The following is an article reprinted with permission from the upcoming Winter 2010 edition of The WWR Letter:
From Crazy Innovations to the Old Standbys
By: Rob Rutkowski, Partner
I cannot remove the magic bullet problem from my mind. It’s like an earworm of a song that will not leave. I’m talking about finding a new revenue producing vehicle for credit unions that will replace overdraft services.
The answer seems to be that there is no magic bullet. Clearly, though, overdraft services itself is a magical product. I certainly would never have guessed that it would have been the runaway success that it was. This is why I’m in my office in Cleveland and not sitting on a beach in Key West. I would never have figured out that something that members could get much more cheaply through a line of credit on their share draft account could be made to be so profitable. I still don’t really get it.
But whatever. Here we are and the goose is dying a slow death by regulation. What to do? Well, there are a couple of things a CEO could try. One of them is to look at some of the more cutting edge services out there. Give a Gen Y’er the ability to point his iPod at a gas pump and pay for the gas out of his share draft account. Let your members scan their checks at home and deposit them at the credit union via email. Give the member the electronic perception that the credit union is available to him or her whenever he or she needs it 24 hours a day. Envelop them in the soft, warm and fuzzy blanket of credit union security. If a credit union can do these things, it can bring in the young people, which is always the key to the future.
Yet there’s money in the old standbys too. What have we got? Indirect lending, mortgages, member business loans, student loans, credit cards, signature loans, direct collateral loans, payday alternatives. This stuff is not new, but does every credit union have them all? If you don’t, add some of them in 2010. Are all of them for every credit union? Not without some preparation. Take indirect lending: you have to monitor the loans so that the dealers don’t kill you with bad paper. You also cannot have the expectation that you’re going to get full service members out of the deal. You’re not. You’re only going to get members who have their car loans with you. But it is still worthwhile if you manage it correctly.
Because of all the problems in the subprime market, there’s opportunity in the mortgage lending world. It’s not perfect either. Interest rates are low and home values are down. But again, if a credit union keeps its costs down and manages the portfolio, it can make money.
Sure there are some barriers to doing commercial loans: you need an underwriter with at least two years experience; the paper is completely different and if a big MBL goes south, you really feel it. Yet, again, these barriers can be overcome with good planning, policies and management. Done correctly, commercial loans are very profitable. 2010 might be a good time to start doing them.
More credit unions are into student loans now than ever before. Using a vendor can make it much easier. Credit cards are a nightmare of new disclosures, but if you buy the forms and disclosures, it can still work nicely. Signature loans are never going to go away and are probably under-marketed by credit unions today. Direct collateral loans could see a come-back even outside the auto market. Remember the computer loan? That’s how I bought my first computer back in the ‘80s. Heck, now credit unions could do direct collateral loans on solar panels and windmills for home use.
You don’t have to add all this stuff in a week. That’s what your planning session is for. Get everyone on board, set up a calendar of what you want to accomplish in 2010 and make daily progress toward your goals. If you plan now not to derive as much of your revenue from overdraft services in 2011 and you are exploring the things I’ve discussed and more, the odds of success will be in your favor.
Rob Rutkowski is the Managing Partner of WWR’s Credit Union department. He can be reached at (216) 739-5004 or firstname.lastname@example.org.