4 Ways to Bring More Growth Capital to Community Development Credit Unions

Community Development Credit Unions (CDCUs) are on the front lines of closing the racial wealth gap in the United States – an accomplishment that could add an estimated $1.5 trillion to the economy, according to McKinsey & Company research. If CDCUs are to be successful with their unmatched ability to translate deposits into impact, they need to find innovative ways to connect with impact investments to facilitate the import of wealth into their communities.

CDCUs share a commitment to shrinking the racial wealth gap in our country and many are uniquely positioned to cultivate tangible impact in their communities. That’s because CDCUs are an inextricable part of their communities; their staffs reflect the surrounding demographics and their employees’ life experiences parallel those of their clients. In no way should limited availability of deposits hinder the opportunity for CDCUs to meet the needs of their communities.

With CDCU missions in mind, here are four actionable steps to consider when thinking about how to grow their deposit base:

1. Import wealth and deposits from across the country. Like many CDCUs, Hope Credit Union (HOPE) imports capital to drive its lending in the Deep South, where the deposit potential for entire communities is often unable to meet the demand for loans. Unlike traditional banks that use low- or no-cost checking and savings accounts to fund their lending activities, HOPE operates in impoverished regions where families simply don’t have access to basic financial services. HOPE traditionally relied on capital in the form of certificates of deposits, often from depositors seeking a high rate of return, to meet the needs of its clients. As a result, HOPE’s overall cost of funds was nearly twice the rate of banks and credit unions operating in affluent markets.

That’s why, in 2020, Hope Credit Union launched its Transformational Deposits program to break free from those constraints and import $100 million in low-cost, federally insured Transformational Deposits into opportunity deserts across the Deep South. The credit union has received more than 460 Transformational Deposits totaling $118.5 million to date. These below-market-rate deposits have come from corporations, foundations and individuals – anyone interested in closing the racial wealth gap.

Because the onus can’t rest on corporations and foundations to seek out and invest in credit unions, HOPE had to make itself more visible to make this program a success. That included developing strong messaging and branding around the initiative, and choosing the right partners to help disseminate their message.

2. Partner with capital intermediaries who can connect the dots. It may seem daunting to think about how to connect with corporations, foundations and other potential depositors outside of their network, let alone outside of their geographic footprint. However, it can be similarly daunting for those same investors to find CDCUs that align with their impact investment goals and organizational values. Fortunately, there are impact deposit platforms, such as CNote, that have built the requisite infrastructure to foster these kinds of connections, establish an agreed-upon set of due diligence criteria and review, and manage impact reporting.

An added benefit exists for credit unions that received Emergency Capital Investment Program (ECIP) awards, which were specifically designed to increase lending in communities of color and under-resourced communities. ECIP-award recipients receive supplemental capital to bolster their balance sheets; but in order to fully realize the potential of their ECIP awards, these credit unions still need to raise additional deposits.

For example, by using an impact deposit platform, investors can efficiently invest geographically (i.e. the Deep South) or thematically (i.e. affordable housing). Intermediaries like CNote facilitate direct relationships and use a need-based approach when delivering impact dollars to CDCUs, which means capital flows to the credit unions that need it most. By plugging into an impact deposit platform, CDCUs can rapidly and simply gain visibility and deposits from a broader network of investors that they could not have otherwise made the organizational investment to attract, and deeply engage with corporations like Netflix, PayPal and Mastercard.

Lastly, partnering with an impact deposit platform gives CDCUs the flexibility to say “yes” or “no” to capital, depending on their needs. Ultimately, with these kinds of technology solutions, credit unions get to decide when to accept capital and when to pass on deposits without having to explain themselves to individual investors. The ability to open and close the faucet on deposits can create a whole host of opportunities, as HOPE discovered.

3. Build strategies around leveraging federal funding. More than twice the number of credit unions applied for the ECIP in 2021 than the Community Development Capital Initiative in 2010. Therefore, it’s important to think strategically about how to leverage these federal dollars to inject capital into the communities that were hit hardest by COVID-19.

That means credit unions should take this moment to seek out additional opportunities to deploy more affordable loans to first-time homebuyers and increase access to capital for Black-led small businesses. For low-income designated credit unions, such opportunities include working with Inclusiv to pursue CDFI certification, which would give them access to Treasury funds that other financial institutions don’t receive.

4. Seek deposits from (and partnerships with) larger credit unions. There is an opportunity for smaller credit unions to seek lower-rate deposits from larger credit unions, particularly those that are interested in supporting their smaller peers and deepening their impact, since this hasn’t been a common practice.

These partnerships can draw on the credit union principle of “cooperatives helping cooperatives” and elicit deposits from larger credit unions. Today, there are nearly 400 credit unions with more than $1 billion in assets. There’s a real opportunity here for smaller credit unions to strategically design programs that invite larger credit unions to (re)invest in the most economically distressed communities in America and establish innovative, inter-credit union partnerships.

CDCUs, however, are not alone in their mission. They have the opportunity to forge ahead by partnering with impact-minded corporations and foundations, capital intermediaries and larger credit unions. Credit unions can’t wait to be courted by these larger actors, just like large corporations and foundations can’t expect that small credit unions will be able to make themselves seen or heard. Instead, if everyone rallies around the idea of partnership, meets in the middle and plugs themselves into one (or more) of these partnership platforms, we can take a big step toward closing the racial wealth gap in the United States.

Pearl Wicks is EVP and COO of the $468 million, Jackson, Miss.-based Hope Credit Union.

Mary Bruce Alford is SVP of Investor Relations for Hope Credit Union.

Stacy Zielinski is Community Development Director for Cnote, an Oakland, Calif.-based provider of an impact investment platform supporting female- and minority-led small businesses, affordable housing and economic development in financially underserved communities.