Lessons Learned in Business Services
CUs have been offering business services long enough to have learned some valuable lessons. Here’s their ‘top 10’ list.
Three trends have contributed to less-than-stellar results over the past decade for credit union business services programs, according to a recent study by Cornerstone Advisors Inc.—a strategy and technology planning company.
Those three trends are:
1. The bursting commercial real estate bubble, which led to business lending delinquency rates as high as 30% for some lenders in parts of the U.S. that were especially hard hit by the recession;
2. Limited knowledge of business services; and
3. A focus on lending rather than deposits.
That said, Cornerstone believes the time could be right for credit unions to launch or re-energize business services programs.
Cornerstone is bullish on credit union business services programs because small-business owners are feeling alienated from large banks due to impersonal service, high fees, and lack of affordable credit.
And some community banks—primary competitors for credit union business services—have made it more difficult for small business to qualify for affordable lines of credit.
Credit unions with experience offer 10 tips for building or fine-tuning business services programs:
Next: Listen to your members
1. Listen to your members. Two of the top reasons credit unions gave in a recent CUNA survey for making the move into business services were to offer more services to members (57%) and because members had asked for them (54%), says Pat Keefe, CUNA vice president of communications and media outreach.
It’s a natural transition, says Steve Harkins, president/CEO at $208 million asset SC Telco Federal Credit Union, Greenville, S.C. “Many of our members are small-business owners. It’s natural for them to want business services from us.”
Business services are on track to roll out next year at $137 million asset Icon Credit Union, Boise, Idaho. “Member needs are driving the types of services we’ll deliver and how we’ll deliver them,” says Connie Miller, president/CEO. “They want connections, local service, and technology tools that minimize employee downtime.”
Erie (Pa.) Federal Credit Union—winner of CUNA’s 2009 Credit Union Excellence in Lending award for business lending—laid out a three-year strategic plan to grow its business services.
But connecting with members took the $327 million asset credit union down an unexpected and highly rewarding path, says Denise Kaczmarek, senior vice president of lending. “One of our member businesses lost its main source for customer financing. Now 21 merchants send us their customers, and we’ve closed nearly half a million dollars in loans for them since 2009.”
2. Evaluate the competition. Conduct a formal analysis of your market. Are your competitors local, regional, or national? What types of business services and capabilities do they offer, especially in the area of technology? While $83 million asset First Bristol (Conn.) Federal Credit Union doesn’t currently offer business services, it’s considering them.
“A couple of area community banks were just sold to larger national and regional banks,” says Mark Cornacchio, president/CEO. “It’s still a competitive environment, but for the first time we think we might be in a position to make some inroads.”
3. Decide how to gain needed expertise. Business services require more due diligence, analysis, and monitoring, and an understanding of a host of regulatory issues.
“We have in-house training to help staff gain the core competencies, but we did hire people from the banking world to lay the original foundation,” says Wayne Paton, vice president of commercial banking and wealth management at $3.1 billion asset Ent Federal Credit Union, Colorado Springs, Colo.
Using a credit union service organization (CUSO) has been more cost-effective for $585 million asset Tropical Financial Credit Union in Miramar, Fla. “Replicating what they can offer us internally would be extremely expensive,” says Richard Helber, president/CEO.
“We originally used a national CUSO, but quickly decided it made more sense to form our own regional one (Innovative Business Solutions) so we could have more control, personal service, and local knowledge,” says SC Telco Federal’s Harkins.
Some credit unions choose to work with service companies that can handle everything from loan underwriting and servicing to merchant processing, payroll, and member websites.
“We make it easy for credit unions to reach out to this market by providing a ‘one-stop shop’ for your member businesses,” says Barry Sloane, president/CEO of The Small Business Authority. “A partnership with our company can allow you to provide business services with minimal staff commitment.” The Small Business Authority is powered by Newtek Business Services Inc., a CUNA Strategic Services alliance provider.
“Be methodical, and reach out to get the help you need,” says Icon’s Miller. The credit union is sending its vice president of lending to a five-week business lending school run by the Northwest Credit Union Association. Icon staff also are attending regular seminars, connecting with regulators, talking with other credit unions, and investigating services available through CUSOs.
