Young Adults & Credit Unions - Partnering with mY generation
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Delivered at the 2008 CUNA Lending Council Conference. This presentation offers examples, suggestions, resources, and info about successful Gen Y lending practices.
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Young Adults & Credit Unions - Partnering with mY generation
- 1. Young Adults & Credit Unions: Partnering with m Y Generation for Success 2008 CUNA Lending Council Conference Monday, November 3rd JW Marriott Grande Lakes – Orlando, FL
- 13. Macro Trend, Gen Y Peak borrowing years Membership by age 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
- 22. In need of asset building & creditworthiness starter products now Product Demand Reflects Our Needs
- 24. Customer Advocacy 2007 How Customers Rate Financial Services Company Score USAA 88% Local Advisor 76% Credit Unions 66% Local Banks 48% Wachovia 40% U.S. Bank 36% WaMu 34% Bank of America 33% Wells Fargo 32% Citibank 24% Advocacy drives willingness to buy or borrow more.
- 26. Serving Us Even if We Don’t Qualify Sarah Sam A story of two young adults…
- 27. Serving Us Even if We Don’t Qualify Sorry Sam, no can do… consider We Lend To Everyone Mortgage or GIANT Bank What? I’m never coming back here again
- 28. Serving Us Even if We Don’t Qualify Let’s get you started on the path to home ownership… first, let’s help you get your finances in order… I was hoping to get the loan NOW… but they do want to help me get there. No one else has offered that!
Notas del editor
- At first, I thought lending would be a bit of a departure from what I’m used to presenting on young adults. But as I sat down to draw up the outline I realized it fits right in and relates to the other major topics I discuss. Technology, the importance of the internet and use of appropriate tech such as mobile access… Marketing, who is the demographic, how do you reach them, what are their needs, what messaging strategies work best… ultimately none of it will work unless it is relevant to the needs of the demographic… All of this relates back to lending, because lending is a method in which young adults are able to meet their needs. How you broadcast that you’re able to meet those needs, and how you fulfill the needs are also a part of the lending equation. So, I quickly realized that these things are interrelated with the subject of lending to young adults, as well as the overall subject of better attracting and serving the demographic… and I stopped sweating bullets. We’ll refer back to these throughout, and you’ll see what I mean. For today’s discussion…
- Don’t want to spend a whole lot of time on who the demographic is, feel there is a basic understanding among credit unions, the conversation needs to advance beyond who they are to how do we serve them… but let’s review quickly
- Since there are so many names, and definitions… research shows no real consensus… so let’s define for today
- In short, want to caution about over-generalizing the demographic. It’s dangerous to over-generalize about what makes this demographic tick… what’s true for one 18 year old may be different than another 18 year old… not to mention the differences between a 28 year old and a 21 year old. So when looking at the demographic, remember the following… these are the safest generalizations These bullet points also emphasize the need for your credit union to really understand the young adults in your FOM… do so by reaching out, focus groups, get into the community in a relevant way, use young adult employees to help. No presentation or young adult guru will have the silver bullet for your credit union. There’s no easy answer, specifically to lending issues for demographic, in general to helping credit unions better serve and attract young adults
- What I want to do now is connect the overall issue of credit union growth to today’s discussion on lending to Gen Y and partnering with my demographic for success. Figuring out effective methods for lending to my demographic is a very important piece to figuring out this CU growth puzzle and the future sustainability of credit unions. Some of you are thinking, okay Josh, why is credit union growth a compelling reason for focusing on your generation, and lending in specific?
- Lots of important and smart people got together to address the growth concerns hitting credit unions… young adults one of the three groups that can have an impact on growth…. Also, Young adults fit into the other two categories
- Here’s a great slide… not only does this tie growth to young adults, it also nicely ties lending to growth as these stats reference folks entering prime borrowing years. Historically, when we look at growth we see a relationship between younger demographics and the overall growth of credit unions… mid eighties revealed growth at around 3%, correlation between that and number of young adults. Recently, we’ve seen growth rates around 1% and a sharp decline in the number of young adults as members.
