10 minutes
Can CUs profitably gain loans, deposits and fee income by serving business members?
U.S. businesses often operate out of buildings financed by credit union commercial real estate loans. Those businesses also need loans to grow, buy equipment and inventory, and satisfy working capital demands, but CUs rarely get those loans; they’re also missing out on deposits and the fees those businesses pay for cash management services.
In today’s economy, it’s no wonder that more CUs are talking about how to attract business members. According to research from CUES Supplier member Jack Henry, 65% of credit union CEOs consider expanding small business services a high priority, reports Lee Wetherington, senior director of corporate strategy. CUESolutions provider Cornerstone Advisors puts the value of that market at $400 billion, Wetherington notes. And Block (formerly Square) has estimated that just 5% of the business market is currently served, leaving 95% “up for grabs.”
In some cases, such talk has progressed to action.
Anchors Aweigh
$165 billion Navy Federal Credit Union, Vienna, Virginia, has had a business-services portfolio for 20 years to accommodate the banking needs of its business members when it could do so within its traditional, people-focused role.
Now it is preparing to create a strategic, profit-oriented line of business around business operating services, reports Will Scott, VP/business solutions. And that will require a package of new cash management and treasury services that Navy Federal has never offered before.
Will it work? Navy Federal thinks so, and, as the world’s biggest credit union, it has the resources to go for it. “We have had business checking accounts,” Scott reports. “We have made commercial real estate loans. We have made business vehicle loans.
“What’s missing is the cash management piece,” he notes. “CUs generally don’t have the technology and expertise to support cash management, but we’ve been seriously considering this move ... and have decided to introduce a program in 2024.”
Of Navy Federal’s more than 500,000 business accounts, 80% are companies with annual revenue under $1 million, he estimates, and 20% are companies with annual revenue between $1 million and $15 million.
Business members, Scott says, need services like entitlements or permissions to provide controlled access to accounts by multiple authorized people. They also need positive pay—matching checks issued to the checked presented for payment—for fraud prevention, remote check deposit and the ability to initiate wires and ACH payments on their own, services Navy Federal is preparing to offer.
“We haven’t decided yet whether to buy, rent or build advanced services like lockbox,” Scott adds. Lockbox banking service allows customers of the business member to send payments to a special P.O. box; the credit union retrieves those payments, processes them and deposits the funds into the business’s account.
Operating lines of credit for small businesses are another big item to be determined, Scott explains. “We want to expand our limited number of operating lines and active account monitoring. We want to provide working capital lines, either asset-based or formula-based. We’d expect these businesses to have all their operating accounts with us so we could see what money is coming in and going out.”
The business case for becoming a full-service business provider, Scott says, is based on capturing noninterest income and deposits, as well as stronger member service. “With the pressure to drop overdraft fees and tight net interest margins, new sources of fee income become important,” he notes. “Businesses pay fees for these services.” Cash management also brings deposits.
The 20% of the credit union’s business members that exceed $1 million in annual revenue generally get these needed services (lockbox, operating lines, SWIFT payments) from banks. Navy Federal wants that business. “We want all their business,” Scott says. “We intend to offer all the services they get from banks at a better value proposition” with a positive ROI. Scott’s expectations are based on his experience working for banks—SunTrust (now Truist) and KeyBank—that offer treasury services.
Navy Federal has the assets and confidence, but most CUs have some catching up to do with the technology required for commercial relationships, Wetherington notes. Their core systems were not designed for commercial relationships and lack the entitlement layers businesses need to enforce which employees can do what.
Integration with business accounting systems is a challenge, Wetherington explains. “What passes for integration often boils down to a CSV (comma-separated values) file manually exported out of the CU’s retail digital banking system.” That’s inadequate, he points out. “The better option is a direct and full API integration that’s dynamic and two-way.”
With mature application programming interfaces, he notes, a lot can be done through open banking and financial data exchange platforms. Finicity, Plaid, Intuit and others offer the connectivity, but most credit unions aren’t plumbed into one, much less all of them.
A Full Array of Business Services
Still, despite the technical challenges, many large credit unions are hopeful about business banking. One CU, its people say, is already there. That would be $2.9 billion GTE Financial in Tampa, Florida. “We have a full array of business services,” reports Gerhard Toth, VP/member business services. “We have a story to tell, and we’re getting it out there.”
GTE Financial has long offered basic business services, but three years ago, the CU decided to revamp and become “a full-service business bank,” he says.
GTE Financial is also moving into space that national and regional banks are leaving, Toth says. “We’re building relationships with local teams on the ground. Most larger banks have moved their business banking operations to a remote service model.”
What does an on-the-ground operation mean? Personnel, for one thing. GTE Financial has business bankers in every county around its Tampa market, Toth reports. “We tripled the size of our business banking team in two years. We recruited bankers who thrived with relationship banking before their banks went remote. They’re experienced in relationship management, sales, credit, deposits and processing.”
That includes Toth, who worked in commercial banking at Regions Bank, Wachovia and Bank of America, and Manny Aguilar, SVP/chief commercial and advisory services officer, who also came from Regions.
