Scott Butterfield

Serving the underserved: ‘That’s relevance’

Special loan products require alternative underwriting and enhanced review and monitoring procedures.

July 28, 2016

If your credit union disappeared today, what would become of your members?

Scott Butterfield, principal at Your Credit Union Partner, posed that question to CUNA Management School students in Madison, Wis., to encourage thoughts about their credit unions’ relevance.

Chances are, members would take their accounts to another credit union, or even a bank, he says. That’s because financial services are virtual commodities to consumers today.

Now, consider if those members were underserved segments of the population. Members would have to turn to payday lenders for quick-fix loans at exorbitant rates.

For transportation, members might look to “buy here, pay here” car lots for overpriced, unreliable vehicles at equally untenable loan terms. Members who rely on microenterprise loans to finance small business would be forced to look for low-paying jobs that barely cover expenses.

The changes to members’ lives would be financially devastating in many cases. “That’s relevance,” Butterfield says.

Serving underserved populations offers credit unions an opportunity for brand differentiation and increased member loyalty. It also provides operational benefits such as consistent growth, higher average loan yields, and higher fee income.

Credit unions can gain eligibility for grant funds and regulatory relief to leverage access to underserved populations by obtaining a low-income designation [PDF] through NCUA or Community Development Financial Institution status through the U.S. Treasury.

Credit unions are “slugging it out” with banks and even other credit unions for prime borrowers, Butterfield says. At the same time, 56% of consumers have subprime credit scores, he notes, citing statistics from the Corporation for Enterprise Development.

Plus, 51% of all U.S. workers make less than $30,000 per year, according to the Social Security Administration.

“Meanwhile, our value proposition is literally built around a few basis points for those prime borrowers,” Butterfield says.

Butterfield uses the metaphor of a bridge. On one side are consumers without access to mainstream financial services. They lack savings and access to credit, or they have bad credit and are in desperate need of financial education.

On the other side of the bridge are mainstream financial services consumers with savings for emergency expenses and assets provided by loans. In most cases, they possess basic financial education that provides a foundation for day-to-day living.

“As credit unions, we look at how we can improve the quality of life in our community,” Butterfield says. “You want to leverage your strengths. Our greatest strength is helping a whole bunch of people cross to the other side of that bridge. That’s community development. That’s being relevant.”

Butterfield cites some credit unions that offer subprime car loans through a National Credit Union Foundation initiative.

“Cars change lives,” Butterfield says. “In many cases you’re talking about a providing someone with access to a job across town they could not other get to. That’s when a loan is really more than a loan.”

To serve this market, credit unions must adjust their business model. Second-chance products must be a part of both savings and loans.

Credit products require special underwriting and enhanced review and monitoring procedures. Allow for higher operating and provision expenses—which will be offset by higher loan yields and fee income.

Credit unions offering microenterprise loans can leverage community partners, such as the U.S. Small Business Administration and local chambers of commerce to provide expertise and outreach.

Credit unions serving Latino communities must design products specifically for those members and make Spanish language communication a priority.

Butterfield notes the simple fact that payday lenders plaster their storefronts with “Habla Espanol” signs reels in susceptible Latino customers who are willing to pay higher fees.

“People will pay more to speak in their native language. Bilingual is a good first choice for credit unions,” Butterfield says. “Bicultural is the best choice.”

But for credit unions it’s not about charging more; it’s about offering more services, Butterfield says.

He cites Lower Valley Credit Union in Sunnyside, Wash., which under the leadership of President/CEO Suzy Fonseca serves a largely Hispanic and agricultural population through such initiatives as a path to citizenship program, Individual Tax Identification Number lending, and financial literacy.

“Suzy started with a methodical approach to build her credit union through community partnerships and one-on-one counseling,” Butterfield says. “They’re not experts at completing the paperwork for the citizenship process, but they have community partners who are. Those partners now advocate for the credit union. Some of the people who become citizens are family members of employees. That’s inspiring.”

Butterfield also lauds North Side Community Federal Credit Union in Chicago, which has an inner-city membership that is 55% African-American and 18% Latino. The credit union “fairly serves a market that other traditional financial institutions are not focusing on,” says CEO Sarah Marshall.

“We really seem to have found a niche with single African-American mothers between the age of 35 and 45,” Marshall says.

The credit union offers small-dollar loans to cover costs that run the gamut from moving to school supplies to car repairs and debt consolidation.

“The only other viable alternatives are payday lenders and buy-here lots,” Marshall says. “Other financial institutions may offer programs, but there’s just not a strategic focus. People are comfortable here. They trust us. A lot of that is because we’re a credit union.”