- 2008 CUNA Mutual Group Discovery Conference 11/19/09 To help illustrate the point let’s look at this graph. Where there is an increase in pop for young adults, we see a dip in CU penetration levels CUs are losing revenue because those young adults are going elsewhere for their financial needs How much revenue? Let’s take a look at the next slide…
- When you boil down all of the research and look at the evidence you’re left with the following: These were identified at CUNA’s YES Summit with the help of Filene Research Tremendous opportunity for credit unions to take good members who are already buying products and services that credit unions offer and make us into great members who can use more financial services later in life by partnering with my demographic for success… how? Through education and service. I’ll get back to this in a moment and show some examples… But first, let’s explore the creditworthiness and asset building needs
- Use of credit and bill payment affects ability to receive loans Part of solution for lending to young adults involves addressing and improving creditworthiness
- In addition to saving for retirement, investments are very important… beyond mutual funds, more along the lines of investments in appreciating assets that require loans. Other asset building investments that require loans include investing in our education… need a student loan for that. Smaller but equally important segment involves young entrepreneurs… often need loans to get their businesses off the ground. Similar to creditworthiness, education and service important to make sure that we are able to get these loans in the first place, but also, identifying ways to maximize our options… we’re seeking guidance and someone to point us in the right direction.
- 2008 CUNA Mutual Group Discovery Conference 11/19/09 Most arguments I’ve heard against youth programs over the years are that Young Adults don’t buy. But the research shows that this is not true. For example, this study showed the products that were going to be bought. The bottom line is that GEN Y has the same desires as other generations. Its they way they approach these needs and their engagements that’s different. Its not so much what they use but how they use it and access it.
- So, meeting the creditworthiness and asset building needs of my demographic involves more than just extending loans so we can get that car, that college education, and that condo. That is a short sighted way to look at our asset building and credit worthiness needs. Below the surface, our real needs involve education and service. This will help us get things we need now, and set us up for the future. You’re probably thinking at the moment… “Okay, Josh… that sounds nice and rosy, but the reality is that many young adults don’t have the credit scores, or have a thin file… they’re high risk and we can’t just give out loans to everyone….” Well, here’s where the service part comes into play. Study from Forrester Research suggests that advocacy is very important
- 2008 CUNA Mutual Group Discovery Conference 11/19/09 Consumers have become less trusting of financial institutions over recent years… just look at today’s financial crisis. Financial institutions have often thought that improving customer service is the way to combat this lack of consumer trust… but Forrester research argues that it’s not customer service but ADVOCACY that is important in improving consumer trust. Sure it’s nice to have your call picked up within 2 rings, and cookies in the lobby, but feeling like the financial institution has your best interests in mind is a true indicator of trust… and that’s how they define advocacy. Forrester identifies the following as the main parts to advocacy: Four Principles of Advocacy: Simplicity-makes my easier Transparency-clear and fair rates, no surprises. Benevolence-on my side and willing to help me. Trustworthy-would do what is right regardless of regulation, honors promises, goes the extra step to protect me.) Main Point: Credit Unions have the advantage of Trust!!!! Every year, Forrester Research surveys financial services customers asking them whether their financial provider does what’s best for them and not just what is best for the companies bottom line. In 2007, Credit Unions came in right after USAA, a financial services firm focused on serving the military, and independent advisors, who are often paid only a flat fee to remain objective in providing products and advice. This left Credit Unions at the top of the financial services firm with the banks, displayed in red, far below them. Forrester mentions that unlike banks who put profits and political in fighting ahead of customers, credit unions focus on helping their members first. And Forrester has determined that being trusted is actually the primary indicator that customers will purchase more in the future. Gen Y values honesty and simplicity. Remember, they’ve grown up with Enron, Worldcom and other corporate scandals. The internet bubble, and most recently sub-prime scandals and housing bubbles doing business with the right company is important. They are skeptical and looking for trusted places to do business. They will become even more interested in this trust as they have to start making critical financial decisions. Additional Notes:
- To back up this whole thing about advocacy, you as a credit union really must have the best interests of the member in mind, especially young adults… and especially when it comes to lending. Not every young adult will be able to avail themselves of your loans and products… so instead of just showing them the door, become their advocate. What do I mean? Let me tell you a story of two young adults… Story of two young adults Both have similar credit score/history Are first time homebuyers looking for a home loan Eligible for membership, but not currently members of a credit union Go to two different credit unions
- Sam is told no, CU can’t help, consider going to mortgage company or a bank
- Sarah is told that the CU wants to give them a loan, and will help them get there by offering a bunch of cool services like X, Y, and Z. Don’t look now, but this credit union is advocating for their member!
