More than one string to your bow – addressing the single product crisis

Ralph SwobodaManaging DirectorCUFA Ltd. (Dublin)23 June 2015

The Situation:

Credit unions are a half century old in Britain, yet . . .

We account for only 0.084% of all household borrowing.

Only 0.732% of all non-housing consumer credit.

Source: Bank of England, BankStats, 31 Dec. 2014.

Why?

Multiple possible causes, and no single explanation is sufficient.

But one major factor receives little or no attention:

Why?

Multiple possible causes, and no single explanation is sufficient.

But one major factor receives little or no attention:

Credit unions offer only a single loan product:

A level payment, relatively low interest rate loan secured in part by shares.

Question for debate: Is this a product that is onlyneeded and wanted by a small minority of consumers?

The Reality: What People Want

£ millions

Loans Secured by Dwellings 1,297,559 88.5%Credit Card Loans 61,078 4.2%All Other Consumer Credit 107,751 7.3%

Total 1,466,388

Source: Bank of England, BankStats, 31 Dec. 2014.

The Reality: What People Choose

Source: Dept. for Business, Innovation & Skills, “Credit, Debt and Financial Difficulty in Britain” (2012)

Credi

t Uni

on

Use of Consumer Credit Sources in Britain

Choices Reflect Consumer Priorities

1. Credit now, when I want it. (credit cards, overdrafts, store credit)

2. Approved once for multiple loans (credit cards, overdrafts, etc.)

3. Little risk of “No” (store/catalog credit, payday, other high cost)

4. Low monthly payment (credit cards, hire purchase, store/catalog)

5. Convenient to apply on-line, mail-in (all except credit unions)

6. Do not need to be a saver first (all except credit unions)

7. Low APR (advantage credit unions . . . for higher-risk borrowers)

People pay more for what they actually want.

The Hypothesis:

Credit unions loan to people who can’t get what they really want from other lenders.

Credit unions are rarely consumers’ first choice.

If so, is this a sustainable business model?

The International Experience:

Highly successful credit union movements provide consumers with a full range of loan products -- everything they can get from banks, but at rates and terms that are better than banks.

CREDIT UNION LOAN PRODUCTS

Bri

tain

U.S

.

Can

ad

a

Au

str

alia

Home mortgages No Yes Yes YesSecond charge home equity No Yes Yes YesSecured new car loans (HP) No Yes Yes YesSecured used car loans (HP) No Yes Yes YesCredit cards No Yes Yes YesCurrent account overdraft loans No Yes Yes YesOther revolving lines of credit No Yes Yes YesGov't guaranteed student loans No Yes Yes YesAsset-secured small business loans No Yes Yes YesShare secured installment loans Yes Yes Yes Yes

U.S. Credit Unions

• After 50 years: 23,866 credit unions served 21.6 million members (11% of US population) in 1969.

• Now 6,413 U.S. credit unions serve 103 million members.

• Even small CUs offer same consumer financial services as a bank, but at better rates and with lower fees:

• Current accounts, savings accounts, time deposits• Debit/ATM cards, Internet and mobile phone access • Automobile, credit card, home mortgage loans, etc. • 90% of loans are asset secured

• Half of U.S. credit unions less than $25.5 million in assets.

• 41% of members consider a credit union to be their primary financial institution.

U.S. Credit Unions

Distribution of Outstanding Loan Balances by Type of Loan

Type of Lending National Average

CUs < $20 million

Credit cards 6.2% 3.2%

Other unsecured loans 4.3% 15.5%

New automobile 12.3% 18.1%

Used automobile 20.3% 33.2%

First mortgage 41.0% 13.4%

Home equity / 2nd charge 9.9% 7.4%

Member business loans 7.4% 1.2% Notes: 1. US automobile lending is secured lending and basically equivalent to UK hire purchase car finance. 2. Percentages do not total to 100% because some categories are missing or overlap.

Source: Credit Union National Assoc., U.S Credit Union Profile (1st Quarter 2015)

The International Experience:

Highly successful credit union movements:

1. Copy the competition’s products and then strive to deliver them better, cheaper, easier, friendlier.

2. Invest substantially in IT and automation.3. Get scale economies from robust networks of back-office

support organisations.4. Achieve a sustainable base by serving working class and

middle class consumers.5. Receive no money from government.6. Instead they get: (1) government employee credit unions

and (2) tough but supportive prudential supervision.

The International Experience:

Highly successful credit unions price their loans based on risk:

1. Interest rates must be high enough to cover the cost of bad loans.

2. The competition prices based on risk.

3. Offering a single rate means being too expensive for the best borrowers -- only attracting the riskiest borrowers.

4. The successful alternative: Give each borrower a better deal than that particular borrower can get anywhere else.

Concluding Thoughts:

• To survive, we must meet the needs of today’s and tomorrow’s consumers. People vote with their feet and their money.

• Paradoxically, many credit unions are high risk businesses BECAUSE they are risk averse.

• Making too few bad loans means not meeting the credit needs of the community you serve.

• At the same time, it is reckless lending if you do not know exactly what risks you are taking and price your loans to cover the risk.

• To flourish, credit unions need to be Modern, Convenient and Appropriate to the needs of society.

What Are Our Choices?

• Whom do we aspire to serve?

• What do they want and expect from a lender?

• What will make our loans the first choice for the people we aspire to serve?

• What is our vision for the future?

• What strategies do we need to follow to achieve that vision?

CUFA Lending Analytics:

• Expert system for objectively measuring and understanding the risks and opportunities in a consumer loan portfolio

• ‘Big data’ statistical and mathematical model:

–Experience-based analysis, individualised to lender

–Based on detailed portfolio history, updated monthly

–Projects a loss forecast for every loan in the portfolio

• Robust tool for gaining key insights that inform risk management, product design, risk pricing, underwriting, credit

control, and provisioning