A Q&A with Communicating Arts Credit Union President/CEO Hank Hubbard
Michael Porter identified three generic strategies: segmentation, differentiation and cost leadership. This white paper is one in a series detailing credit unions that characterize one of the three strategies. Read the first installment, “ Cost Leadership Strategy,” and the third, "Differentiation Strategy."
Describe your credit union’s strategy.
Our strategy is to focus on unbanked and underbanked people in Detroit. Every decision we have now goes through that filter: Does it help our target market? If the answer is no, then it goes to the bottom of the pile. We have found that our products and services remain competitive for upper-management types, but we have stopped putting any resources into actively pursuing those members. They have other choices, but if they choose us – we’ll do right by them.
Eliminating things like planning strategies to reach members with higher balances or better credit scores has not only freed up resources to concentrate on our core – but also freed up our minds from distractions from our core mission.
I would describe our strategy as a combination of Porter’s segmentation strategy and the differentiation strategy. We have a well-defined focus on low- to moderate-income people in Detroit, and this focus helps us concentrate on what is important to the institution and shed the distractions that seem like good ideas, but don’t push us forward. That is the segmentation strategy piece.
We do almost no traditional marketing. Our strategy is to do great things and tell the story every opportunity we get. Weekly newspapers love the good news content, and we have been featured on the local National Public Radio station and television talk shows. These things help with brand awareness. Then when members talk about their credit union, the response is “Is that the one I read about in the paper?” That is the single most significant way we attract new members.
We are always pointing out that we are different from banks, and why. In fact, that was how I began the grand opening celebration of our newest branch last month. Credit unions are fundamentally different from banks, and we (as a community development credit union) are different from most credit unions as well.
We are also innovators in that we were one of the first credit unions in our area a dozen years ago to implement risk-based loan pricing. We were also early adopters for courtesy pay, and offered our own payday lender alternative in early 2008. We put a branch in probably the most devastated neighborhood (Highland Park) in Detroit in 2008, and have just opened another in a similarly abandoned neighborhood.
We joined with seven other credit unions in Michigan to pilot a prize-linked-savings product we call Save to Win, because we felt it was an innovative way to encourage our members to save. Through this effort, CACU has been featured in national media such as the Wall Street Journal and Washington Post. These are ways that we are different, and we emphasize that by telling the story. That is the differentiation strategy piece.
Frankly, we don’t have much direct competition. Banks and credit unions alike have fled the Detroit neighborhoods. If you are trying to be all things to all people, tackling this market is difficult – because it is so different from “normal” operations.
Banks are in the area for Community Reinvestment Act credit, but their products are still designed for people with means. So they don’t approve many consumer loans, often won’t open checking accounts at all, and charge exorbitant fees for low balances or overdrafts. In fact, the bank down the street often refers their customers to us if they can’t help – and all of their employees are members.
We do often charge more for some products that banks and credit unions offer, but don’t approve for this market, so in some ways it looks like our pricing is high. One has to remember, though, that a low price is not attractive if it is not available (approved). On the other hand, we are considerably less expensive than payday lenders and other alternative financial providers. Consider a member who had a 25 percent auto loan that we refinanced to 11 percent and after some credit score counseling and score reduction we refinanced it again to 5 percent, saving the member $17,000 in interest. So while we do not actively take a cost leadership position, we are far more cost effective than the available options.
How did Communicating Arts CU embark on this strategy?
CACU was a select employee group-based credit union for its first 70 years, serving the newspaper industry. It was originally named the Detroit Newspaper Industrial Credit Union, then expanded to include radio, printing, publishing, TV, advertising, and more. In the 1990s we began to realize that it had become harder and harder to reach high-income people in our field, and that we really appealed more to the lower-level employees. This was exacerbated by the fallout of a newspaper strike and resultant replacement workers, and by the introduction of two new SEGs that were mandated to hire Detroit residents. This brought on a flood of new members who had never had a steady job and whose credit was battered.
We developed an expertise in working with this segment, and making it work financially. We turned what may have been a reputation for being the “lender of last resort” around and made it into a positive. That created a buzz about the credit union within the employee groups.
This new popularity was accompanied by a healthy net income. It proved to us that doing what we thought was the “right thing” could work financially as well. Focusing on these members became the strategy.
The board felt that the best way to utilize this growth in net worth would be to invest in a branch that is convenient to where members lived. Also, in order to have the greatest impact we needed to expand our field of membership to include anyone in the area. That branch averaged 100 new members a month in its first year, and is still signing about 70 per month in its third. The Highland Park branch has grown from 57 members in 2008 to having 2,606 members after the first quarter of 2011.
How does the strategy make you different?
Everyone… bankers, credit union professionals, law enforcement, neighbors; everyone thought we were crazy to open a branch in Highland Park. That was probably the big turning point, having the courage to take that step.
We also seem to be out in our neighborhoods doing things more than most other businesses (including credit unions). Our landlords in Highland Park are continually telling us how proud they are to have us in their shopping center.
We’ve earned several awards for these things, including the CUNA Louise Herring Award, Dora Maxwell Award (first place in Michigan and second place in the nation) and the Credit Union Times 2010 Trail Blazer award for Outstanding Service to the Underserved.
What other tools do you use to carry out your strategy?
No matter what you’re doing, you want to look at all of the tools available to you carefully and utilize them when you can. Specifically when you are serving a low income population, there are several sources of help.