- First YA leaves with poor impression of that CU and of all CUs… he’s sure to take their advice though and finds a mortgage with another lender… closed off to credit unions in the future. Perception is that credit unions are all the same, and won’t help him. Also, he tells ALL of his friends that will listen that he had a poor experience at that credit union… influencing his peers. The second has a good impression, feels as though the CU is really looking out for his interests… even though it will take upwards of 6 months for the plan to happen and possibly get a loan, he realizes they want to work with him, depending on his situation he may or may not go with the CU, but the CU has established a relationship with the young adult, and even if they don’t get his loan business, they may be able to help him out with other areas, and eventually serve other needs.
- Opportunity to build a member by getting us ready for the home loan Be there to help us achieve our goal of home ownership, and in the process make us financially sound Cross selling products, molding a new member into a GREAT member Building loyalty Preparing us to make good financial decisions so we can pay off the loan, and use other credit union services in the future
- Let’s explore some credit union programs successfully addressing the creditworthiness and asset building needs of young adults… and therefore operating effective lending practices for my demographic
- 2008 CUNA Mutual Group Discovery Conference 11/19/09 Wright-Patt not only offering first time homebuyer loans but also e ducating and advise young adult first time home buyers on all aspects of home buying process. This helps build trust and sense of advocacy. Relevant to the demographic by placing information online and using appropriate langauage and tone. Home Buying Facts for Gen Y: Average age of first time home buyer is 26! They tend to be better educated &76% have training or degress post high school. HH income averaged $58,000. (Filene, First Time Home Yer’s). Parental influence irrelevant. Relationships with realtor important. Facilitate information gathering. Provide good content on your home financing options on the web.
- 2008 CUNA Mutual Group Discovery Conference 11/19/09 It is obviously for the student, give the functionality online, and speaks in their language. UW Credit Union in Madison, has an entirely separate site for student loans. They provide an easy online application process for student loans and heavily leverage the site to capture additional relationships. They speak in the generation’s language and media – leveraging online video to showcase branches or online services. And, of course, they allow the ability to open account online.
- Financing auto loan and auto insurance
- In its purest form P2P addresses two major downsides to institutional lending… 1. transaction overhead that limits the % return for those with funds to lend and increases the interest rate on funds borrowed. So instead of an institution trying to make money by offering small returns to those with deposits and selling those funds for a higher percentage, P2P allows those with funds to receive a higher return, and those who borrow a more favorable interest rate. 2.Community loyalty – Institutional lenders remove a sense of community… I’m not borrowing from the people who have deposits there, I’m borrowing from an institution. So, P2P attempts to reintroduce social components thanks to the internet/technology while still pooling the funds of those who want to lend in order to mitigate any one default b/c the vast majority are paying their loans… social pressure to do so. Marketplace model uses internet to bring borrowers and lenders together… social networking and internet. Lending Club ex. Used Facebook Family/Friend Model relies on existing relationships
- Secured - In this model, the lender gives money to the borrower against the strength of the collateral given by the borrower. The advantage of this model is that the capital and interest of the lender is secured to the extent of the realizable value of the collateral. The Dis-intermediator provides risk management as per the terms and condition agreed upon by the lender and the borrower. Unsecured - In this model, the lender gives money to the borrower based on the credit rating of the borrower. The lender runs the risk of the capital and interest in case of failure on the part of the borrower. Two variants have evolved in this space. Most popular in the US…
- Pooled Lending - the lender lends the money to a pool of borrowers with similar credit ratings. In this model the risk of capital and interest for the lender is defaulters in the pool. The risk of capital and interest of the lender is reduced considerably. (Zopa or Lending Club) The key here is that borrowers choose the lenders, and the lenders’ lump sum is divided among a group of borrowers According to their website, people who are willing to invest become Zopa lenders and can choose to lend to riskier borrowers at higher rates or to more qualified borrowers at lower rates. Borrowers then browse available rates, and if there’s an agreement a loan is made. ZOPA, by the way, stands for “Zone of Possible Agreement and is the overlap between one person’s bottom line (the lowest they’re prepared to get for something) and another person’s top line (the most they’re prepared to give for something).” Zopa divides lenders’ offers up and distributes them around at least fifty potential borrowers. Zopa then manages the payment collection process and charges borrowers a 1% exchange fee.
