P2P Lending — The Bank And Credit Union Way

I’ve often thought that banks could easily squash P2P “lenders” like Prosper and Lending Club by creating an online lending marketplace of their own. In addition to the organic traffic they could drive to the site, they could refer loans they decide to pass on themselves, and give the option to investors/savers looking for higher rates of return than they’d get with CDs to lend money in the marketplace.

Lending Club charges a processing fee ranging from 2.25% to 4.5% of the loan amount, and hits investors with a service charge of 1% of each payment received from a borrower. Seems to me that banks could easily underprice that.

But there’s another P2P lending opportunity for banks and credit unions to capitalize on.

Do you know how much money is lent between family, friends, and acquaintances? I doubt that you do, because, as far as I know, Aite Group is the only firm to have estimated the volume of P2P transactions that occur in the US.

We’ve estimated that US consumers borrow (and presumably, repay) nearly $75 billion from each other (and not from financial institutions or other types of businesses, legal or otherwise) each year. On average, every household in the US makes two loan payments to other people for money they’ve borrowed.

That last number is actually pretty useless, since a large percentage of households don’t make any P2P transactions for the purpose of repaying loans. But in our research on consumers who use alternative financial services (e.g.,  payday loans, check cashing services, etc.), borrowing from family and friends is the second most popular source of funds (after overdrawing on their checking accounts, which might not count).

In fact, of the alternative financial services customers that Aite Group surveyed, one in four borrowed from family or friends three or more times in 2010, and more than one-third did so more often in2010 than they did in 2009.

This is a huge P2P payment opportunity for banks. Note that I didn’t say it was a P2P lending opportunity.

How are these loans and agreements documented? I have no idea, but my bet is that in many cases they’re not documented at all. After all, among friends, verbal agreement is just fine, right?

But if there was a cheap (i.e., free) and convenient way to capture the details of that loan, and a way to actually transfer the money between participants — cheaply and conveniently — don’t you think a lot of people would use it?

The money in the P2P lending space for banks isn’t from loan processing fees or from taking a cut on the interest rates. The money is in the movement of funds.

To date, banks, as a whole, have floundered with their P2P payment offerings. CashEdge and Zashpay have gained some traction, but have hardly become household names. PayPal is a household name, but the vast majority of their business isn’t P2P.

Why haven’t P2P payments taken off?

Banks are marketing it all wrong. They’re pitching the “electronic” aspect. Big deal. People don’t care about channels and methods. They simply care about what’s the most convenient thing to do when they want to do it.

Instead, banks should be marketing convenient alternatives to transacting certain types of P2P payments — repaying loans to other people being one type.

Banks could provide an online capability for the parties to document the terms of the agreement, establish repayment parameters, and enable either the automatic or manual transfer of funds. All for the low fee of a P2P transaction, and not a cut on the loan. No future disagreements about the terms of the agreement, and proof of payment.

In addition to improve the way existing customers transact P2P loans between family/friends, this approach might help attract un- and under-banked consumers who could fund an account that could either be a savings account or take the form of a prepaid card account. 

The real winner, though, will be P2P payments. By driving trial of the service, consumers may find it convenient for other use cases. 

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How To Differentiate Your Credit Union

On the CU Water Cooler site, William Azaroff wrote:

“When I look at many credit unions, I’m troubled by their blandness, their inoffensiveness. They used to stand for something, but now they’re moving away from differentiation and towards sameness. And many credit unions are doing this at the precise moment when differentiation is a necessity. The question is: do some people hate your brand? If some do, then I would say you’re doing something right. If not, then I’m guessing your organization is trying to be all things to all people, and should take a stand for something and embed that into your brand.”

My take: To quote former President Clinton: “I did not have sex…” No, wait, that’s the wrong quote. I meant this one: “I feel your pain.”

William is spot on that many credit unions aren’t differentiated in the marketplace. What William didn’t get into, however, is why few credit unions are effectively differentiated. There are (at least) three reasons why undifferentiated credit unions are that way:

  1. They don’t know how to differentiate themselves.
  2. They think they’re differentiated, but don’t know better.
  3. They don’t want to be differentiated.

