5 minutes
Credit unions need to revisit their strategic plan for serving small business owners
According to industry statistics from NCUA and Callahan and Associates, there are now some 2,300 credit unions filing member business services and member business lending information in their NCUA call reports. Collectively there are nearly $50 billion in member business loans on the books. The vast majority of these loans were made to finance one- to four-family rental properties or commercial real estate.
We have seen the credit union business lending industry expand over the years. In fact, 2014 marks the 13th year I have been a lead presenter for the CUES School of Business Lending program, which has expanded beyond three segments to now include an advanced program that addresses the issues faced in MBL credit administration.
Attendance in these schools has increased significantly in the last few years as the industry embraces the need to develop its own talent pool of skilled staff members. The range of products and services offered to business members has also been expanding to address non-credit financial services needs.
On the other hand, many CUs are experiencing the re-emergence of the banking industry into the small business lending market. As banks have recovered from the credit challenges they faced during the recent recession, they have focused on getting back some of the business loans they lost to credit unions.
Commercial Real Estate
A primary focus of this aggressive marketing effort has been CRE loans. Banks have approached many commercial real estate owners with existing CRE loans at credit unions and offered refinancing packages that have been at significantly lower interest rates. Often these offers have included fixed rate provisions for 10 or more years without any related transaction fees.
Since credit unions typically do not have any pre-payment penalties in their CRE loan agreements, their MBL portfolios have experienced either significant erosion due to the loss of these loans or dramatically reduced net interest rate margins on those loans they haven chosen to re-engineer at lower interest rates due to the competing bank offers.
Increased Bank Competition
Some CUs have experienced a 25+ percent MBL portfolio decrease in just the last 18 months as a result of the banks getting aggressively back in the game. And, as the famous New York Yankees catcher Yogi Berra, said, “It ain’t over till it’s over.”
Transaction financing is a commoditized game that is incredibly vulnerable to interest rate fluctuations. Big national and international banks have been very aggressive. They have more dynamic asset/liability management options than most credit unions have available and they are utilizing these capabilities.
This renewed market competition should compel CUs to take a step back and revisit their strategic game plan for member business services. CUs need to look at the value proposition they are providing to their business members and develop relationship management strategies that make them less vulnerable to interest rate changes.
Holistic Approach Necessary
We have reviewed many CU business plans for member business services over the last two years. Most of them have emphasized CRE loans and have included goals to increase loan volume on an annual basis by some desired percentage. The plans spoke very little about the non-credit aspects of the relationship.
We consider many of these plans to be sales plans and not strategic business plans. To create sustainable business member relationships, CUs need to offer more holistic financial services value propositions. These offers should commingle credit and non-credit products and services to foster deeper working relationships with their business members.
Creating depth in business member relationships will make them far less vulnerable to refinancing offers from competing banks. It will also have significant impact on overall relationship profitability.
To create depth, CUs need to develop business model expertise that enables them to sell on a very anticipative basis. Matching products and services to needs enables a powerful selling environment. CUs can offer solutions to specific financial services challenges. Business model experts who can wrap themselves around the specific structure of the business’s entity and truly understand the wants and needs of that entity can then match products and services to those needs. The more in-depth the lender’s knowledge is of different entity types, the more proactive they can be selling other products and services. For example, a credit union business lender who understands the intricacies of seasonal businesses can suggest the right deposit and savings account or loan structure to that business owner.
Cost/benefit logic can permeate the discussion and business members can clearly see the value of the products and services being offered.
Over the last 30 years, we have had the opportunity to interview thousands of small business owners regarding their working relationships with their financial services providers. Consistently they have told us they want to work with someone with business knowledge and who can help them make better business management decisions.
At the end of the day, the best way to create sustainable working relationships with business members is to have staff members capable of identifying needs on a timely basis and suggesting solutions that enable a measurable cost/benefit capability. Help from a subject matter expert is the key.
In addition, CUs need to offer an array of products and services comparable to what banks make available for business members. Compliance reality tends to make the typical features and benefits of most products and services very comparable.
The ultimate differentiator boils down to the quality of staff members engaged in delivering member business services. Commitments need to be made to develop staff business and personal financial analysis skill sets. These skills need to be supplemented with good common sense communication capabilities.
Small business owners want to work with someone they know and trust. Trust is an earned right. Do you have subject matter experts on your MBS staff?
Jim Devine is founder, chairman and CEO of Hipereon Inc., Seattle, an instructor for the CUES School of Business Lending™ and a trainer for financial institution regulators.
Photo credit: Dollarphotoclub.com/ Monkey Business
