Credit unions have terrific momentum coming into the new year. The industry’s $245 billion in loans originated during the first nine months of 2012 set a new record. Credit unions set two additional records as well: Year over year, the industry added 2.5 million new members and 2.9 million new checking accounts.
Now is the time for credit unions to invest in three key strategic areas to drive success in 2013 and beyond. Those areas include mortgage lending, younger member recruitment, and sophisticated data usage.
1. Become A Post-Refi Mortgage Juggernaut
Credit unions have become major mortgage lenders and must continue to press that advantage. At the end of third quarter 2012, real estate comprised 54% of credit union loan portfolios. As an industry, credit unions grew national real estate lending market share from 2.5% in 2007 to 7.2% in 2012. In 25 of the nation’s Metropolitan Statistical Areas (MSAs), credit unions have captured at least 20% of first mortgage loans, and in each of the top five MSAs by credit union market share, the industry has captured more than 30%.
Increasing gains on sales of mortgages to the secondary market is fueling a rise in non-interest income, and such sales are now a vital source of credit union non-interest income. In 2011, non-interest income comprised 1.28% of average assets; that jumped to 1.38% in 2012.
Years ago, the most successful credit union mortgage lenders realized they had to court local realtors in order to get in on the ground floor of the house-buying process. In 2008, Community First Credit Union ($1.7B, Appleton, WI) made itself the go-to funding source for realtors by putting qualified buyers into homes when the banks refused to lend. Pentagon Federal Credit Union ($15.2B, Alexandria, VA) and other credit unions have taken realtor relationships one step further by purchasing real estate agencies. PenFed’s subsidiary CUSO, PenFed Realty, acquired three Prudential real estate agencies in 2012. It now owns agencies in Florida, Kansas, Tennessee, Texas, and Washington, DC. With 1,400 agents and 47 offices across five states, the CUSO posts annual sales of $1.7 billion.
Credit unions have many ways to ramp up the real estate segment of their portfolio. For example, CUSOs offer easy access to efficient mortgage lending as well as established infrastructure, scale, and expertise. Wright-Patt Credit Union ($2.5B, Fairborn, OH) extended its mortgage-lending prowess through the launch of myCUmortgage. Now, more than 130 credit unions leverage the CUSO’s lending platform.
Wright-Patt understands the dynamics of the real estate market and acknowledges the cyclicality of the refinance boom. That’s why this summer the credit union formed a partnership with a local realty company to operate Southern Ohio Mortgage out of six realtors’ offices.
“Eventually interest rates will rise and the refinance business will die down,” says Tim Mislansky, president of myCUmortgage. “Credit unions need to start planning now for how they will succeed in a purchase money market. It’s about more than great service and good rates and fees; it includes outreach to non-profits, actively engaging with realtors, and using our balance sheets to create niche products for first-time home buyers. I’m hopeful we can use our cooperative approach to bring even greater success to credit union mortgage lending. As we aim to control a larger share of the mortgage market, we will bring financial success to our cooperatives and our members.”
2. Court Future Members
In the long term, of course, the strength of the credit union movement depends on the younger generation. Their embrace of the credit union system and philosophy — or lack thereof — will determine whether credit unions 30 years from now will flourish or flail.
But credit unions need younger members for the shorter term as well. It’s the younger members who borrow and reach out for new products and services. Younger members need financing for college, cars, homes, and home improvements. They also need access to credit cards so they can build their own credit histories and habits. With credit, they need financial education that teaches them how to be responsible stewards of credit. This is a core strength of credit unions; indeed, it is part of the reason credit unions receive a tax exemption.
Unfortunately, credit union deposits nationally are growing faster than loans. The industry’s loan-to-share ratio stood at 68% as of September 2012, and credit unions are holding $383 billion in liquidity. It’s going to take the involvement of younger members to convert that liquidity into loans, raise the loan-to-share ratio, and kick-start the engines of credit union growth.
Currently, the average credit union member is 47 years old. Nearly all credit unions need to devote resources to present the credit union story to the rising generation. But making the credit union philosophy front-and-center is only part of the effort. Credit unions need to focus on developing products that respond to younger consumers’ needs and messaging that connects with them. This includes embracing emerging services that allow young members to conduct remote financial transactions — such as new websites and mobile banking — as well as offering more traditional products that help young people develop responsible spending habits — such as debit and pre-paid cards.
“I know credit unions that are sitting on 18% or 20% capital and they have websites that are not going to attract Gen Y,” says Jim Kasch, CEO of Darden Employees Credit Union. “You have to make sure you have the products and services and delivery channels that are going to appeal to Gen Y. You need to be able to walk into a SEG’s HR department and say, ‘Here’s what we can do for your employees.’”
Tonya Voltolina, chief financial officer at Darden, agrees.
“If you’re sitting on 13% capital, take some of that and invest it into a robust website and mobile application,” she says. “We have one branch, but to our members we look like Bank of America. If you can look big and have a good product offering, then you can attract members.”
As important as it is to cultivate a relationship with the next generation of credit union members, credit unions must also take care to not alienate those older members that are known for saving. In today’s cash-rich environment it might be hard to imagine a future in which credit unions need more deposits, but the economy is cyclical and that day will come. Plus, older members wield strong influence over their younger counterparts. Credit unions rely on parental referrals to introduce younger members to a credit union “banking” relationship. The importance of having the proper balance of older and younger members cannot be understated.
3. Deliver Results With Data-Mining
Statistician, author, and New York Times FiveThirtyEight blogger Nate Silver accurately predicted how 49 of 50 states would tilt in the 2008 presidential election. He improved that record to 50 of 50 states in the 2012 presidential election. In 2012 he also accurately predicted 31 of 33 U.S. Senate races. How did he do this? He analyzed the data and in doing so has created an interest among decision makers of all ilk regarding how they can mine data to anticipate the future.
Analyzing data works, and credit unions have a wealth of it to draw on. Credit unions maintain member demographic data via marketing customer information files (MCIF). They also capture data on everyday member activity such as ATM usage, debit and credit card transactions, and call center, website, and branch inquiries.
This data provides not only insight into members’ lives but also better risk management and fraud prevention. Armed with such data, credit unions can offer members the right product at the right time. They can also use the data to determine the depth of a member’s relationship and make better pricing decisions. Finally, such data helps credit unions identify discrepancies in member behavior, which might indicate a larger identity theft issue.
These kinds of capabilities derived from data analysis are a strategic advantage in today’s interest rate environment. But to maximize the value of data, management must focus on the right issues and credit unions must dedicate resources to identify and mine existing as well as new sources of data for greater insight into members’ lives.
Onward And Upward
Credit unions did many things right in 2012, and by any number of measures it was an outstanding year. Credit unions must now use this momentum, the likes of which does not come often, to make 2013 an even better, break-through year. Consumers are embracing the cooperative model of people helping people, of customer rather than stockholder ownership. Use the coming year to press forward and help more people reach a higher plane of life. Bring it on!