Michigan Credit Union Foundation gave us a small grant to support our doing the Save to Win project. This was extraordinary for us because all of the other credit unions they talked to were big. We were $25 million at that time and the next smallest was $125 million at the time. We applied, and they supported us with one third of the amount we needed to buy in. For us that was the bottom line for a month, so that’s a lot.
We’ve applied for and receive several grants from the National Credit Union Administration (NCUA) because of our low income designation. They range from a few thousand dollars to $15,000.
And then the granddaddy of them all is the Community Development Financial Institutions Fund. Two CDFI grants total $2,750,000. They are not easy to get, but they are “gettable”. You have to be CDFI certified to apply. You have to provide a business plan to on how you’ll use the grant funds. We used it for lending capital.
We have been able to weather the downturn all credit unions have suffered. All the NCUA premiums we’ve had to swallow. It also improved our net worth. Without the grant, we would have suffered a loss, but with the grant we are able to stay strong and keep moving forward instead of doing the bunker thing a lot of credit unions are doing. We’re still expanding and increasing employees because of that. We wouldn’t be expanding nearly as fast without the grants. Because of our change in strategy and using the tools available, we’re doing well.
What is the role of the board in pursuing and continuing this strategy?
CACU’s board is responsible for setting the tone and goals of the credit union, then monitoring the progress while keeping the institution’s financial strength top of mind. Prior to our change in strategy, the financial strength issue overshadowed other plans, because we were pretty close to the wire and frankly were not sure of the place for a credit union of our size in the long term. The financial success in the early 2000s allowed the board to think more strategically because there was less regulatory pressure.
They looked at what was working, thought about the credit union philosophy, and basically set the new course.
In hindsight that sounds a lot easier than it was. It didn’t really compute that we could make a branch in a poor neighborhood work, even though the projections said it could. We were bombarded by skepticism from every angle. We were petrified about the possible physical and mental risks (robberies, other crime) and took great measures to control it as best we could. We looked at all of the risks we could think of, took measures to address each one – with contingency plans if something didn’t work, or something new came up.
Then we had to take a leap of faith.
Are your board members representative of the members you serve?
None of the board members are low income. We have at least two that live in the city of Detroit. Our board has been fairly stable all these years. They primarily come out of the communications industry.
We have a mixture of people who are working and retired. We don’t have the power-broker/resume-builder directors that some credit unions have. They are all in it because they think it’s the right thing to do.
They made the decision to go into a neighborhood they wouldn’t have gotten out of their car in. Now they go visit. Some of our staff were afraid, too. It’s an interesting thing. The staff and the board liked the idea on paper, but weren’t sure they wanted to be there personally. We had to work on that.
Highland Park is surrounded by Detroit. It’s a city of its own. When we made the decision, they had shut down police and fire and were contracting with county to do those things. It really tested the will of all of us. But we really felt this was the right thing to do. It was credit union philosophy pushing us to do that. We were in a position to make a difference, and so we should.
It’s going to be hard to have underbanked members serve on the board, since the people we serve don’t normally have good credit.
What is the role of the CEO?
The board relies on me for quality information from our CU and outside sources, analysis of that information, and implementation (through staff). When talking about any major shift, they rely on me to provide options. That often means that I’ll raise a trial balloon (what do you think about this?) and gauge the reaction to determine which way to go next.
While the board members are quite credit union savvy, they aren’t immersed in it like our management team, so there are different perspectives which have to be managed to get on the same page. Our group really gets along well, and there is no board/staff animosity, which really helps keep the organization moving forward. I think maintaining that balance is a primary responsibility of the CEO, ideally doing it in such a way that it is imperceptible.
The CEO has to provide vision, to be open to adjusting the vision based on feedback or other information, and to be able to articulate it in a credible manner to both the board and the staff. It’s part of being a leader. Then you have to be able to act on the board’s strategic plans, which is also a matter of articulation and persuasion. I often tell people that “I don’t do anything, I’m the CEO,” and to some extent that’s the way I want it to appear. The staff clearly does the important work; I just help them make it so.
What advice do you have for other credit unions who are interested in pursuing the same strategy?
In pursuing a low-income/low-wealth market, the first thing you have to do is realize that they have different needs and priorities than might a standard credit union member. You need to analyze their needs and focus on those, and do not focus on things that they don’t need.
For instance – you wouldn’t have a big Jumbo CD Promotion, because 90 percent of our members have less than $500 on deposit.
In pricing, you want to make sure that you are better than the market, but you do not want to give away the store. Low-balance/high-transaction members are very high touch and expensive to serve. Make sure you are pricing high enough to cover the extra risk this target represents. When comparing to market, be careful selecting your market.
Our target is not rate sensitive. What they care about is monthly payments. They don’t even think about deposit rates (1 percent return on $500 is $.41 per month). So setting rates is more philosophical. When comparing to market, remember to compare alternatives that are available to the members. The rates at your friend’s credit union probably are not available. The same goes for many bank products. Payday lenders, check cashers, and the “no credit check” auto lenders are the alternatives these members use.
Make sure to price your rates and fees so that your operation can continue to serve this population that so badly needs a credible choice. You will need more staff per assets than peer numbers suggest. Ours is about 1 per $1 million and that rarely seems adequate.
Hank Hubbard is President/CEO of Communicating Arts CU in Detroit, Mich. (Asset size: $29.3 million)
Questions for the Board Room
- What underserved populations could our CU serve?
- Does it serve those populations?
- What strategies (from Michael Porter or others) might be most effective in serving underserved members? Why?
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