- Direct Lending - the lender lends money to a borrower based on their credit rating. In this model the risk of capital and interest for the lender is that the borrower could default on the loan. Risk is mitigated because small amounts are lent to individual borrowers and a lender’s money is spread among several borrowers.(Prosper) The key here is that lenders choose to lend to individuals in small chunks at different rates
- Zopa launched in the US in partnership with six Credit Unions on December 4, 2007 but it closed to new business due to the US Government bailout of financial institutions on October 8, 2008. The US model was significantly different from that elsewhere due to regulatory restrictions. Customers can be "Investors" or "Borrowers". Borrowers can obtain a loan via Zopa from one of the Credit Unions. Borrowers will then post a profile on Zopa giving some details about themselves. Investors buy a Zopa Certificate of Deposit . Investors are able to help Borrowers by offering them a slice of the return on their CD , reducing the amount of interest the Borrower has to pay. If enough Investors help a single Borrower then all of their repayments can be covered.
- Congress took away half the lender profits, and the credit crisis took the other half – a perfect storm Credit crunch of a year ago AND current economic crisis affects members who now need to borrow for their children’s education
- CCRAA is good for students and government, bad for lenders… Exceptional performer status = lenders that meet certain requirements established by the Secretary of Education to receive higher insurance rates on defaulted loans Department = Dept of Education
- Fill the gap between federal loans and costs for school with signature loans Family Federal Education Loan Program = US Dept of Ed program Subsidized and Unsubsidized Stafford Loans, PLUS Loans marketed, originated, & serviced by private parties
- TDECU’s Caite Blount said that the program doesn’t just offer loans, but provides education to parents by going to events at high schools and colleges. A student going to college has so many other things on their mind that student loans are going to be the last thing they think about, but the first thing on the minds of parents. At UW Credit Union Lending coordinator Sherrie Nelson said she often speaks to students personally about an questions they have. Nelson said that students come in to lay everything out, discuss their options and get the big picture of their financial situation. With student loans in the news recently she’s received more questions from both students and parents
- Despite the opportunities indirect borrowing presents, Jolicoeur admitted that converting these borrowers to members is not easy. It takes time and tenacity to grow membership through the ranks of indirect borrowers. “ We have to remember that these people are there because the car dealer steered them there,” Jolicoeur said. “You aren’t going to win them over in one day. Earning their primary checking account is key, which isn’t easy. People are loyal to their financial institutions and don’t change that relationship overnight. It’s a take-away business.”
- The opportunity credit unions have with indirect borrowers is the access to their financial information; a process Jolicoeur calls data mining. This gives credit unions the ability to research the borrowers at their location and develop plans that provide them with individualized help for their specific circumstance. This could include refinancing at the credit union, debt consolidation, home equity loans or other types of products. “Data mining allows you to look at what they have outstanding,” said Jolicoeur. “You have to be able to show them there’s a really good shot at helping them financially.” That said, there are credit unions that are succeeding at enticing indirect borrowers to become members. Taylor Murray, dealer program manager at Baxter Credit Union in Vernon Hills, Illinois, told the audience it’s critical to dedicate resources to calling new members in a timely manner, to create and set reasonable expectations, and to offer attractive promotions. For example, Murray said his credit union has offered auto loan buyouts that beat the lowest auto loan rate by one percent as well as a deferral of 90 days for the first payment. Adding to the discussion was Steve Loenen, vice president of business development at Altra Federal Credit Union in LaCrosse, Wisconsin, who said his top strategy for indirect borrowers is having the dealer relationship drive the business. By selling dealer finance managers on credit union membership, they become advocates for the credit union which sets the tone for converting indirect borrowers to members. -Idaho CU League Aug 2007 Newsletter
- 2008 CUNA Mutual Group Discovery Conference 11/19/09
- 2008 CUNA Mutual Group Discovery Conference 11/19/09