10 Ways To Lend To Tomorrow’s Members

Heritage FCU demonstrates how a little creativity can go a long way in adapting traditional strategies to an evolving loan environment.

Changes in the marketplace over the past five years have forced Heritage Federal Credit Union ($451M, Newburgh, IN) to adapt its lending strategy in several important ways. According to Callahan Associates’ Peer-to-Peer analytics, the credit union posted an annual loan growth of 6.3% in third quarter 2013. This figure indicates Heritage already has a number of winning loan strategies; however, the Indiana credit union knows that continually refining and reshaping its offerings and expanding into new areas of business such as merchant financing and commercial lending will pay dividends in time.

One of our real challenges in the current lending environment is to avoid concentration risk, says Ruth Jenkins, president and CEO of Heritage. After the recession, we know how rapidly things can change. We want to encourage more diversity in our balance sheet, look at those different spreads, and be well positioned for whatever lies ahead. For 2013 and 2014, the credit union has identified 10 distinct strategies to make its lending vision a reality.

1. Arm The Front Line And Beyond

Too often, front-line employees lack access to the marketing and analytical tools that will help them engage in meaningful conversations about products and services. That’s why four years ago, Heritage began working with its core provider, Symitar, to offer advanced CRM information including existing financial relationships, rate comparisons, descriptions of next best products based on the member’s financial profile, and even scripted talking points directly to branch employees and staff in its call center.

Heritage also brought in a nonfinancial services consultant to explain how with the right approach natural, service-oriented conversations can lead directly to sales opportunities.

Other businesses are after our members, so we need to have those conversations and they need to be relevant and tailored to members’ needs, says Steve Bugg, the credit union’s chief marketing and member service officer.

In addition to front-line staff in the branches and call center, the credit union also employs two roving business development specialists who are tasked with generating 500 new product and service sales per year. These specialists do not work from a lead list. Instead, the credit union requires them to serve on two, or more, non-profit boards in the community. By working these and other community channels such as the local chamber of commerce, these employees drum up new business and uncover prospective alliances that those in traditional financial environments would never come into contact with.

The business development specialists consistently blow through their sales numbers because they are such good networkers, Bugg says.

2. Embrace Happy Accidents

The best tools in the world aren’t helpful if employees don’t believe in what they’re selling. That’s why the staff at Heritage works to develop creative and transparent loan campaigns. One of the credit union’s most successful front-line driven promotions to date revolved around a Flip-A-Loan product, which offered members a reward of 1% off their balance if they moved their loan over to Heritage. In just two-and-a-half months, the promotion generated more than $6 million in refinances, primarily in autos.

To engage members in conversations about the promotion, branch staff wore their nametags upside down. They got the idea to do so after Jenkins accidently wore her nametag that way at a meeting.

Members would say, Why is your nametag upside down?’ Bugg says. The employees could respond, Because we have this great product and it can save you a lot of money.’

The promotion gave staff members who rarely interacted with members a good reason to speak up, and employees helped train one another on what was working best for them.

Our top performer on the front line referred more than $250,000 in loans, says John Phipps, chief lending officer at Heritage. There were 35 referrals from our call center during the campaign, and we had three branches where every teller had at least one.

3. Put The Membership Back In Member Business Lending

Next year, Heritage will begin rolling out commercial vehicle loans, equipment loans, building loans, and even some SBA offerings to small and mid-sized community businesses, those underserved, mom-and-pop type shops that many larger institutions dismiss.

Members have been asking for these types of products for years, but we wanted to wait and do it right because it’s easy to get too far out there in terms of risk, Phipps says. Multimillion dollar loans look good when they go on the books, but if they go bad they hit you hard.

To soften the risk, the credit union is pursuing a total relationship with its business members. For now, that mainly means securing deposits, but there is potential for deeper ties down the line.

There are numerous things we have expertise in that we could help these businesses with, Jenkins says. From payroll to making phone calls for collections.