“We’re looking at our underwriting, determining what kind of ongoing analysis we’ll need to monitor our risk, and evaluating various technologies—like remote deposit capture—and the risks they hold,” says Miller.
4. Evaluate your technology capabilities. Take a close look at your processing systems and member-facing online tools. Can your core system accommodate member businesses’ lending and deposit/cash management needs, and deliver the risk analysis tools you need? Are your online service offerings competitive?
Most member businesses will expect online bill payment and banking, and assistance with payroll and cash management. Remote deposit capture is also growing in popularity.
“We brought in business owners and asked them what they’d want to see in an online business platform and took it from there,” says Gregg Cawlfield, director of business banking at Ent Federal. “Tiered authority was especially popular,” giving different users at the business access to different functions within the system.
It’s important to be able to integrate existing systems with your credit union’s online banking platform, credit unions agree. “We wanted member businesses to rely on us for their ‘whole ball of wax,’ so we had to wait until we had a core processing system in place that could handle it,” says Kaczmarek.
On the hardware side, Erie Federal added two “fast branch” machines for businesses that need to make late-night deposits. The machines can count bills, accept cash deposits, take bulk deposits of checks, and provide check images on the receipt. And they’re open 24/7.
5. Start small. “One of the most common mistakes is jumping into large loans,” says Paton. Credit unions do better starting with loans less than $50,000, he explains. “They’re similar to consumer loans and you can deliver a needed service without betting the farm.”
“We don’t have the resources to do things like complicated treasury transactions,” adds Harkins. “We’ve found that most of our business members are looking for things like checking and deposit accounts, a place to handle their payroll, equipment financing, lines of credit, and maybe a credit card.”
“Credit unions shouldn’t be afraid to find their niche,” agrees Miller. “Don’t go in too many directions and don’t try to be all things to all businesses.”
Next: Keep it local
6. Keep it local. “Local decision making is one of the big benefits of working with our credit union,” says Harkins. “For instance, the man who does the landscaping at our branches needed help to buy trucks and equipment. He wasn’t looking for a big loan, but he might not have fit the traditional ‘box’ at other financial institutions.”
Knowing your borrowers and the local market conditions can also help your credit union mitigate risk. While some credit unions choose to enter business lending through participations, that raises a red flag for Paton. “You can quickly get into trouble there, especially if the loan is in a geographic area or industry where you don’t have any experience.”
7. Increase your visibility. Business owners don’t always think of credit unions as a resource for their financial services. To turn that around, Tropical Financial makes a huge effort to be a visible player in the local business community. “We go to chamber of commerce programs, host events, and speak at the Rotary and the Kiwanis Clubs,” says Helber.
Erie Federal runs ads in local business magazines, sponsors local community and business events, works with local economic development groups, and has a blog dedicated to small businesses.
“We intend to put a big focus on member-business education,” says Miller. “We want to help members’ employees gain the business acumen they need to be happier, more productive employees. And we want to play a mentoring role for our small-business members. This service is about building relationships.”
8. Educate your entire team. Knowledge and support are critical at every level—from the board to the front-line staff. Make it an ongoing commitment, not a one-shot deal that happens before the launch of business services, suggests Helber.
“We’re taking a year to make sure we understand all the nuances of business lending so we can effectively educate our board on the risks,” agrees Miller.
Kaczmarek’s credit union has taken advantage of employee training provided by the Pennsylvania Credit Union Association on business lending, best practices for business accounts, and types of business entities. Many other state leagues offer similar programs.
9. Manage your risk. Business lending is inherently riskier than consumer lending. So it’s important to put policies in place that limit your exposure. After the recent real estate meltdown, most credit unions are leery of making commercial loans for anything other than owner-occupied properties.
“Have a healthy mix of loan types and collateral,” recommends Harkins. “Our CUSO’s reporting tools help us monitor our overall portfolio.”
Limiting online activities can also be prudent. “We don’t allow businesses to apply for loans online,” explains Paton. “You’re trying to build relationships, so you want to see the property and meet the controller.”
