Can You Trust Zelle?

By Robert McGarvey


Big banks have rushed to embrace Zelle – the new breed person to person payment tool – and credit unions too are joining the queue.

And now there is news about rising rates of fraud and criminality involving Zelle.

Time for a rethink?

First off, why Zelle?  Part of the answer is in the immensity of its primary backers, such as Chase, Bank of America, Citi, Capital One, Wells Fargo, USAA, and a handful of credit unions including BECU, First Tech, Schools First, Star One. Many more institutions – credit unions included – are in the queue to go live.

Zelle makes it very easy to send money to anyone with an email account or mobile phone number and a bank account.  No Zelle account is needed.

Some years ago I tried an experiment where I sent small payments to people using services such as Dwolla and the redemption rate was about zero. People asked me if I’d been co-opted by Nigerian scammers.  They just did not want to pick up money involving a service they hadn’t heard of.

Zelle is hard to not have heard of. A lot of TV ads and digital ads support it.

And then there’s how easy it is to get the cash.

Consider this a death warning to legacy but clunky services such as PopMoney.

But the trigger that launched Zelle was the PayPal fueled fire around Venmo which, out of nowhere, had emerged as the p2p tool of choice.  Bankers had snorted at tools like PopMoney but Venmo was different – users liked it, it had fintech heritage, and suddenly p2p was gaining the kind of enthusiasm many had predicted for it but that had stubbornly not materialized.

Bankers decided they needed their own weapon and thus Zelle, which in 2017 moved an estimated $75 billion, twice as much as Venmo, and the scariest bit is that this is plainly early days for Zelle.  Thought of a trillion dollar market is not far-fetched. Pymnts offered this dazzling buffet of Zelle stats: “Earlier this year, Zelle revealed that on average, close to 100,000 customers signed up each day for 2017. It also said it processed more than 247 million payments last year, which marks a 45 percent jump from 2016. It handled a total of $75 billion in peer-to-peer (P2P) payments in 2017, a significant increase from the $55 billion it made the year before.”

And now there are the stories about Zelle as a platform for fraudsters. The New York Times dropped the biggest bomb in a piece that began this way: “Big banks are making it easy to zap money to your friends. Maybe too easy.”

The Times continued: “Interviews with more than two dozen customers who had their money stolen through Zelle illustrate the weaknesses that criminals are using in targeting the network. While all financial systems are susceptible to fraud, aspects of Zelle’s design, like not always notifying customers when money is transferred — some banks do; others don’t — have contributed to the system’s vulnerability.”

Time to re-think Zelle? Not so fast.  Three years ago I wrote a piece for The Street headlined: “Are Peer-to-Peer Money Transfer Apps Unsafe to Use? Worries Focus on Venmo.”

The story started this way: “The Internet has been abuzz for a couple weeks with chatter about documented cases of theft of money from accounts of users of Venmo, the p2p (peer-to-peer) money transfer app that had been the the fast growing darling of Millennials.

One user, in a story reported in Slate, had $2,850 looted from a Chase checking account.”

Sound familiar? Indeed, it sounds exactly like the Zelle growing pains.  Regarding Venmo back then, PayPal told me they had moved fast to put in more security. File this under problem solved was their message.

Similar is getting said about Zelle.  Lou Anne Alexander, head of payments at Early Warning which runs Zelle, told the New York Times: “When there is a problem, we and the banks are proactive. It’s not something we’re putting our heads in the sand about.”

A lot is riding on Zelle for the banks and credit unions that embrace it.

There’s no present reason for a financial institution to panic about Zelle. If fraud reports continue and multiply, by all means, get worried. But for now this all sounds like growing pains and there are enough grown ups in the room to put in the needed fixes.

Color me optimistic.

Apple Pay Status Update: Three Years On Do You Still Need It?


By Robert McGarvey

For Credit Union 2.0


It’s been over three years since Apple Pay rolled out the nation’s first beefy mobile payments system and today’s blunt question has to be: does anyone still care?

Into that fray has stepped Pymnts which recently offered up a detailed look at mobile wallet usage, along with trends.

Be ready to question your own institution’s wallet strategy.

Be ready to ask if it’s in fact time for an institution that offers Apple Pay, et. al. to dump them.

The data just may surprise you.

For good reason. Apple Pay was birthed amid loud and wide clamoring for it. I remember the panic that beset many credit unions three years ago when Navy Federal was the first – and only – credit union invited to the launch party by Apple.  I had many talks with credit union CEOs and even more CIOs who wanted Apply Pay, like right now. And Apple put all of them in a deliberate queue where it took many weeks, sometimes months, before more credit unions joined the Apple Pay legions.

Every credit union wanted Apple Pay – even though they had spurned a very similar Google Wallet a few years earlier.  I had first used Google Wallet to pay at a Whole Foods in Scottsdale AZ in, I believe, 2013 which had Mastercard touch and pay installed on its registers and sometimes it worked with Google Wallet, sometimes it didn’t.  

But few credit union execs paid much mind to Google Wallet. It was Apple’s marketing genius that spawned a feeding frenzy where every institution craved a contactless payment solution.

Apple nowadays regularly updates its list of institutions that offer Apple Pay but I don’t think anybody much cares anymore.  More credit unions don’t offer Apple Pay than do – should they care?

