More than one string to
your bow – addressing the
single product crisis
Ralph Swoboda
Managing Director
CUFA 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 only
needed and wanted by a small minority of consumers?
The Reality: What People Want
£ millions
Loans Secured by Dwellings
Credit Card Loans
All Other Consumer Credit
Total
1,297,559
61,078
107,751
1,466,388
88.5%
4.2%
7.3%
Source: Bank of England, BankStats, 31 Dec. 2014.
The Reality: What People Choose
Use of Consumer Credit Sources in Britain
Source: Dept. for Business, Innovation & Skills, “Credit, Debt and Financial Difficulty in Britain” (2012)
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:
CREDIT UNION LOAN PRODUCTS
Britain
U.S.
Canada
Australia
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.
Home mortgages
Second charge home equity
Secured new car loans (HP)
Secured used car loans (HP)
Credit cards
Current account overdraft loans
Other revolving lines of credit
Gov't guaranteed student loans
Asset-secured small business loans
Share secured installment loans
No
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
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
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%
Type of Lending
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.
2.
3.
4.
5.
6.
Copy the competition’s products and then strive to deliver
them better, cheaper, easier, friendlier.
Invest substantially in IT and automation.
Get scale economies from robust networks of back-office
support organisations.
Achieve a sustainable base by serving working class and
middle class consumers.
Receive no money from government.
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