Ed Callahan used to say that the answer to all credit union strategic questions can be determined by first asking “What is best for the members?” It was excellent advice then and it is now. We, in the credit union world, often look at problems from the credit union’s perspective. How does the credit union make more net income? How do we grow the credit union? The answers to those questions are important but let’s start at the core question. What do our members want and how can the credit union deliver? In the past, this thinking led to credit unions introducing checking accounts, mortgage loans and business loans to meet member needs.
Today, in my humble opinion, members are looking for four benefits. First, they are looking for financial products that are competitive on value and price. Second, they want to access the services quickly and conveniently. Third, they want the ability to access financial advice conveniently. Fourth, they want to receive unique value from their membership.
Forget that you run a credit union. Put on your consumer hat and look at credit unions as one choice among many . . . one more cereal box on the shelf. Why would you choose a credit union over another credit union, bank or fintech? Credit unions are no longer the market disrupters. You can go online and find many competitors with more favorably priced services which are delivered more quickly and more conveniently than most credit unions can deliver. If you can apply and get a mortgage loan in the same day, why would you wait a week or two for an approval? Why go to grandpa’s credit union . . . nice people but they take so long to do anything.
If credit unions are going to be competitive in the 21st Century, credit unions will require an innovative mind-set coupled with technology tools, data analysis tools, revised processes and the expertise to execute. How do credit unions deliver on consumer expectations in the 21st Century? Let’s look at the example of Q-Cash, wholly owned CUSO of Washington State Employees’ Credit Union (“WSECU”). The following is the series of questions and answers that led WSECU on its path of innovation.
- How can we help our members using payday lenders and paying enormous levels of interest for short term, small balance loans? WSECU developed an alternative payday loan program that complies with Washington State’s laws that has much lower interest rates. Members who use WSECU’s program, saved substantial interest costs. Currently, the maximum amount of their alternative payday loan is $4,000.
- How do we underwrite the loans more efficiently and effectively so we can continue to afford to provide the alternative payday loan program? WSECU analyzed their loan data to determine what factors were the most effective in predicting loan repayment and narrowed the underwriting criteria to just six questions. This simplified the process and reduced the cost of WSECU’s loan approval process. This underwriting and process change required good data that was expertly analyzed and the courage to be different.
- Some members that need payday loans go to storefront payday lenders because they are embarrassed to apply at credit union branches. How do we deliver the loans to members more discretely? How can we continue to lower the costs to provide the loan program? WSECU’s CUSO developed the Q-Cash App which permits a member to apply any time of the day and night for a loan with the six questions. If the underwriting criteria is met, the loan is funded immediately and automatically. Funding without human intervention is another significant process change.
- How do we extend the benefits of this technology to all members for other loan products and reduce our costs to serve them? The Q-Cash App was designed to permit WSECU to vary the terms of a loan offer. WSECU uses its member data to develop pre-approved terms for credit card loans and other unsecured loans which are customized for each member. If a member has a credit card loan with another provider, the member is provided a competitive offer to move the credit card loan to WSECU. The lesson here is that once you have the data, technology, and improved processes for one application, it is likely that there are other ways to leverage them.
- How do we help our members meet their financial goals and specifically how do we help our members who use payday alternative loans become financially stable? WSECU is developing a Financial Wellness App. The App has financial literacy tools, the ability of the member to set his or her goals and access to a live coach, but the secret sauce is the use of data and artificial intelligence. The App uses the member’s data at the credit union and the behavior of the member to coach and nudge the member to behave in a way that will accomplish the member’s financial goals. A nudge might be, “Going to a restaurant, once a week instead of three times a week will help you save enough money to meet your goals for your vacation fund.” If one method of coaching and nudging does not work, the App tries other methods until the member takes actions to meet his or her goals. The App learns what works to motivate the specific member. The methods used by the App uses similar technology and techniques developed to favorably influence behavior of diabetes patients. If the purpose of credit unions is to help members manage thrift, this App is the ultimate tool.
- How can we recover our costs of development to re-invest in other resources to benefit our members? Q-Cash is selling the Apps to other credit unions which will enable them to have similar tools to better serve their members.
The path of innovation is not a straight line. As Ben Morales of Q-Cash says, you have to be nimble and willing to change. You start down one path and it may lead in directions you did not anticipate. Be ready to pivot to the opportunity if it will better serve the members. As a result of this journey, WSECU has used technology and data to provide unique and compelling benefits to their members.
Let’s assume you have all the technology and data analysis tools you need to be competitive, why should a person choose to be a member of your credit union? Are there any value-adds of membership? Most credit unions have both consumer and business members. Connecting individual members to business members for discounted services is a win-win-win. Both sets of members will enjoy a tangible benefit of membership and the credit union will grow in membership.
However, the most compelling member benefit is cold hard cash. Many credit unions declare an annual member dividend. That is an annual reminder of the credit union difference. For example, DFCU Financial pays a patronage dividend on loan and deposit balances. The more a member uses the credit union, the more value the member perceives and receives. In the first thirteen years that the program has been in place in a state where the population is declining, membership has grown 49% and the average deposit balance per member has grown over 105%. DFCU Financial has paid back almost $300 million to its members over thirteen years for an average of $23 million per year. The difference between DFCU Financial and other patronage paying credit unions is the dividend calculator on its website. Check it out for yourself. The total amount of the patronage dividend pot grows in front of your eyes and you can calculate your portion of it. It is a constant reminder that credit unions are different and the member benefits cannot be replicated at banks or fintechs.
The first stage of solving a problem is understanding that you have a problem. Credit unions that do not see the problem or see the problem but do not respond, should be prepared to pick a credit union to merge into. You will not survive as an independent credit union. If surviving as an independent credit union is important to you and the credit union cannot afford the necessary resources on its own, I highly recommend collaboration as means to obtain the scale to afford the resources to compete in today’s world. But that is subject for another day.