The New Year came with a new plan and budget. Long and short-term
goals are always central to every plan. Goals cover quantifiable
outcomes-growth rates, balance sheet ratios, earnings targets, as
well as qualitative indicators such as member satisfaction and wallet
But in some ways goals are the easy part of the plan. They often
just repeat measures used in the past. The more important part is
maintaining or possibly reestablishing direction. For most credit
unions that means asking, "How can I do more for my members
given the goal's constraints?"
Doing more for members is tougher because times are irregular. Members
are uncertain about what they want to do. What could be more confusing
than 0% financing? The words do not belong together. In the wake
of September 11th, car dealers bundled the finance charges into
the price of the auto. In essence, this eliminated the financial
intermediary from the auto buying value chain. How do credit unions
As money continues to roll in because of members' concerns about
stock market exposure, do credit unions turn their backs by offering
below market rates? Or do we use this as a chance to retake market
share, especially from money market funds? The low rate environment
clearly shows how credit unions add value to savings versus the
simple "pass through" function of mutual funds.
While newspapers report that interest rates have not been this
low for 40 years, thereby suggesting that low rates are not a new
event, the reality is that this is a new event. Forty years ago,
almost all savings and borrowing rates were regulated. Consumers
did not go to the market for mutual funds. Credit cards and ATMs
for all practical purposes did not exist. With marginal borrowing
and savings rates under 2%, borrowing plays a much-reduced role
in purchasing decisions. What does this mean for consumer loan demand?
Irregular times means the pattern of expectations can no longer
be assumed. While many economic events continue to be reported as
usual, traditional indicators of economic and consumer trends may
not be portraying the real story.
The natural reaction in uncertainty is to hunker down, keep the
powder dry and wait until trends are clearly known. Additional risk
taking is limited, for there are already too many unknowns. But
this tendency may be a mistake. For with risk, there is also return,
that is, opportunity. I believe there are at least five areas where
credit unions can make a significant market impact in the current
1. Taking Back the Transaction Account
Deregulation started with the mutual fund money market account.
These market-based returns overwhelmed the regulatory-imposed limits
on insured savings in the late 1970s. One result was savings deregulation
in the early 1980s. A second was the establishment of a substitute
product for the checking account--that is a money market-check writing
fund. Retail money market accounts have grown to over $1 trillion.
Today most credit unions can pay rates much in excess of money
market accounts. One Florida credit union is paying 3.4% on large
money market balances as of December 31, while rates on the largest
mutual funds have fallen to 1.75% or lower.
Money market funds are prisoners of market rates. With short-term
interest rates at 40-year lows, the product concept is not competitive
with balance-sheet-based products. Credit unions should use this
next 3-6 months of low rates to bring back the liquid funds members
2. Going After Retirement Savings
For the past decade the returns available in the stock market exceeded
all historical norms. As a result, consumers managing IRA, 401(k)
and other forms of long term savings accounts turned increasingly
to mutual fund and direct stock investments.
Today, most investors want balance in their portfolios, especially
older savers nearing retirement. Credit unions traditionally have
not been an option in employer sponsored 401(k) plans and had trouble
competing with market options for IRA savings. That is not the case
IRA savings balances total over $2.7 trillion, but only $250 billion
is in insured accounts at banks, thrifts or credit unions. However,
now credit unions can offer safe, risk-free returns that provide
members a balance to the obvious risks of equities. Older members
who are generally more active with their credit union have both
new savings limits and a preference for risk-free alternatives.
IRAs can provide momentum and member value as a marketing lead in
the first quarter of 2002.
3. Lowering Members' Debt Burden
Committee hearings on predatory lenders led off Congress's January
activity focusing on real estate loans. Many members have yet to
take advantage of lower rates or shorter maturity options for mortgages.
Members trust credit unions to do the right thing for them. Reviewing
mortgage loans with the credit union as well as offering loan reviews
for mortgages elsewhere can provide a benefit that can cement a
long-term member relationship.
For credit unions concerned about interest rate risk by putting
too many fixed rate loans on the balance sheet, the Federal Home
Loan Banks have become much more aggressive about their new Managed
Mortgage Partner program. In this relationship, the Home Loan Bank
will buy the interest rate risk of the loan and let the credit union
retain the loan on its balance sheet.
4. Risk Insurance for Members?
Several innovative companies are offering to partner with credit
unions with a new product under the general description of debt
cancellation. The product, which has been used in banking for a
number of years, is similar to insurance, but legally, is not an
insurance product. In fact, NCUA, in its expanded CUSO authority,
specifically authorizes debt cancellation programs.
As new products, debt cancellation can be created to cover a number
of contingencies from unemployment, disability or even the death
of a borrower during which time the debt payment is canceled or
The product has been tested by credit unions in a number of states.
In addition to protecting the member and credit union if a member
is unable to pay when the event occurs, the program also provides
credit unions with fee income.
5. Counseling and Credit Information
Some credit unions have created programs or partnered with third
parties to provide credit information and/or counseling for members
experiencing cash flow problems. With unemployment rising and zero
percent financing perhaps attracting a higher loan than might be
prudent, the time to adjust debt overload is before rates turn up.
One program that has a national capability is Balance, a credit
counseling company located in San Francisco. Several credit unions
have subscribed to the service so that members have an independent
third party source of credit information and advice. The goal is
to provide a resource that members can go to before problems occur.