CU Business Services: Started at the Bottom, Now We’re Here

When you start from zero on something, whether it’s an exercise regimen or a new career, it’s essential to celebrate the small milestones. Measuring yourself against someone who is working toward the same goal but began their journey with a special advantage is pointless and discouraging – yet in our culture of constant comparison, it’s difficult not to do (thanks, social media).

The importance of judging the journey of an individual or group against its own progress up until that point – not against the progress of others – is relevant to the credit union industry’s business services journey. I had the opportunity to attend CU Business Group’s annual conference for the third year in a row this month, and a common theme I heard while interviewing the business services CUSO’s executives was that if you were to compare credit unions’ involvement in the business services space to that of banks, CUs may appear to be falling behind. But because they joined the game a little later and began playing at a beginner’s level, their accomplishments should be viewed as a major success.

Credit unions have been primarily focused on commercial real estate lending, but they’re now looking to diversify their portfolios, for instance with commercial and industrial (C&I) loans – working capital business loans secured by something other than real estate, like equipment or vehicles – CUBG President/CEO Larry Middleman explained. “If you look at the credit union pie chart of [business] loans, almost all of them are commercial real estate and a tiny slice of the pie is C&I. Loaning more holistically to a business is pretty standard for banks, while credit unions have been a little more one dimensional, where real estate is backing the loan,” he said.

Another step credit unions have been taking on their business services journey is attracting larger, more sophisticated businesses that can help them bring in six-figure-plus deposits to help them continue to fund their loans. Rachel Snyder, CUBG’s SVP/COO, noted while commercial deposits are growing for the industry as a whole (they more than doubled from 2013 to 2019), credit unions are still not funding their loans like they should be – the industry-wide loan to share ratio is at about 2:1, far from the ideal ratio of 1:1.

“It’s tough to win consumer deposits in today’s market, so businesses are a great place to look,” Snyder said. “This isn’t necessarily new, it’s something we’ve been beating the drum about for a while – gathering more core commercial deposits to supplement your lending.”

Another effort CUBG is working on with credit unions to help them advance to a higher level is similar to a mutual fund – a concept that would allow a group of credit unions to pool their money, use it to make a portfolio of loans, and share that portfolio’s risks and benefits. Middleman said the potential project, which is still in its very early stages, would allow credit unions to increase their lending presence, and for those that are subject to the Member Business Lending cap, engage in lending beyond the cap. “This is another concept that is certainly not new, but is not being done in the credit union space,” he said.

What makes it so challenging for credit unions to move ahead from Business Services 101 to a more advanced course? One key hurdle is core technology system limitations, Middleman and Snyder explained. The functionality of traditional credit union core systems is not robust enough to accommodate business-specific functions, such as initiating an ACH transaction or managing a sweep account. “For a lot of credit unions, system constraints continue to be a challenge,” Snyder said. “For folks who recognized this in the past, they’ve been able to plan and budget for core conversions and online banking providers that can overcome that. But the systems are traditionally meant for consumers.”

So, is there any way credit unions can get around these system constraints? According to Snyder, the best thing they can do is plan ahead and partner with technology vendors that can enable the business-specific functions they need, even if it means piecing together products from different vendors. “There are some system providers out there where you can buy things a la carte and plug them in the best you can,” she said.

In addition, some credit unions that are looking to advance their business services have trouble landing the talent they need to elevate them to the next level. “Credit unions shortcut the idea of, you have to put people on the ground, you have to build the relationships, you have to win the business, you have to knock on doors and you have to ask for the money,” Snyder said.

Successful business services staff must be sales- and relationship-oriented, plus understand how the businesses served by the credit union function. Snyder noted that one credit union, which planned to target doctors to grow its business accounts, found that hiring an ex-pharmaceutical sales rep with no banking experience was the right move. “Find the skill set you need and get that person on board, and you can teach them the credit union side of it.”

Considering where they started, and the challenges they’ve faced that are no fault of their own but are simply due to the nature of the industry, credit unions that have pursued business services deserve a big congratulations. Their process has been – as Middleman likes to describe it – like building a house, and many credit unions that have perfected the first floor in their house of business services are ready to work on a second.

“You have to build a really good foundation, and that foundation allows you to build the first story,” he said. “There are a good number of credit unions that have that first floor of the house completed. It’s well-insulated and it’s really comfortable, and now they’re thinking, maybe we should look at a second story.”

Natasha Chilingerian is executive editor for CU Times. She can be reached at nchilingerian@cutimes.com.