The credit union plans to hire three or more employees to run the new commercial department and the new hires will be tasked with driving sales as well as monitoring and understanding the long-term ramifications of the credit union’s business activity.

We’re looking to hire a strong credit analyst who can do more than enter numbers into a program and kick out some ratios, Phipps says. They’ll need to look into trends and understand the markets so they can say Hey, the growth is not going to be there to support this,’ or Here’s where things need to be before we can move forward.’

4. Expand Indirect Horizons

During the depths of the recession, Heritage was one of the few institutions in the area that continued to provide financing for auto dealers. Its steadfast reliability lead to significant growth, but that indirect financing activity has since dropped precipitously. To counteract the slowdown, the credit union started offering financing through new indirect relationships with local businesses such as dentists, jewelry stores, and veterinarians. The credit union offers a competitive rate but still gives merchants the ability to pay down the rate on select loan products even further, which drives extra income to the credit union.

Everything is done on the spot, just like with an indirect auto dealer, and at a much lower rate than the financing options their customers might normally turn to, Jenkins says. Plus, the businesses know we’re not going to sell these loans. Their customers can always meet with us face to face rather than being stuck on hold with a company they don’t know.

Unlike traditional indirect auto lending, the credit union can build holistic relationships with its new business partners, particularly once its planned commercial department takes off.

In many traditional arrangements, merchants are expected to pay a small fee, but we’re not asking them to pay anything, Jenkins says. Because we take good care of them and help them reduce some of their operational expense, they’ve started asking what other services we can provide for their business.

Heritage has signed up six clients since it began its new indirect focus four months ago. Now, armed with success stories, Heritage is planning a second push to recruit additional relationships in the New Year.

5. Adopt A DIY Mortgage Mentality

Like many credit unions, Heritage developed several strategies to maximize the refinancing boom of the past few years. For example, it launched its Simpli-Easy Refi mortgage product for people that were willing to pay a slightly higher rate in return for much lower closing costs.

But as the market shifts, so too has the credit union’s priorities.

Most people who were going to refinance have, Phipps says. These type of loans have dropped as a percentage of production from approximately 70% last year to less than 50% currently.

One purchase product that has helped the credit union fill that gap is its construction-to-permanent mortgage loan, which can be procured with as little as 5% down.

Normally, construction loans are balloon products, which means the borrower needs to complete a refi at the end of the building process. However, the Heritage product is a fixed loan with a one time close. That means the member signs one time, pays interest during the construction period, and then once the home is finished the loan is amortized over the remaining term at the initial rate established during the signing.

The credit union typically keeps those construction loans as well as its jumbo loans and shorter-term 10- and 15-year products in portfolio with servicing retained. But although they are profitable and in demand, construction loans do require additional legwork beyond that of a normal mortgage.

You don’t want to give the builders free rein, Phipps says. You need to make sure the work the credit union and member are paying for is actually being done.

Two Heritage employees handle the draw requests and inspections for the credit union, but it also uses outside appraisers to help assess a project’s level of completion.

Usually the builder will send the bill for work done around the tenth of the month, so we try to anticipate that and send an inspector out between the first and the fifth, Phipps says. If the construction is 50% complete, we don’t want to be giving them 60% or 70% of the funds.

6. Experiment With Freemiums

Competition for auto shoppers is so fierce that some institutions price their loans below their financial tipping points just to garner the attention of rate-driven consumers.

Rather than playing lowball and potentially putting the institution at risk, Heritage has taken a different route. Through a third party called SWBC, it offers freemium services to its car buyers.

For example, the credit union offers a complimentary six-month vehicle return policy. In the case of a job loss or disastrous event, a borrower can walk away from their auto obligation by simply providing proof of the event and returning the vehicle to a designated dealership. SWBC receives the dealer’s offer on the vehicle, gets two additional independent prices from other dealerships, and uses that information to determine fair value. Once it strikes a deal with the dealer, the company buys the vehicle and pays down the credit union loan. In the case of negative equity, SWBC covers up to a $7,500 difference. Beyond that, the borrower is responsible for paying back those funds.

