By Ray Birch
MADISON, Wis.—Serving the underserved can benefit the credit union’s bottom line as well as the community–but only if the offerings to low-income members are managed correctly, says the Filene Research Institute.
Filene recently studied five different types of financial products aimed specifically at meeting the needs of minority households over an 18-month period. Called the “Reaching Minority Households Incubator,” the fundamental underpinning of the study was to determine whether traditional financial institutions could find financially sustainable ways to make a difference for financially vulnerable minority households, said Incubator Director Adam Lee.
“What the research does is get credit unions past the myth that they can’t have their cake and eat it, too, when it comes to serving financially vulnerable populations,” said Lee. “The study reveals that these offerings to low-income members can be financially sustainable for the organization.”
Varying Degrees of Profitability
Lee said that each of the five study programs showed varying degrees of profitability for the credit union.
“By and large, when these programs are managed well, they serve the needs of a financially vulnerable population and are a profitable enterprise for the credit union,” he said.
As part of the Incubator project, more than 58,000 loans representing $84.4-million in lending have been issued to more than 18,559 underbanked households by 40 credit unions across the U.S. and Canada. The project was underwritten with grant support from Visa and the Ford Foundation.
“These results have to be taken directionally,” said Lee. “We are not saying that if you offer these programs they will return 5% ROA. But when you look program by program, across the board, in every single case these offerings were on par with or exceeded the average ROA for credit unions industry-wide. When managed appropriately, and best practices are adhered to, these programs can pack a very healthy return on average assets—higher than other products.”
What Was Analyzed
During the lab period, Filene analyzed the following products:
- Individual Taxpayer Identification Number (ITIN) Lending: Loans for noncitizen members
- Data Mined Auto Loans: Data mining techniques used to identify households that could benefit from an auto-loan refinance
- QCash Small-Dollar Loans: Small-dollar loans based on relationship factors other than credit score that relied on rapid underwriting and disbursement via a mobile application
- Community Microfinance Small-Business Lending: Small-business microloans to entrepreneurs
- Payday Payoff Installment Loans: Loans to consolidate high-rate payday loans or other debt into one affordable payment by leveraging alternative data for underwriting
Some Guidance
Lee shared with CUToday.info what it is credit unions need to do to make these programs work for members and the bottom line.
“One size does not fit all with these offerings,” insisted Lee. “It’s very difficult to go to any credit union in any community and say, ‘This is the blueprint, fire it up and you will have a profitable program.’ But when the credit union carefully looks at what they are trying to accomplish, takes the time to understand the blueprint for these programs, looks critically at their own organization, assesses their risks and members’ needs and then makes tweaks to these programs, they do well.”
Lee said it is a good idea to first test a program with a small number of credit union members, maybe 100 to 500 account-holders.
“We have seen this approach be very beneficial,” he said. “Understand where some of your weaknesses are and learn what is working well, and then refine the program. I think a real key to these offerings are the credit union’s willingness to learn as they go.”
Best Way to View Programs
What also helps the programs perform well for members as well as the credit unions is not seeing them as a single point of intervention, explained Lee.
“Each offering, by itself, will not likely address the systemic financial challenges individuals and households face in their lives,” Lee said. “One loan won’t fix things. But when credit unions can learn more about the holistic needs of their members who come in for these services, they can then identify other products and services that can improve members’ financial wellness. And, credit unions can then connect these members with other resources in the community. It’s dealing with the holistic needs of members to make sure they are in the best financial situation possible to pay off that loan, for example.”
One of the biggest hurdles to profitability with these types of programs, said Lee, is the credit union feeling uncomfortable charging a high rate that is commensurate with the risk.
“Credit unions, we find, face a moral quandary. They say, ‘Can I charge 18% to 30% for a small-dollar loan,’ for example. ‘Is that fair to my members?’” noted Lee. “But when you look at the many alternatives members face for small-dollar loans, those alternative rates are much higher and members are not getting any kind of repayment support, which they get from the credit union. So, credit unions need to get past the shock of charging that higher rate needed to not only address risk but m