By George Hofheimer
At the Filene Research Institute we have the luxury to think about the future of credit unions every day. We accomplish this task by working with academic experts on research projects or the next generation of credit union leaders on innovation programs. Sometimes we use old fashioned methods like gathering around the water cooler and bouncing ideas off each other.
I’d like to share some of the crazy ideas we’ve been talking about here at Filene. On the surface, you may say, “Oh, that’ll never work." We ask you to think beyond conventional wisdom and break from the inertia that is so commonplace in financial services today to consider what it might take to make some of them actually work.
Crazy Idea #1: Zero percent student loans. Recent studies place the net present value of an undergraduate education between $500,000 and $1 million. Graduate and professional degrees command much higher NPVs.
Question: Why not dedicate a portion of your loan portfolio to zero percent student loans?
Idea in Action: Navy Federal Credit Union uses a variation of this idea by lending $30,000 to Naval Academy midshipmen at a paltry .75% interest rate.
The logic: These midshipmen will be the influencers of tomorrow’s credit union member, namely the officers that give orders to the enlisted folks.
What to do: Identify a prospective group of college students in your field of membership who would benefit from this type of program and have the high potential to influence your credit union's members down the road.
Crazy Idea #2: Progressive loan pricing. Most underwriters subscribe to the conventional wisdom of charging higher rates of interest to higher credit risks. This risk-based pricing practice merges with economic theories of risk/return. Typically, though, the higher the risk profile of an individual, the lower their income level, which results in poor folks paying a disproportionate amount of interest to their income level, leading to higher default rates.
Question: Does it make sense to have a regressive credit pricing structure which makes credit more expensive to those in the most need? Can we flip that logic on its head and create a special class of needy borrowers with non-traditional underwriting procedures?
Idea in Action: Grameen Bank in Bangladesh keeps the price of credit low to the neediest of their population by lending to small homogenous groups whereby credit is extended to each individual in the group one at a time without legal contracts or collateral. The peer pressure within these small groups ensures timely repayment so others in the group can also access credit. The rates on their loans are typically half that of market rates. Incidentally, Grameen’s default rates hover around 5%. This is just one example of creative lenders operating in less than ideal situations.
The logic: Extending credit to those in the most need is part of the credit union ethos.
What to do: Identify a group of lower-income individuals in your membership and craft an experiment which flips the traditional underwriting logic on its head. For example, offer 10% of your low income members an automobile loan at prime rate and compare their delinquency and charge-off rates to a similar group of members over a certain period of time.
Crazy Idea #3: The 10% Solution. U.S. credit unions have that weary look in their eyes when the words “modest means” are uttered. We implicitly understand our tax exemption is somehow linked to the level of service we provide to people of modest means. This begs the question what is modest means and how do we measure our service to such folks? Question: Rather than waiting for the banking industry to frame the discussion, why don’t credit unions make such discussions irrelevant by proactively dedicating 10% (an arbitrary, but commanding figure) of budgeted income or profit to community development activities?
Idea in Action: I can’t think of any examples in the financial services world which either speak to the foolishness of the idea or its deceptively simple approach. I would love to hear anyone’s ideas on this concept. However, in a $500 million credit union with an ROA of 1%, the 10% solution would earmark $500,000 to community development efforts.
The logic: Rather than coming to a precisely wrong definition of modest means with a precisely wrong measurement, the 10% solution is a number that is approximately right, powerful and could differentiate credit unions. Furthermore, credit unions in general have a strong capital position, so sloughing off 10% of planned income would not likely impair capital adequacy, safety, soundness, etc.
What to do: Conduct an audit of where and how much your credit union currently dedicates to community development and modest means outreach efforts. These activities could include: investments in facilities/operations to serve low-income members, lending to non-profits, grants to local organizations, etc. Do you spend 10% of budgeted net income? Determine how you can get to that level and any gaps in your support of local community efforts.
Crazy Idea #4: The green credit union. Rising gasoline prices, the maturation of alternative fuels/automobiles, a focus on global warming. All these trends are coming to a point where an increasingly large segment of the American public is becoming more green in their outlook. Question: Who will be the first credit union to stake the claim of being the green financial institution in their community?
Idea in Action: At the Co-operative Bank in the UK, an incredible amount of focus in put on the environmental impact of the bank. Alternatively, MECU, an Australian credit union, developed the “go green auto loan” which offsets the CO2 emissions of the member’s financed automobile by planting the appropriate number of trees in a nature preserve.
The logic: According to a recent article in Business Week, companies that market themselves as the “green alternative” can command price premiums of 20-30%. Additionally, very few financial institutions have latched onto to this important societal trend in the U.S.
What to do: Be on the lookout for an upcoming study by Filene on this topic authored by Stuart Hart, a professor at Cornell University. Also, discuss whether the green approach is appropriate for your field of membership, management structure and community.
George Hofheimer is director of research at the Filene Research Institute, Madison, Wis.
Hear more from George at CUES' CEO Network, Nov. 4-7, 2007, at the Ritz-Carlton in
Key Biscayne, Fla.
Read another Skybox posting on innovation from Filene's Mark Meyer.
Learn about a book by Stuart Hart, The Fortune at the Bottom of the Pyramid, in this blog's "Good Reading" section on the left side of the page.