“We have 8,000 business members,” Toth reports. In the business banking segment, the CU focuses on operating companies between $1 million and $25 million in annual revenue. “We’re getting to know them better and introducing them to our services,” he adds. “The businesses include Florida healthcare providers, manufacturers, professional services, wholesalers and distributors.”
The payoff, says Toth, is revenue diversification and significant deposit growth potential. “Treasury services are a good fit for operating businesses looking to streamline tasks and mitigate fraud.”
There are three goals for providing treasury management services, he explains: providing technology and convenience to businesses, increasing fraud protection and gaining core business operating deposits.
GTE Financial may be striking out boldly, but a closer look shows that it is getting to its goal in measured steps. “We currently offer four treasury management services,” Toth reports—positive pay, ACH, wires and remote deposit.
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Importantly, GTE Financial offers flexible, floating-rate lines of credit to support business operations. “There are times,” Toth explains, “when companies need to tap a line of credit for immediate operating needs. A manufacturer may need $500,000 to buy an important piece of machinery on the spot. We offer guidance lines of credit for that. They don’t need to come to us repeatedly when needs for working capital crop up.”
The lines typically are for one year and are renewable. Underwriting is based on cash flow, debt service coverage, credit history and available collateral—primarily accounts receivable, inventory and real estate.
How is collateral evaluated? For stable collateral, it’s based on financial statements—basically balance sheets or tax returns, Toth explains. For more complex situations, a field audit may be required. For lines based on cash flow, the credit union needs to see financial statements plus observation of the activity in the business’s accounts and operations.
GTE Financial expects to have all those operating accounts if it’s going to extend lines of credit, Toth reports. And it expects to have clear understanding of all the business’s debt.
The second generation of treasury services will add commercial purchasing cards. “We expect to have a true commercial p-card program by the end of this year (2024),” he states. Business members will be able to track spending, earn rebates and have fraud protection.
What it does not offer yet are lockboxes. “We will offer them,” Toth says. “And there’s also a demand for sweep accounts. We’re taking time to do it right.”
And maybe, in a third generation, the CU will add controlled disbursement, allowing business members to decide which checks will post to their accounts each day based on funding needs. “We know our top-tier business members want it,” Toth adds, “but we don’t have it yet.”
Doing It Gradually
Credit unions can ease into business services, says CUES member Mark Papoccia, by first offering business checking accounts. Papoccia is chief experience officer of $2.8 billion Vantage West Credit Union, Tucson, Arizona.
A business checking account involves a few more legal nuances than a personal checking account, he points out. “Start with deposit products and expand into loans” like vehicle financing and business credit cards, Papoccia recommends, then consider treasury management products like positive pay and remote deposit capture. Commercial and industrial loans require more expertise.
Vantage West CU takes a risk-adjusted approach to processing business member loans, Papoccia explains. The CU uses Numerated to underwrite loans up to $350,000. Below $100,000, approvals are automated; above that number, the underwriting is manual.
Vantage West CU does make commercial loans, including lines of credit. Underwriting a C&I loan, Papoccia says, requires consideration of several factors: industry risk, capitalization, management experience, collateral and ability to repay based on cash flow. “We always look to cash flow as the first source of repayment and then collateral.”
The CU does not interface with the accounting systems of its business members but requires periodic financial reports.
Fintech partners are an option to help pave the way for offering business services. Boston-based Numerated “automates and streamlines the business lending process from application to underwriting to closing,” explains Mickey Goldwasser, VP/marketing for Vantage West CU. There is an auto-decisioning option for underwriting, but usually Numerated works with its lenders to set criteria.
Small businesses’ needs are diverse and unique, Wetherington observes, but they all have cash flow. The pattern of money coming in and going out is revealing. Some nonbank lenders, like Block and PayPal, approve operating lines of credit based on that visibility.
Given the growing fraud threat, offering positive pay is “absolutely necessary” if a CU wants to serve businesses, Wetherington adds. Medium and larger businesses often expect to hand off payment files to a FI to be executed in the most efficient way, considering time and cost.
Business services can help CUs improve the balance between interest income and noninterest income, notes James Devine, chairman/CEO of Hipereon, a financial training firm headquartered in Kirkland, Washington, and faculty member for CUES School of Business Lending. Business owners don’t like fees, he admits, but if a service really helps them streamline operations, they’ll pay willingly. Transaction processing—wires, ACH files, foreign currency conversions, collections, disbursements—can be a significant source of noninterest income.
Fees also can come from payroll processing, merchant services, insurance products, employee benefits, financial planning, leasing, disbursement timing and lockboxes for collections, Devine adds.
He cites a CU in North Dakota that collects a lot of noninterest income from selling crop insurance to its farmer members. Another CU in Texas gets 36% of its income from fees, and Greater Commercial Lending in Nevada underwrites a lot of green loans and sells participations to banks and CUs, generating fee income that goes back to the credit union service organization owners.
“You need to sell them what they need,” Devine emphasizes, “not what you have.” That’s the key to deep relationships that last and are the most profitable. cues icon
Richard H. Gamble writes from Grand Junction, Colorado.