The last reason might surprise you, or strike you as wrong. But after 25 years of being a consultant, I can’t even begin to count the number of times I’ve made a recommendation to a client to do something, only to be met with the following question: “Who else is doing that?” Risk adversity runs deep in the financial service business.

There are also a fair number of CU execs who think that their CU is differentiated. Almost to a man/woman they give the same description of what differentiates their CU: “Our service.” This is often — I’m inclined to say always — wishful thinking. Why? First, service may be what your firm does best, but it doesn’t mean your service is comparatively better. And second, because service means different things to different people.

The most prevalent reason why so many CUs are undifferentiated, however, is probably the first reason: They don’t know how to differentiate themselves. 

I’m not looking to pick a fight with William — I suspect he would agree with me here — but approaching the topic of differentiation from the perspective “what can we do to tick people off and be hated by some of them?” is not the right way to go about it. 

And with all due respect to my friends in the advertising business, the last thing a credit union should do is bring in the advertising people to help them figure out how to differentiate the CU. 

Why? Because there’s a prevalent — but misguided — mindset among advertising people that differentiation comes from “the story you tell.” (If you need proof, go read Seth Godin).

But the story you tell doesn’t differentiate you. What differentiates you is the story that your members tell. That they tell to themselves inside their head, and that they tell verbally to their family and friends. And those stories only come from their experiences with the credit union, not the advertising. 

Which means this: Differentiation comes from something you do

That “something” must be meaningful to members. And that something must be something that: 1) only you do; 2) you do measurably better than anyone else; or 3) you do measurably more often than anyone else.

Differentiation doesn’t come from standing for something, and it doesn’t come from your branding efforts (your differentiation drives your brand, not the other way around).

William’s credit union Vancity “stands” for community development and improvement.  So do plenty of other CUs. What differentiates Vancity is that — time and again — they do something about it. They can count the number of times they’ve done something about it, and they can measure the impact of what they’ve done.

Differentiating on service is tenuous. What does that mean? That you fix your mistakes better than anyone else? That the lines in your branch aren’t as long as they are in the mega-banks down the street? That Sally at one of your branches greets everyone by name and with a smile when they come in?

If you’re going to differentiate your credit union, you have to do something. Different, better, or more. None of those options is particularly easy to do. Technology initiatives intended to gain a competitive advantage — mobile banking, remote deposit capture, etc — are often easily (I didn’t say cheaply) copied. Better is hard to prove. And “more” requires strong commitment from the management team for an extended period of time.

This isn’t to say that aren’t opportunities for differentiation, just that they require commitment — and a lot of it.

So what can you do to differentiate your CU? I think it comes from committing to differentiate in one — and only one — of the following areas:

1. Advice. Managing our financial lives is tough and getting tougher. People need help making smart financial choices. But the advice available in the market tends to be focused on asset allocation and stock picking for the relatively affluent, or focused at the very lowest end of the income spectrum for people who need help with serious debt problems. What about everybody else in the middle? What about providing help with all those everyday/week/year decisions that have to be made? PFM holds the potential to provide and deliver this kind of advice, but the tools aren’t quite there yet. If this is the path you choose, you’re going to have to make some investments to develop them and get them to point where they can deliver on this promise.

2. Convenience. There’s one bank in the Boston marketplace that advertises itself  as the “most convenient” bank. Hooey. Having extended branch hours and free checking isn’t “convenience.” Making people’s financial lives easier — i.e. more convenient — to manage is a complex and difficult proposition. But when you’re really doing it, people know it. And you’ll be differentiated.

3. Performance. You might not be the easiest FI in the market for me to deal with, and you might not provide me with any advice (maybe because I don’t want any), but if the performance of my financial life — that is, the interest I earn, the fees I pay, and the rewards I get and earn, are superior to everyone else out there, than I will consider you to be differentiated in the marketplace.

I didn’t say differentiation is easy.

What FourSquare Means To Financial Institutions

The Financial Brand does an excellent job of putting FourSquare into perspective for financial services firms:

Most financial institutions are trying to push people out of branches — especially for routine interactions — by encouraging use of self-service channels. But a Foursquare promotion encourages exactly the opposite: frequent branch visits. If your financial institution builds a Foursquare promotion around mayors, you will be taking those who are highly wired, leading-edge, early adopter tech junkies and encouraging them to come into branches more often than they should.