Through this relationship, Heritage also offers vehicles with less than 36,000 miles free paintless dent protection as well as tire and wheel coverage. For used vehicles past that mark, it offers a three-month limited powertrain coverage.

There’s still a lot of uncertainty in the economy and people are hesitant to make those larger purchases, Phipps says. So we believe in giving them some free benefits as well as an option to pay to protect their loan for an even longer period of time. For less than $400, they can buy protection that will last the life of the loan.

Advanced upgrades provide larger benefits, such as allowing members to return a vehicle with negative equity of up to $15,000, which is more than double the standard amount.

7. Add Insurance And Ancillary Products

Heritage excels at selling additional, value-added products in several areas of the portfolio, which helps bolster its non-interest income without the use of aggressive fees. A prime example of such a product is its GAP insurance.

If people get in an accident, insurance is only going to cover what the vehicle is worth, Phipps says. That could fall anywhere from $2,000 to $13,000 short of what the member owes, so our GAP product helps alleviate that burden. In addition, if they do have a total loss and finance their new replacement vehicle through us, we’ll give them a $1,000 credit.

The credit union also has its own insurance and investments CUSO called Heritage Financial, which allows it to offer a spectrum of products and services. Heritage originally formed the CUSO in 1986 to address the need of Alcoa employees for retirement and pension rollover services. In recent years, though, the CUSO has become more active in providing options for different segments of the consumer lifecycle. Products such as fixed and variable annuities and a new hybrid product that walks the line between yield and short-term accessibility are currently the biggest drivers to the CUSO’s bottom line. But members with young families are showing increased interest in newer options like the 529 college savings plan.

Staffed with a modest investment of just two employees, the CUSO serves nearly 1,400 clients, including many high-net-worth individuals who are prime candidates for cross-sell in other areas of the business.

8. Take A Risk On New Payment Technology

In July 2013, Heritage began offering V.me, Visa’s version of a mobile wallet.

We saw an opportunity to get out in front of others in our industry and help make our cards more top of wallet, says David Milligan, vice president of electronic services and deposit support operations. We had a relationship with Visa, so we interviewed the company as to what its plans were for the product, and because it aligned with our own way of thinking, we went with that option.

Network infighting, sluggish retail adoption, and lack of consumer awareness have pushed point of sale purchase activity further out on the horizon, but the credit union has taken advantage of immediate efficiency and security benefits the wallet provides for online purchases.

Members can register their card online and then as long as the online retailer is equipped for V. me, they don’t need to enter additional information, Milligan says.It populates all of the forms, sending the merchant only what they need to complete the transaction without exposing any sensitive information.

Members can also choose to receive text or email confirmations for transactions and can cancel activity they believe to be fraudulent. Next year, the credit union will implement instant issuance, which will present a significant advantage during its many balance transfer campaigns.

We can transfer funds in real time and the member can walk out with a new card that’s going to be top of wallet, Phipps says.

9. Have A Vision For Rewards

The entire nature of credit card relationships is changing, but not every investment in the future of payments needs to be a high-tech one. For example, according to Milligan, the credit union has worked to expand its card portfolio through rewards. As a result of a conversion to VISA Debit Processing Service and a relationship with loyalty program company Rewards Now, the credit union offers arrangements such as triple points for short windows of time or points for desirable behaviors such as activating a credit or debit card or signing up for eStatements.

Still, in a world where cash in king, creating a transparent value for these benefits can be a significant challenge.

Our particular membership has not been as interested in airline miles, iTunes cards, or some of the other options out there, Jenkins says. With competitors like Discover offering 10 cents for each debit and credit transaction or check written, it’s hard to compete against that with points. What’s 100 points relative to 10 cents?

Regardless of which rewards dispersal system Heritage chooses for the future, the credit union is looking at ways to expand benefits across multiple financial products and drive more holistic relationships.

