USF posted a loan-to-share ratio of 74%. To maximize its earnings, the credit union set a strategic goal in January 2015 to increase its loan-to-share ratio to about 90%.
In the past, USF was making exceptions for certain risks, but what Wahlgren found was that the credit union wasn't getting paid for different risks that it was taking on.
“We tried to identify all of those risks and then attached rate adjustments to each one of those risks,” he explained. “If you had a higher LTV and we still wanted to do the loan because we thought it made sense, maybe you get a half a point rate adjustment. That tiered LTV rate adjustment could go as high as you wanted it to go. It could start at half a point and it could go to two points, as an example. We might add another point for a previous bankruptcy or repossession. We might add a half a point for mileage over 100,000. If we are going to take on that risk, we wanted to get paid for it, which would offset the collection losses, instead of saying, ‘We’re just going to raise our rates by a point and hope that we can still make loans.’”
Making these rate adjustments, along with raising some auto lending-related fees to market levels, which were still well below the fees charged by subprime financing businesses, and reducing costs through renegotiating indirect and direct lending contracts, enabled USF to increase auto loan revenue from $115 million to $238 million within 18 months. In a year and a half, the total number of new and used car loans increased from 8,253 to 14,485.
Improvements in its auto loan portfolio, which accounts for nearly half of the credit union's total loan portfolio, enabled USF to reach its primary goal of increasing its loan-to-share ratio from 74% at the end of 2014 to 89% by the end of the third quarter of this year.
Another potential revenue generator is microenterprise loans of $50,000 or less for work-at-home, self-employed freelancers, contractors, consultants and other service providers who run a microbusiness in the emerging gig economy.
Advances in mobile and online technologies have substantially simplified and expanded ways for freelancers across many industries to find work projects, deliver services and market their own products on the web. More than one in three workers, or 53 million Americans, are freelancers, a 2014 research study by the Freelancer's Union and Elance-oDesk revealed.
According to the NCUA, 25% of employers are small businesses and 88% of them have one to four employees. Though 58% of these entrepreneurs are searching for loans of more than $50,000, 41% of them are looking for loans of less than $50,000.
Melissa Marquez, president/CEO of the $18.1 million Genesee Co-op Federal Credit Union in Rochester, N.Y., began making microloans in 1999 because the community it serves has many self-employed members who needed personal loans to support their businesses.
Over the last 15 years, the Rochester, N.Y.-based cooperative has made 200 microloans totaling $1.5 million.
Currently, Genesee manages 36 loans and 80 business lines of credit totaling $335,000 and $100,000 in credit for its business lines of credit. The cooperative's average business line of credit is $2,500 with a maximum of $10,000 and its average loan is $6,500 with a maximum limit of $25,000, unless the loan is secured by a car or real estate.
“Microenterprise lending is seen as a risky endeavor, and in our early years we did take some hits that were difficult,” Marquez said. “However, we have really focused on staying in touch with our members as soon as they are late on the payment, which has helped us manage our delinquency. As of December of 2015, our delinquency was 1.8%, and we had a net charge-off for the year of 0.76%. At the end of March, we had no delinquent loans over 30 days and as of the end of June, we had a 2% delinquency and losses of $600.”
What's more, the credit union's loan yield for its microenterprise loan portfolio was 9.7% in 2015, and in the first six months of this year, it was 9.5%.
“And this yield is very important to our profitability and makes it a very worthwhile loan product to offer our members,” she said.
However, before a credit union ventures into microenterprise lending, it needs to develop a strong program foundation that is supported by a strategic plan, knowledgeable personnel and appropriate policies that determine the loan initiative's structure and limits.
“It is key to keep in mind that the training and personnel would greatly depend on the size and complexity of the loan program being offered,” NCUA Regional Lending Specialist William MacMaster said. “At minimum, the loan officer must understand basic cash flow, balance sheet analysis and what is expected to manage the business loan relationship.”
Millennials and the kids coming up behind them, Generation Z, who were born between 1995 and 2010, live out of their smartphones. That lifestyle creates opportunities for credit unions to figure out ways to leverage smartphone technology to not only attract and retain young members but generate new revenue such as noninterest income.
Filene recently tested a noninterest income opportunity with a pilot program, Larky. This web and mobile loyalty platform enables credit unions to provide members with point-of-sale discounts at local and national merchants via a credit union-customized and branded app that features location-based smartphone alerts and personalized messaging. The member receives the merchant discounts by utilizing the credit union's credit and/or debit card.
According to Filene, 82% of smartphone users consult their phones while they are in a store deciding which product to buy.
Filene's pilot project involved 10 credit unions from a diverse asset size mix. They each introduced the Larky app to their members and collected data to determine its impact over 20 months.
Although the adoption rate of the app among active mobile banking users ranged from a low of 3.4% to a high of 38.8%, the average adoption rate was 7.6%.
The pilot found that credit card penetration increased 5%. Though Larky was part of that increase, these results cannot solely be attributed to Larky usage. The pilot credit unions saw only a marginal increase among debit card interchange and penetration, however.
Nonetheless, the credit unions also shared ideas for improving the Larky app, such as location-based promotions at auto dealerships or credit union branches, smarter notifications to meet members’ needs and an analytics dashboard to leverage data about Larky usage to improve member engagement.
In partnership with Larky, the Northwest Credit Union Association developed the CU Values app to help credit unions cooperatively build a mobile platform rather than forcing individual credit unions to take on the cost alone. Participating credit unions purchase “shares” each for $150 per month. Each share includes a location-based notification to promote a product for their credit union. What's more, each share includes three unique offers at merchants in their communities along with mobile advertising within the platform.
The process does not include enormous setup or implementation fees or lengthy contract terms, according to the Northwest league. Because the CU Values app was deployed last month, there is no data yet on the app's performance.