Building a Foursquare promotion around the mayors of your locations may feel like the easiest and most obvious way to tap this social media platform, but it is probably the worst thing you can do. For starters, it really limits the promotion’s audience. There can be only one mayor at a time and there will likely never be more than 2-3 people who could possibly ever overtake him/her. So if you have five branches, a mayor-based promotion would mean something to only around 15 people.”

Banks and credit unions are missing the real lesson here: People like to play games. We like friendly competition, and we like to turn routine things into games to spice them up, make them a little more interesting.

So what should banks and credit unions do? Make a game out of interacting with the bank/CU. No, I don’t mean getting 5 points every time someone does some as meaningless as check their account balance.

But what about applying “game theory” to PFM usage? Construct a budget, get 50 points. Categorize your quarterly spending, get 50 points. Help someone else “in the network” set up their budget, get 250 points. Or more broadly, make a deposit into a savings account for more than $100, get 100 points. Give up paper statements, get 100 points. For every $10 you spend with your debit card, get 10 points.

Sound like a loyalty program? What in tarnation do you think Foursquare is? (Side note: Hypocrisy kills me. There are people who criticize rewards programs for “buying” loyalty instead of “earning” it, and then turn around and rave about some social media concoction like FourSquare).

The keys to success are: 1) Constructing a points scheme that rewards meaningful interactions and actions (this is why I keep harping on the importance of the concept of customer engagement, and how to measure it); 2) Making it social so people can see how they stand relative to everyone else, and to encourage some friendly competition; and 3) Integrating it with enterprise-wide marketing efforts.

Of course, if you prefer publicity over profits, feel free to pursue that Foursquare promotion.

Shoveling Out From The Interchange Snowjob

If one of those big, bad companies (oh, for kicks, let’s just say it was a bank, our punching bag du jour) tried to mislead the public, what would the response be? Outrage. People would be up in arms, and politicians — especially the current administration — would be calling for legislation to punish the offender, and prevent it from happening again.

And, of course, our elected public officials would make a public spectacle out of it. Might even warrant dropping a few F-bombs, eh Carl Levin?

But what happens when those same elected officials, or some other politically-motivated individual, spews misleading information? Not only do they get a pass, but they get a platform to deliver those messages in publications like the New York Times and Huffington Post.

Examples: In a HuffPo article from February, California state assembly member Pedro Nava wrote:

On average, consumers pay $427 annually on interchange fees without even realizing it.”

Unfortunately, that’s simply not true, at least not literally. Consumers don’t pay an interchange fee. Merchants do. Whether or not that cost gets passed on to consumers is a different question of course, but if he’s going to expand the analysis to every cost a merchant incurs that works its way back to consumers, maybe Nava should start with the 8.25% sales tax that Californians pay.

More recently, the NY Times published an article written by Albert Foer, the president of the American Antitrust Institute, who wrote:

If the United States were to reduce the interchange rate from 2.0 percent to 0.5 percent, the savings would be $36 billion per year.”

That’s a true statement, kind of. $36 billion would be saved, but it’s really not clear who would reap those savings. With retailers’ profit levels declining, do you really think the savings they would accrue in interchange fees would be passed on to consumers? It’s possible. Just not on this planet.

The other fallacy in Foer’s analysis is that when companies are faced with revenue decline, most don’t sit back and do nothing. They try to find ways to recoup those shortfalls. This involves trying to find new customers, and/or offering new products, but may involve raising prices and fees in other areas. So, in the long run, those savings never materialize.

I’ll repeat that: Those savings never materialize.

If the same elected officials who are spewing falsehoods continue to (or try to) regulate firms’ ability to price their products and services, the outcome may be lower prices, but with a cost: Lower employment levels. As a firm’s revenue declines, so does its employment count.

But I should stop this rant — I’m probably preaching to the choir. If you’re reading this, you likely work in the financial services industry for a bank or credit union and agree with me.

The question that needs to be addressed: What should FIs do about this?