We’re asking ourselves what if for the first year after someone finances a vehicle through Heritage they also get extra points every time they buy gas with their Heritage credit or debit card? Jenkins says. We’re even curious if we could somehow use rewards for those at the dealership who are most responsible for driving indirect loan business to us.

10. Adapt To Gen Y

Demographic-specific strategies might change from market to market, yet one undeniable fact remains Gen Y doesn’t buy or at least not as early as it used to.

We have a lot of Gen Y members on the deposit side, Bugg says. But people in that age bracket are hesitant about stepping up to that first car or home loan.

To address this, Heritage plans to introduce a stepping stone product designed specifically for Gen Y. Launching at the end of 2013, Heritage’s Express Loan a concept borrowed from a Texas-based cooperative offers an unsecured $500 to $1,000 loan with no application fee, a competitive interest rate, and a one-year repayment term.

By offering a smaller dollar product, we can establish that relationship and teach those members to come to us first for their borrowing needs, Bugg says.

As checks rapidly go the way of the dodo, especially among Gen Y members, the definition of financial engagement is also changing at Heritage.

Checking accounts are no longer the main indicator of a primary financial institution relationship, Bugg says. Instead, it’s all about our success with debit and credit cards if we can get that plastic, we know we’ll get our members’ checking accounts too.

Perhaps surprisingly, gift cards have proven to be effective in ramping up card activity among borrow-wary members. When the credit union runs cash-back campaigns, it pays those funds using branded, prepaid Heritage gift cards. The idea is that if the credit union can get a member using any type of plastic with the Heritage name on it, that individual will be more open to having a permanent place in their wallet for the credit union’s debit or credit card products.

Data as of September 30, 2013
Double-or even triple-digit growth in fixed first mortgage, unsecured loans, and other loans have counterbalanced Heritage’s large auto portfolio.
Callahan Associates | www.creditunions.com

Source: Callahan Associates Peer-to-Peer Analytics

Loan Originations Per Employee (Annualized)
Data as of September 30, 2013
Heritage employees sell more valuable products per employee than their national peers despite the drop in originations per employee from 2012 levels.
Callahan Associates | www.creditunions.com

Source: Callahan Associates’Peer-to-Peer Analytics

Indirect Loans Outstanding By Type
Data as of September 30, 2013
Indirect auto loan balances are declining but Heritage sees potential in its merchant point of sale financing opportunities.
Callahan Associates | www.creditunions.com

Source: Callahan Associates’ Peer-to-Peer Analytics

Real Estate Loan Penetration
Data as of September 30, 2013
Investments in homebuyer awareness, such as the sponsorship of a tri-state home show, are helping Heritage achieve superior real estate penetration compared to its peers.
Callahan Associates | www.creditunions.com

Source: Callahan Associates’ Peer-to-Peer Analytics

Data as of September 30, 2013
Non-interest income from the sale of ancillary, insurance or investment, and other value-added services has helped Heritage stabilize its income without resorting to aggressive fees.
Callahan Associates | www.creditunions.com

Source: Callahan Associates’ Peer-to-Peer Analytics

Data as of September 30, 2013
Non-interest income from the sale of ancillary, insurance or investment, and other value-added services has helped Heritage stabilize its income without resorting to aggressive fees.
Callahan Associates | www.creditunions.com

Source: Callahan Associates’ Peer-to-Peer Analytics

Marketing Expense Per Member
Data as of September 30, 2013
Heritage spends more on marketing than its peers in the same asset size but spends $28 less to acquire every new member.
Callahan Associates | www.creditunions.com

Source: Callahan Associates’Peer-to-Peer Analytics

Delinquent Loans / total Loans
Data as of September 30, 2013
Heritage attributes its low delinquency rate largely to its localized origination, underwriting, and collections units.
Callahan Associates | www.creditunions.com

Source: Callahan Associates’ Peer-to-Peer Analytics

January 13, 2014

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