Setting Direction in Irregular Times

Long and short-term goals are central to every plan. Goals cover quantifiable outcomes and even some qualitative indicators. But in many ways these goals are the easy part of our planning. The more important part is maintaining or possibly reestablishing true direction. For most credit unions that means asking, How can I do more for my members given the goal's constraints?


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 share.

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?"

Irregular Times
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 respond?

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 environment.

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 hold.

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 anymore.

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 postponed.

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.




March 25, 2002



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