Lending 2020

Given the shifting landscape, it can be difficult to forecast loan growth for the next year, let alone a half-decade into the future. However, scenario planning provides a preview of “plausible what-ifs” that can help steer lending strategies.

A new report, Scenarios for Credit Unions 2020: Striving to Stay Relevant in a Rapidly Changing World, published by CUES and Decision Strategies International, Conshohocken, Pa., examines four “alternative futures” for CUs over the next five years.

The goal of scenario planning, according to the report, is not to predict which outcome is most likely, but to prepare for some combination—“to be approximately right, instead of absolutely wrong” on which products and services to have in place and how to connect with existing and new members.

Studying possible futures can help lenders “be better prepared for whatever comes” even if their forecasts are not spot on, says CUES member Bill Vogeney, SVP/chief lending officer for $4 billion, 220,000-member Ent Federal Credit Union, Colorado Springs. He applies the philosophy of hockey great Wayne Gretzky “to skate to where the puck is going” to anticipating and responding to imminent disruptions in the industry.

We asked experienced lenders to apply the four scenarios and the report’s recommendations to useful lending strategies.

Avoiding an Economic Rut

In the report’s first scenario, “Stuck in a Rut,” global economic growth continues to lag. Cautious consumers stick with traditional financial services instead of going to new entrants (think tech companies and retailers), but CUs, squeezed by a double-dip recession, have few marketing resources to make headway with new members.

This scenario might have a familiar ring, recalling the challenges and lessons learned—especially from mortgage and indirect lending losses—in the recent recession. “We thought the mortgage loan was the most sacred loan. For 100 years, we thought Americans would pay their mortgage before any other loan, and we were all wrong,” says Brett Christensen, owner of CU Lending Advice LLC, Euless, Texas, and chief faculty for CUES School of Consumer Lending™ and CUES Advanced School of Consumer Lending™.

“When property values collapsed, people couldn’t charge a tank of gas on their homes anymore because they couldn’t get home equity loans, and delinquency rates spiked.”

In the possible future of another economic downturn, “losses go up, and collections become very important,” Christensen says. “In a lot of credit unions, collections are not a strength, and they weren’t prepared for the economic downtown the last time around.”

On the Rebound

In the second scenario, “Finding a Second Wind,” the global economy stabilizes and U.S. interest rates begin to rise. But a series of major data breaches shakes consumer confidence around the world. CUs that can deliver a wide range of secure services have the opportunity to expand membership among consumers who favor doing business in their own communities.

“This is kind of where we are right now,” Christensen notes. With unemployment on the decline and consumer confidence rising, lending went well in 2014 for many CUs. 

What matters most in this climate is improving loan sales. “With the refi boom tailing off, credit unions will need to get better at bringing in purchase money. And auto lending is, if possible, even more competitive,” he suggests. “Because it’s so competitive, we’ve got to get better at sales, which is a real struggle for many credit unions. We grew up as a service industry, not a sales industry. When the economy is good, competition is strong and we’ve got to deliver on members’ needs.”

That means recognizing that the loan delivery channel needs to change as well. CUs should be investing in improving loan processes via phone, mobile, and online channels, especially e-signatures and electronic transmission of loan documents, Christensen adds.

New Challenges

The third scenario, “Hitting a Wall,” envisions an economic pattern of minor recessions followed by shallow recoveries. In this possible future, a U.S. Supreme Court decision loosening regulations widens the marketplace for nontraditional financial service providers, sending new customers their way. Even though credit unions’ tax-exempt status remains in place, they face continuing regulatory restraints.

New entrants in lending—from “lending clubs” facilitating person-to-person loans to PayPal’s plans to expand its Working Capital program for small businesses—could complicate an already competitive environment, Vogeney says.

“What do you need to do to be better prepared for those potential disruptors? Get better at lending. How do you do that? You’ve got to make the process easier for employees and members,” he says. Toward that end, e-signatures and more robust phone and Web lending platforms are essential.

When economic and competitive conditions tighten up, lowering operational costs becomes a priority, Christensen maintains. “The good old days, when every credit union had its own field of membership and grew loans 10 percent every year with minor marketing and old-school processes, aren’t coming back. Credit unions have to find ways to grow more loans at a lower cost.”

Lending managers may need to take a hard look at their department structure and staffing. Christensen contends that many loan departments are “over-expensed and over-staffed” to compete in today’s marketplace. In an uncertain economy, “there’s more pressure on the cost side of the equation,” he says. “In some of the credit unions I work with, 34 people touch lending and produce $4 million a month, and in others, a seven-person loan department produces $4 million in loans a month.”

Ready for a Boom

The final scenario, “Blazing the Trail,” hinges on U.S. energy independence, which triggers an economic boom, enhances manufacturing growth and innovation across industries, and widens acceptance of technology. Consumers are eager to try new financial services and amenable to CUs as community partners. CUs seek out collaborations as a path to innovation.

While consulting with a northern Minnesota credit union last fall, Christensen saw the energy boom personified in a 19-year-old member seeking a loan for a brand new $13,000 snowmobile. He was employed in the North Dakota oil industry, working hard and paid well, earning more than $90,000 in nine months. In regions enjoying an economic boom, Christensen’s advice is simple: Stay smart.

“If you do stupid lending, if you get complacent when times are good, you’ll get fried,” he cautions. “That’s what happened to the mortgage industry. That’s what happens when you hand out 130 percent financing on auto loans to complete strangers and big credit card balance limits because you haven’t had any losses. When the economy turned, we all regretted that. The key is to be consistent, and don’t fall in love with that good economy. Stick to intelligent fundamentals of good lending.”

