3 Steps To Embrace Member Need Without Sacrificing Profitability

Special loan rates for qualifying segments, such as military members, help credit unions stay true to their values and remain financially stable.

 
 

Most credit unions want to help their vulnerable or underserved borrowers; that’s the basis for the “people helping people” philosophy. But credit union leaders must balance such assistance against obligations to the rest of the membership. After all, the credit union will be in a position to help no one if it is not financially sound and stable. Finding this balance is not always easy, but one benefit of being a cooperative financial institution is the freedom to implement creative methods to serve all areas of a membership.

Some credit unions segment their memberships to identify needed products and services. In these cases, credit unions frequently allocate extra resources or provide discounts to certain individuals based on desirable behaviors — such as those who contribute above and beyond to the credit union — or simply according to financial need. Member segmentation can be a strong complement to any lending strategy, and you can be on your way to realizing its benefits in three steps.

Step 1: Identify Segmentation Candidates

With 6.71% annual loan growth, 1.25% ROA, and a 1.55 % increase in average member relationship as of first quarter 2013, according to Callahan & Associates’ Peer-to-Peer Analytics, Service Credit Union ($2.3B, Portsmouth, NH) knows how to loan at a fair rate. However, it also knows when and how to be a rate leader, or even a loss leader, in order to support certain member segments.

LOAN GROWTH
DATA AS OF MARCH 2013
© Callahan & Associates | www.creditunions.com

loan-growth

Generated by Callahan & Associates' Peer-to-Peer Analytics.

In addition to loan discounts for qualifying elderly or low-income membership and for those who sign up for services such as direct deposit or allotment payroll deduction with automatic loan payment, the credit union also offers special products and rates specifically for its military members.

“We realize the sacrifices those in the military make and we aim to serve them as they serve our country,” says William Newman, the credit union’s executive vice president.

Veterans, active military members, and families of active military members face a host of pressures and situations that civilian members do not. These challenges can leave such members financially vulnerable.

According to The Center on Budget and Policy Priorities, military families comprise 6.1% of recipients for two of the most significant low-income tax breaks, the Earned Income Tax Credit (EITC) and the income-related category of the Child Tax Credit (CTC). Without these options, more than 140,000 military families would fall below the poverty line. And frequent relocations make it difficult to maintain a two-income household. Despite the fact 85% of military spouses report the desire or need to work, their unemployment rate is 26%, according to a joint report from the Department of Defense and the Department of the Treasury. 

Step 2: Offer Proactive Pricing And Tailored Products

Well aware of these challenges, Service has offered several military loan benefits and products for a number of years.

It’s Warrior Rewards program offers a 100 basis point loan rate reduction for active military members or for those who have just returned, 120 days or fewer, from peacekeeping operations, hostile environments, or combat areas and war zones. It is also available to combat-related award holders and to members with more that 20 years of military service.

For those who are earlier in their careers or serve in non-combat roles, the credit union offers an extra 10 basis point rate discount over the civilian discount — 0.35% versus 0.25% — offered when a member signs up for both direct deposit and automatic loan payments.

The for-profit sector might shun the idea of such reductions, but Service believes the benefit of these rate reductions outweighs the potential income displaced. And it works to mitigate any losses through a holistic pricing strategy.

“We balance the special rates we offer against our overall portfolio to ensure we do not sacrifice our overall loan profitability,” Newman says.  “Service enjoys materially lower delinquency and charge-offs than our peers, which allows some flexibility.”  

Consistent underwriting and the requirement for direct deposit helps keep these discounted loan performance rates on an even keel with the rest of the portfolio. Just 0.33% of Service loans are currently delinquent compared to an average of 1% for credit unions with more than $1 billion in assets.

DELINQUENT LOANS/LOANS
DATA AS OF MARCH 2013
© Callahan & Associates | www.creditunions.com

delinquent-loans

Generated by Callahan & Associates' Peer-to-Peer Analytics.


The direct deposit requirement also helps the credit union ensure loan applicants are interested in developing a holistic relationship and not chasing rates or seeking a one-off benefit.

“Members with direct deposit typically choose Service as their primary financial institution,” Newman says.

When a rate discount on an existing product is not sufficient, the credit union is not averse to developing an entirely original product to meet a distinct member need.

For example, according to the DOD and Treasury report, military families move 10 times more often than their civilian counterparts. To address this, Service offers a free relocation kit, complete with guides and checklists, as well as a 36-month, $2,500 maximummilitary relocation loan for domestic and overseasmoves.

“Service is an innovator of loan products as can be seen by our early pay loan, relocation loan, community lending program, and sequestration and disaster relief loans,” Newman says.  “As our membership grows and the economy changes, we are poised to act quickly to target needs.”     

Step 3: Apply Best Practices To The Big Picture

Slightly more than 1% of credit unions wholly or predominantly serve military members. However, there are many vulnerable member groups — including very young or very old members, SEG groups with low-paid workers, recent immigrants, and furloughed government workers — who could benefit from different degrees of assistance. Whether a credit union wants to develop a special offer, program, product, or service depends on the degree to which the group is represented in the membership.

“Just recently, we launched our select employer group program, which also includes loan discounts,” Newman says.

Member segmentation can complement any lending strategy, and the possible gains are unlimited. It’s one effective way to deepen member relationships and assist those most in-need members without wreaking havoc on the balance sheet.

 

 

 

July 15, 2013


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