If there ever was a good opportunity for a national education/advertising campaign, this is it.

Callahan & Associates recently alerted credit unions to the potential impact of a cut in interchange fees:

If credit union’s interchange income was reduced in total by 75 percent (from Foer’s stated 2.0 to 0.5 percent), the lost revenue would drastically affect credit union non-interest income and the eventual value returned to members. Do your members know how interchange helps the credit union and subsidizes the true cost of providing debit and credit services?”

This is too narrow a view, though. The impact to credit union members is much broader than just the impact on their CU’s payout.

FIs — banks and CUs —  need to educate the public about what the interchange fee is. What it’s there for, who pays it, and how it helps pay for the rewards that consumers get on their credit and debit cards, and how it helps (will increasingly help) to keep checking account fees low, if not free. And how it’s a fee that merchants pay because it enables merchants to reduce the amount of cash they handle, reduces their billing costs, and helps prevent fraudulent activity.

As a VP of operations at a credit union was quoted as saying in American Banker “the current fee system puts financial institutions of all sizes on the same playing field in setting interchange rates. It allows the credit unions to compete with the largest national banks.”

This may cause a bit of a quandary for credit unions, however. After spending so much time and effort over the past 18 months distancing themselves from the larger institutions, I can’t help but wonder if this will cause some PR embarrassment for credit unions.

It doesn’t matter, though. This issue is too important.

Who Needs Vision?

This recent tweet from Sarah Cooke (@CookeOnCUs) caught my attention:

#NACUSO Tom Davis: “The credit union industry has no unifying vision.”

My first thoughts were: 1) What industry does? and 2) So what?

Here are some things I hold to be truths: 1) Consumers have different financial services needs. 2) Consumers have different preferences for the type of relationship they want with their financial services providers. 3) No single credit union can effectively serve the differences in needs and relationship types inferred by points #1 and #2.

Therefore….

1. Each individual needs its OWN vision that unifies the products, people, processes, and policies of that credit union.

2. It would be impossible (given the above truths) to have a unifying vision for the credit union industry that was meaningful on any level.

Whenever the credit union discussion turns to “shared vision” I can’t help but think of REI. Like credit unions, REI is a non-profit cooperative. Unlike credit unions, REI doesn’t obsess over how it’s “different” from Dick’s Sporting Goods or Sports Authority, and it certainly doesn’t worry about whether or not the cooperative sporting goods industry has a shared vision (because, of course, there is no cooperative sporting goods industry).

Instead, they compete — very successfully — by delivering a superior customer experience. Which isn’t some vague “our customer service is superior” claim. They have 1) extremely knowledgeable employees who 2) help customers (and/or members, it doesn’t really matter to them) find the right product for them (the customer) and support all that with 3) return policies that are very customer-friendly. And the quality of products is generally just as good (if not better) than what you would find at other stores.

So, I’m not very convinced that the credit union industry needs a unifying vision. Which isn’t to say that each credit union shouldn’t have a unifying vision. But I’m getting sloppy here with terminology. Because it isn’t vision that’s missing in many credit unions (and banks, to be fair), it’s strategy: How will we compete in the marketplace, with whom, and for whom (i.e., which members/customers)?

A number of years ago, creating a vision or mission statement was the consulting project du jour (@workingonstep2 will remember this well). They fell out of favor because: 1) Every consulting project du jour falls out of favor after 2-3 years, and 2) They had very little impact on the day-to-day operations of the business.

In other words, there was a huge disconnect between vision and execution. Which is another reason why credit unions would be wasting their time trying to come up with a unifying vision: They wouldn’t know how to drive that vision down to tactical and measurable initiatives. (To be fair, few firms do).

So before you (or your credit union) participate in any effort to create a unifying vision for the CU industry, you should really ask: Why are we doing this? What will we (all CUs, not just your own CU) get out of this? And most importantly: What will be different?

I’m betting that a “unifying vision” won’t change much.

Postscript: After writing this, I sent it over to a friend for feedback, and let it sit for awhile. The questions I had to answer before posting this were: 1) Is it valuable enough to publish, and 2) What am I really trying to say here?

My friend gave me the confidence that it was worth publishing.

