Crisis Brings Opportunities to Credit Unions

The coronavirus crisis has created an unprecedented worst-case scenario, abruptly ending the longest economic expansion in U.S. history and quickly morphing it into an uncertain economic morass. With innumerable business closures and nearly 17 million job losses in just three weeks, nobody knows when it will be safe enough for companies to reopen so people can return to their jobs.

How credit unions adapt to this new Twilight Zone reality will be critical for their survival. The key to credit union growth and even expanding market share during the coronavirus crisis is to uncover realistic opportunities that will appeal to members and attract non-members in their time of financial need.

What do major market disruptions like the Great Recession, 9/11 and Superstorm Sandy have in common with the current coronavirus crisis?

Although the catalysts are different, those past crises provide valuable insights and lessons for credit unions on how to manage through the COVID-19 disruption to not just survive but thrive for millions of members and communities that are depending on their financial cooperatives, according to Kirk Kordeleski, who served as president/CEO of the $9.4 billion Bethpage Federal Credit Union and successfully led it through the disasters of 9/11, Superstorm Sandy and the Great Recession. Moreover, George Hofheimer, head of research and development at the Filene Research Institute in Madison, Wis., said with nearly 17 million people who have lost their jobs, the underserved population is now mainstream, opening opportunities for credit unions to help those laid off persons who will need quick access to cash to pay their basic living expenses.

In October 2008, Bethpage was holding a regular strategic planning meeting when the sky fell and all hell broke loose.

“Financial markets were crashing, interest rates were dropping to record lows and the public’s fear was rampant,” Kordeleski recalled, who now serves as executive benefit consultant for OM Financial in Sea Cliff, N.Y. “The capital market system was close to collapse as banking and credit union institutions went bust and their losses were consuming the insurance funds, which required large payments from the institutions left standing.”

Bethpage executives used scenario planning to improve their understanding of what might happen during that uncharted financial debacle. This also allowed executives to focus on what they could do as opposed to what they couldn’t do.

As interest rates dropped and public anger blamed commercial banks for causing the financial crisis that led to the worst economic recession since the Great Depression of the 1930s, Bethpage spotted an enormous opportunity.

“While others stopped marketing, we doubled down,” Kordeleski said. “While others saw the challenges of mortgages, we recognized the opportunity of [our] conservative employed membership who had less than 50% loan to value mortgages and record low rates.”

Bethpage was the first financial institution in its market to advertise refinancing mortgage rates, betting that the interest rates would not increase because the jobless rate was very high nationally.

“We created more than $10 million in excess income in the first year of the economic downturn and grew by nearly 20% while significantly expanding our brand positioning,” he said.

What’s more, Bethpage also built a billion dollars in commercial lending when liquidity dried up at other financial institutions.

“We believed that New York City would recover and there would be value in the real estate,” he said. “In the retail side of the business, we created a new HELOC product that no one had previously attempted – two years at 0.99% – which created a billion dollars in lending over the next three years.”

After 9/11, when the Dow plummeted 38%, the Fed cut interest rates and the nation fell into a recession, Bethpage responded by helping members refinance mortgages and marketed low-rate home equities and auto loans.

“While many competitors were pulling back during this period, we used capital and invested in growth,” Kordeleski said. “By focusing the entire organization on the opportunities to build our mortgage business and serve the members, Bethpage not only grew by more than 20%, it created record-breaking return on assets.”

During the superstorm’s aftermath, in addition to making sure employees who lost their homes had temporary housing, Bethpage increased cash options, removed loan payment requirements for members and stepped up support for charities.

“So in areas that we did not serve, where we did not have branches, we still gave [to charities] if the community was affected by Superstorm Sandy,” he said. “We gave in services, we gave in volunteers and we gave in financial support. We realized that it was the right thing to do, but it was also the right thing to do for our business. We became, in many ways, the regional or the community financial institution of Long Island, based on those actions coming out of Superstorm Sandy. So building a brand and identifying how you can support people ultimately matters and we, again, grew 20% coming out of that challenge.”

During times of pressing and immediate financial needs, a lot of consumers are drawn to the convenience of payday lenders that have usurious rates.

“When you’re thinking about the urgent needs of today among consumers, the last thing that we want to do is have them get short-term relief but then get trapped in a long-term commitment [with a payday lender] that will not be good for their financial institution,” Hofheimer said. “We understand that credit unions traditionally, at least within the recent past, have not been real active participants in the short term small-dollar lending area because they viewed it as too risky or it didn’t fit their business model.”

But over the last three weeks, millions of Americans have lost their jobs. And since many families are living paycheck to paycheck, the immediate need for cash is urgent.

The financial struggles of the underserved populations well-documented before the coronavirus crisis devastated the economy are now in the mainstream, Hofheimer noted.

“When we think about this opportunity, this is one of the reasons why credit unions were created, to fulfill a need for everyday consumers for their core financial service needs,” he said.

Hofheimer and his Filene colleagues, who recently interviewed many executives, said some credit unions did not have emergency loan programs prior to the coronavirus crisis.

“Hearing the numbers that have been coming in just in terms of demand for these types of programs is absolutely astounding and I think is really flooring credit unions in terms of the consumer reaction to this,” he said. “In one case I talked to a credit union that had dealt with a thousand of their members asking for [loan] deferrals in a single day. I also heard another story about a credit union that launched an emergency loan program and within that day they had 300 applications.”

What’s more, Maryland’s largest credit union, the $3.7 billion SECU in Linthicum, Md., has committed $400,000 in grants to members and nonprofits and meal deliveries for frontline medical workers. In less than three days, the credit union received 900 grant applications from members with another 1,200 in progress.

To meet these demands for emergency loans, Filene recommended that credit unions consider the QCash Financial COVID-19 relief program for credit unions looking for a responsible, short-term credit solution for members.

The automated, white label platform, developed by the $3.3 billion Washington State Employees Credit Union in Olympia, Wash., connects to a credit union’s core mobile banking system and uses a relationship-based underwriting engine, not a credit score, to make instantaneous loan approval decisions based on relationship data analytics. The loan amounts, terms and fees are fully configurable by the credit union and personalized to its members.

Through the end of this year, QCash Financial is waiving all fees associated with this program for credit unions that have the DNA, Episys and Spectrum core banking systems.

Another option is TrueConnect, a fintech platform that automates loans for credit unions with a strong SEG relationship, which want to offer employee loans as a benefit program for those who may have poor or no credit or are in a temporary emergency situation.

“Those are two commercial offerings that would be very quick hits for credit unions to be able to implement in a short amount of time to address that market need that we identified, which is getting liquidity back into consumers’ pockets,” Hofheimer said.