Multipurpose Strategies

Develop and recruit talented leaders who can tackle future challenges. Developing internal talent can be a key differentiator, says CUES member Tim Mislansky, CCE, SVP/chief lending officer for $2.8 billion, 280,000-member Wright-Patt Credit Union, Fairborn, Ohio. 

Wright-Patt CU is committed to promoting 70 percent of its management and executives from within. Home-grown talent “get” the credit union culture, but they also need to be open to new ideas from outside, Mislansky says. “And they need to learn how to deal with complexity and vagueness and to be able to make decisions without knowing 90 or 100 percent of the information. We’re slow to move as an industry. It takes us a long time to make decisions.”

To develop executive talent in the loan department, top managers need to be involved in high-level strategic planning, and mid-level managers should have opportunities to improve their understanding of how big-picture issues like economic and demographic shifts influence lending, Vogeney suggests.

“If I have one criticism of credit union lending, it’s that strategic planning typically involves the board, CEO, and executive team and often takes lending for granted. This approach seems to be ‘we’ve got to grow assets and members and build branches, and we’ll worry about lending later,’” he says. 

When Christensen consults with credit unions, he shares a list of 10 factors with the greatest impact on lending. Staff is at the top of that list, and leadership is No. 2. “You’re only as good as your people,” he says. “You’re not going to come up with a loan that nobody’s ever tried. You’re not going to come up with marketing and ads that no one’s ever done. It’s all about your people.”

Leadership drives a forward-looking lending program that recognizes and responds to changing member preferences and expectations, leads the charge for innovation, and emphasizes sales, he says.

Improve technology adoption and seek out collaborative opportunities. One area where CUs might be able to collaborate and innovate is in business intelligence, Mislansky suggests. “We know so much about our members’ buying habits—where they shop and what they spend. Those ACH payments that leave their accounts every month are likely mortgage payments or contributions to retirement funds. There are so many things we could do with that big data, but we’re not harnessing that information yet.”

Get better at recruiting young members. If the average age of your members is mid-50s, you’ve got two problems: (1) Where is your next generation of members coming from? (2) Where are your borrowers? Christensen returns to mobile services as the key to connecting with young members. If you want to become their lender of choice, your CU had better offer remote deposit capture and other mobile services.

Youth savings accounts are another pathway to building relationships with young members from birth onward. Christensen calls the strategy of paying high rates on kids’ accounts—say, 6 percent on savings up to $1,000—a “brilliant” move that’s not all that costly. “And once we get them at 1, 2, and 3 years old, we can market to them all their lives and, if we have the technology, we can keep them,” he adds.

Wright-Patt CU has two universities in its field of membership. It maintains a campus branch, sponsors fall enrollment events for incoming students, and supports athletic programs in return for prominent positioning in arenas and sports fields. Its work on campus pays off, but credit unions without college connections have a much tougher challenge in recruiting young members, Mislansky acknowledges.

“We have a Millennial on our board who made an interesting point at a recent planning session. She said, ‘You guys are the nicest people around and focus on taking care of people. But that doesn’t matter if it’s hard to do business with you,’” Mislansky recalls. “That’s what matters to young members. When they apply for a loan online, can we give them a quick decision? Can we do the closing electronically?”

Strengthen connections with your member community. Ent FCU is studying how to build recognition of member loyalty (as defined by such factors as length of membership, number of accounts, low rate of NSFs, and account experience) into its lending processes. “When we look at who we want to make loans to and who we might make exceptions for, we would favor members based on their relationship with the credit union,” Vogeney notes.

In the Colorado wild fires of 2012 and the 2013 federal shutdown, Ent FCU stepped up to help affected members with emergency loans of up to $2,000 for 90 days at no interest. The loans were processed and funded quickly using simple criteria instead of a credit check: Does the borrower have an account with direct deposit? How long is the member relationship? How many NSFs? The credit union is now studying ways to adapt that successful approach as an ongoing member service, he says.

An emphasis on continually improving lending processes is necessary to keep pace with member expectations, Vogeney adds. “People are used to immediate gratification, and immediate is so much more immediate than it used to be.”

As president of the CUSO myCUmortgage, Mislansky is a big advocate of getting involved in the local housing community, by doing such things as sponsoring foreclosure prevention programs. “Getting really good as a mortgage lender can be a great way to build strength in communities and reach young members,” he says.

CUs moving to community charters should maintain their business development efforts, both to maintain loan quality and to build relationships through a conduit that may be more cost-effective than mass marketing, Christensen suggests. “There’s still value in working with companies, especially when it comes to the loan department. It’s called quality of J-O-B that many times determines loan losses.”

Invest in “small-scale experiments” to make innovation part of your CU’s DNA. “Credit union lending has been around for 100 years, and most experiments with new loan products don’t work,” Christensen cautions. He cites balloon-payment car loans to compete with leases and negative amortization and stated income mortgages as examples of loan experiments that either didn’t catch on or ended as costly failures.

On the other hand, experimenting with niche lending might move the dial on loan volume. For instance, home construction loans for higher-tier members can work if the lending department has the expertise to pull it off, he says. Student loans are another avenue for loan departments willing to wade through new regulations. Some CUs are developing indirect lending programs with orthodontists, furniture retailers, and companies offering energy-efficient home improvements.

“But before you look into these niche markets, make sure you can make a good signature loan, a good auto loan, and a good credit card account,” Christensen recommends. “Be good at the basics first.”

A sure bet on the future is that change is inevitable. “Your credit union is either going to be disrupted or be the disruptor,” Vogeney says. “We should be looking for opportunities for proactive disruption. We’re not going to bat 1,000, but we can make small bets, measure the outcomes, and then try something different.”

A long-time contributor to Credit Union Management, Karen Bankston writes about credit unions, membership growth, marketing, operations and technology.