But the answer to the second question didn’t hit me clearly until I read something by Chip Filson, who wrote:

Credit unions can make 2010 not only the Year of the Consumer, but also the first year in a new decade of credit union leadership.”

And that’s when I realized what I’m trying to say to credit unions. Chip is spot-on, but please don’t wait for every other credit union to get in alignment before making that happen.

What Small Businesses Want From Banks And Credit Unions

Banking Kismet did a good job of taking one credit union to task for ineffective marketing to businesses. The crux of George’s argument was that the attributes that the credit union was using to differentiate itself, and to establish its superiority over large banks, weren’t truly differentiating factors.

While Banking Kismet was referring to just one CU, I think we can all agree that this CU’s approach isn’t unique. [For a great discussion on this, see The Financial Brand’s Service is not what differentiates you].

But while Banking Kismet’s analysis is spot on, it didn’t address the question: So what would differentiate the credit union in the minds of small businesses? Put another way: What are small businesses looking for when choosing a bank or credit union?

I haven’t written about this topic before, because I thought everybody knew the answer already. Apparently not. It comes down to three things:

  1. Are you going to lend me money or not?
  2. Do you understand my business and can you help me grow my business?
  3. Do you provide technology to make banking more convenient?

That’s it. END OF STORY.

Crowing about “personalized service” is useless. Finding out that you don’t know my business well enough to help me is no better coming from someone who knows my name than it is from someone who doesn’t know my name.

And if you’re not inclined to lend me money, then your volunteer board of directors only does me good if one of them is my cousin or next-door neighbor.

Not every small business puts equal importance across the three factors (the list comes from a report recently published by Aite Group on small business banking). But you’ll reach a pretty large percentage of small businesses if you meet all three criteria.

Of course, that’s a lot easier said than done. You’ll need underwriting capabilities to determine the best risks from the poor lending risks. And you might want to figure out which types of businesses you want to develop a knowledge of, and competency in helping. Oh, and you might want to invest in technology capabilities like mobile banking, remote deposit capture, and electronic invoicing.

Or you could just beat your chest, scream about your personalized service, and hope for the best.

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Credit Unions' Credit Card Chimera

I don’t have stats to back this assertion, but it seems to me that credit unions are looking at the credit card market as a growth opportunity these days.

Anecdotally, after linking to a news story about how Chase would drop 15% of its cardholders as a result of the new regulations, one of my Twitter buddies tweeted “time to find a credit union card.” And the CU twittersphere jumps on every mention of CUs from Suze Orman, like this one:

Don’t get me started with these credit card companies….here’s the answer: Credit unions. So many credit unions are giving you no balance-transfer fees, low interest rates. [And] most credit unions aren’t staffed by the dumbest people you will ever meet.”

As a side comment here, I’m not sure why Ms. Orman thinks card issuers employ the “dumbest people you will ever meet.” Personally, I’m very impressed that my card issuer can detect fraudulent patterns in card use, and called me when they noticed that my card was used in both Massachusetts and Texas on the same day.

But the bigger question here is this: Why do credit unions think that the customers that the big issuers will drop are such a great business opportunity? Does it occur to credit unions that the reason why the large issuers are dropping these people is that they’re not profitable customers?

There’s a new definition of “good customer” in the credit card industry these days. The old definition: Someone who revolves balances and pays late. Translation: Someone who pays a lot in interest and late fees.

New definition: People who use their credit card a lot. These folks often don’t revolve, and if they do, don’t do it for long, and make way more than the minimum payment. They drive profits for the issuer through interchange fees, not interest fees. And they’re way more concerned about the quality of the rewards program than they are interest rates or balance transfer fees.

Translation: The card customers that credit unions are likely to obtain by digging through the large issuers’ trashcans may not be very profitable.

If credit unions see this a springboard to obtaining new members and growing the relationship, then why are so many CUs so proud of letting deposit accounts walk out the door when the member wants a good or better rate?

Credit unions can beat their chests all they want about how superior their card programs are. The reality is that only certain types of the cards they offer are a better deal. On the rewards front, the CUs are lagging. And that’s what luring and retaining the “best” cardholders today.