Time to Get Our Houses in Order and Define Ourselves

Recently I came across the following excerpt from an article I had read years ago when a friend had emailed it to me. The article starts with the following point, “Many people do not believe that serious recession will ever come again. Feeling secure in their expectations of continuing employment and a steady flow of wages and salaries, they obligate their future income without thought of what they would do if they should lose their jobs or if their incomes were stopped for some other reason. But the best authorities have repeatedly said that we are not yet smart enough to control our economy without downward adjustments. Sooner or later these adjustments will come.”

In the light of 2010 this article seems boring as if it was only stating the obvious, but the writer of the article wrote this piece back in 1987. The soundness of this counsel is something that all of us in financial services have seen firsthand as we continue to push past one of the sharpest downturns in many of our careers.

The aftermath of the 2008 recession is that there are fewer banks and fewer credit unions in the industry. Lending has changed for many of us. No longer can we supply an unlimited supply of 500 dollar unsecured loans to our members at acceptable rates.  We all share a new reality in which credit has tightened as delinquencies have climbed in both consumer and commercial lending portfolios.

Small credit union collections shops have been hard pressed to keep up with the volume. Good members have become hard pressed as overtime has been eliminated or spouses have been laid off.  Sadly one of the most common job postings I have seen on the credit union job boards over the last year have been for newly created positions of “Collections Manager” or “Part Time Collector”.

Not surprisingly given these challenging times the reaction of most banks and credit unions has been to bunker down and to try and grow their loan portfolios with top tier credit members. This strategy has been adopted by Big Banks, Community Banks, and Credit Unions.  In today’s market everyone seems to be following this same type of strategy. So who is meeting the needs of our credit bruised members who are looking for someone to meet their lending needs?

Sadly, we have created a void in the market that is now being filled by payday lenders who are now starting to sound and act like credit unions in that they are meeting the needs of the under-served. This morning as I was reading the paper one headline that caught my attention was Pay Day Lenders Go Hunting.  

Emboldened by their competitive advantages and the banking industry's retrenchment, payday lenders are aggressively pitching debit cards and online bill payment. Some companies are opening payday-loan branches next door to banks and designed to look like them, even hiring former bank-branch managers

This problem that was on my morning paper had been brought to my attention earlier in the year when I attended a conference in which session moderator Lois Kitsch, REAL Solutions Program Director, asked us, “How many people in the audience have credit union members that use payday lenders?" Now many of us smiled because we figured Lois was experiencing jet lag and simply did not realize what state she was in. If she had she would have realized that our state had outlawed payday lenders and basically pushed them out of the state. Lois she added, “Oh, I know it is not legal here but do any of you have members in another state or members who would drive across the state line?”

Suddenly I realized that the fine people I had lived, worked, and worshiped with would not even think twice about driving across the state line to get a payday loan. For decades people had done work office pools and had someone drive to the state border to buy a lotto ticket. If they would drive for one then they would drive for the other.

Lois then continued and confirmed what I had already been thinking and then added a new twist, “An estimated 7% to 15% of credit union members use payday loan products.” Kitsch paused then added, “So do some credit union employees. Providing alternatives to payday loans is a good business decision, a good social decision, and a good advocacy decision.”

So what are the alternatives that are still prudent and not just “charitable social lending” to save the world? Some in the industry are working to help identify what those options are. In my opinion they have a difficult road as both ends of the credit union spectrum have to be satisfied.

You have to be able to offer solutions that pay for the service.Unsecured debt in low amounts to troubled borrowers is not an easy sell to any lender. The immediate reaction to such a proposal is to charge a rate that compensates for the risk involved which upsets credit union purists. 

Those that would have us give members loans regardless of risk and cost simply do not live in the real world.  There are scores of well intentioned purists who at times simply choose to ignore the balance sheet and do not try to consider the risk involved with their good intentions.  While their passion is commendable they have to help bottom line focused credit union leaders see past the charity element and help build a real business case for meeting these member and employee needs.

I realize that for many of you reading this blog the concept of payday lending is an old and tired topic. While there might be “gold in the mines” the cost of business and the public relations nightmare make it an easy issue to put on the back burner. However, there is still a need to be meet and most credit unions will see noninterest income from interchange shrink by some estimates by as much as 70 percent with newly proposed Fed limits.

So we have an unmet member need with the potential to move back into a space we should have never left to payday lenders. How do we take some prudent steps back? That is the billion dollar question isn’t? While I do not have the answers I do know we as an industry need to tackle these questions below:

• What are appropriate products to add to our menu of services
•  How do we determine if our members are caught in the short term loan cycle trap
• We all know our members want a low cost short term loan option
• What is a product we can offer to help them move up a wealth path
• How do we price our products as low as possible to generate revenue the programs will need to make to see a return to all member owners
• How do you encourage your members to save and to become savvy borrowers

As we look at a new year I am suggesting that the time has come for us as an industry to get our houses in order and define ourselves to our members. While we are at it we need to help our members do the same. 

If we are in the business of improving our members’ financial well being then surely we have to help them with self-reliance. Self reliance simply cannot be obtained when there is serious debt hanging over a members’ household. One has neither independence nor freedom from bondage when he is obligated to others. If we as an industry can’t figure it out then we have left our members in the hands of payday lenders to define the solution.

Many of you reading this blog are industry thought leaders at your credit unions who understand the issues in much greater depth. Leave a comment and share your insight. Help educate those of us in the industry that want to make a difference but are not sure where to start. As always thanks for reading.