Most credit unions prefer to work with established businesses, he adds. “We like to work with organizations that have been in business for at least three years.”
Participation is another way to share the risk. “We keep our business loans in the $50,000 to $500,000 range, and most of them fall around $100,000,” says Helber. “If, for instance, we have a member who needs a $4 million loan for an owner-occupied building, we’ll use our CUSO to see if we can share the loan.”
Put policies in place to limit risk exposure over the life of the loan, he suggests. “Reporting is critical. Get routine financials from your business members on a set schedule.” You need to track and analyze this information to help you see if a business is stressed and getting into trouble, he says.
10. Show businesses they won’t get lost in the shuffle. Smaller businesses can quickly get frustrated working with large national banks, says Helber. “Their account rep might be in another city, their loan decisions are often made elsewhere, and they don’t get the service they need.
“We communicate that their experience at the credit union will be different, and that we’ll typically be able to offer them better terms and rates.”
NEW MUTUAL FUND COULD HELP WITH MBL CAP
A small group of credit union professionals are creating a mutual fund that could help credit unions package and sell their business loans—providing a way to better manage the member business lending (MBL) cap. The new fund’s tentative name is the “Unity Fund.”
It’s a collaboration of Tom Campbell and Mario Pelosi, managing directors of Glasgow Partners; David Dunn former commercial lender and former president of two credit union service organizations (CUSOs) providing business services; and Guy Messick from the law firm of Messick & Weber PC. To launch the mutual fund, the team will partner with investor credit unions in a CUSO that’s a registered investment adviser.
BNY Mellon conditionally approved the group’s proposal in December to become a mutual fund offered by BNY Mellon in its family of mutual funds. This was no small feat, according to Dunn. It shows the business viability of this project, he adds. It has a few more hurdles to clear before it can open for business, but its prospects look bright—no fund that has gained BNY Mellon approval has ever failed to clear subsequent regulatory hurdles.
At this time, NCUA has interpreted the investment regulations as not permitting federal credit unions to buy shares in the proposed mutual fund. There will be follow-through with NCUA to determine if the investment regulations could be amended to permit credit unions to buy shares in the mutual fund. In the meantime, the shares will be sold to institutional investors.
The quality control on the loans will be extensive, according to the fund’s creators. The CUSO will certify the lenders, and that certification must be reviewed and renewed annually. The CUSO will only certify experienced and successful business lending credit unions and CUSOs to sell loans into the mutual fund. If a noncertified credit union wants to sell loans to the mutual fund, a certified credit union must review and approve the underwriting. The certified lenders will service the loans in the mutual fund. The CUSO will review all loans sold into the mutual fund and there will be a third-party reviewer who’ll sample test the underwriting.
“The mutual fund will only be successful if the loans are of the highest quality. And we’re sparing no effort to ensure this,” Dunn says. “We’re excited about this new tool for the credit union industry that will help manage the regulatory cap issue [because when credit unions sell their business loans, those assets are taken off their books], provide liquidity from outside the industry, shift some lending risk to outside the industry, and provide high underwriting standards that will tend to raise the bar for credit unions that want to sell to the mutual fund. We look forward to the day when credit unions can buy shares in the mutual fund so they can benefit from a favorable return on their investment without the same level of risk that a loan participation might pose.
“There’s a great deal of business lending opportunity for credit unions,” he adds. “We’re not looking for the big syndicated real estate loans that have been so problematic. Credit unions can help America recover if they have the necessary business lending expertise and regulatory relief. This mutual fund can help credit unions seize their significant business lending opportunities.”
CUNA and credit unions are trying to get Congress to increase credit unions’ MBL cap to 27.5% of assets from 12.25%. Doing so would open up more opportunity to offer MBLs, inject $13 billion in loans into the economy and create as many as 140,000 new jobs, with no cost to taxpayers, CUNA says.
- Cornerstone Advisors Inc., Scottsdale, Ariz.: 480-423-2030.
1. 2011-2012 Credit Union Environmental Scan Report
2. Business services
3. Member business lending
- CUNA Strategic Services alliance provider: The Small Business Authority, powered by Newtek Business Services Inc., New York: 855-284-3722