That’s where the Pymnts data come in.

The article reminds readers of the famous S Curve, via Harvard Business prof Theodore Levitt, which posited that three years in, a new consumer product’s adoption should be at the top of the S curve.  Where does Apple Pay stand? Here’s what Pymnts says: “Apple Pay’s adoption since its launch in Oct. 2014 looks more like a flat line than an S-curve. In fact, the overall growth in Apple Pay transactions is almost certainly the result of more merchants installing near-field communication (NFC) terminals than iPhone users getting more interested in Apple Pay itself.”

Read that again – and remember that, per Apple CEO Tim Cook, Apple Pay is now accepted at more than half of all US retail locations.  And yet even Cook said that mobile payments have “taken off slower than I personally would have thought if you asked me sitting here a few years ago.”  

How bad is it?  According to Pymnts, under 30% of Apple iPhone owners have activated and tried Apple Pay. That’s terrible but just 17% of Samsung owners have activated and tried Samsung Pay.  And only 13% of all Android users have activated and tried Android Pay (nee Google Pay, nee Google Wallet).

Remember Levitt’s curve.  These are awful adoption rates.

Pymnts tossed out more gloomy data. Just 23% of Apple Pay users used it for their last transaction at store where they could use it.

And a dismal 17% of Android Pay users did likewise.

(Pyments, by the way, is reasonably bullish on WalMart Pay and its adoption.  I don’t shop at WalMart so I defer to other opinions.)

Bottomline: Apple Pay has its fan base but it definitely isn’t huge. Data is no more compelling for Android Pay and Samsung Pay. There is a user cohort – but, really, mobile wallets are still not wowing that many consumers with their alleged advantages over plastic cards.

The big question: if you don’t presently offer Apple Pay and Android Pay should you?  That depends upon your demographic, now and also the one you want five or ten years from now.  If your members want mobile payments, give them what they want.

Which bring us to the should you dump the mobile wallets?  Absolutely not, multiple credit union senior execs told me.  They in fact expressed delight that the mobile wallets are not much used – Apple Pay for instance charges a significant premium over a credit card as such and no credit union is thrilled about paying the difference. And yet credit unions that offer Apple Pay, etc. nonetheless get to proclaim themselves on the tech cutting edge and that’s a potent marketing platform, especially with Millennials.

For some credit unions, the present situation is win – win.  They brag about their techie cred and yet they aren’t stuck with paying the premiums involved in mobile wallet usage.

So don’t dis non use of the mobile wallets. It just may be exactly what most credit unions honestly prefer.  

Mortgage Business at Risk in the Digital Age


By Robert McGarvey

For Credit Union 2.0


Put the new Bank of America 2018 Homebuyers Insight Report high on your reading pile.  And you may find yourself reading it as a contemporary horror story. That’s because the central message of the report is that today technology has become inextricably intertwined with the homebuying process.

The question for a lot of credit unions has to be: can we continue to hold onto any mortgage business?

Steven Boland, head of consumer lending at Bank of America, wrote in the report: “Perhaps the biggest takeaway [in this report] is that NextGen technologies are here today, and their influence will continue to grow. Many buyers report they are already comfortable using technology throughout their homebuying journey, with room for evolution. Over the next decade, many even predict open houses will only be done through virtual reality.”

The future is coming, ready or not.

Credit unions have been gobbling up marketshare in mortgage origination.  Will that last?

In 2005 credit unions had about 1.9% of mortgages.  In 2014 that had grown to 8.3% according to CUNA.

But in recent years the headline in the mortgage business has been the rocketing growth of non banks such as Quicken which now has a bigger share than Bank of America and Wells Fargo.

Non banks in fact now grab five of the top 10 spots in mortgage origination. And Quicken Loans is in 1st place.

What is going on is found in the B of A homebuying report and that is why it is critical reading for credit unions that want to continue to stake a role in first mortgage residential originations.

A number that jumps off the page: 32% of us told B of A we are comfortable applying for a mortgage online.  

Just 20% of us like online dating.  Only 37% are comfortable shopping for groceries online.  

Think on that. Almost as many who are comfortable buying kibble and chickpeas online are comfortable with applying for a mortgage online.

The majority – 52% – of those who are comfortable with applying for a mortgage online are or already have done.

Personally I got a mortgage, via USAA, almost entirely online in 2013. In 2004 I did similar with Countrywide.  The tools exist, they work, and at least to me the online process is more comfortable and faster than doing it in a bank or credit union office.  A bonus is that at home I have all the necessary paperwork on hand. I honestly cannot imagine going through a mortgage application at a remote office.

And more of us are coming to think similarly.

The data goes on.  According to B of A, “92 percent agree that technology makes them feel more in control of their financial decisions. They also see technology playing a role during every stage of the homebuying journey.”

One interesting data point from B of A: 4% of us say we’d make a home purchase offer based only upon an online review of the property.

Surprised it’s that many? I’m surprised it’s that few. In 2004 I sold a home in Tucson to a buyer in Hawaii who had seen the house only online. She made a full price offer.  She did want a contingency where she could pull out at closing if the house had been presented deceptively. I knew it hadn’t been, I consented, and at closing she did the deal.

Expect more changes. According to B of A, in the next 10 years 55% of us expect the mortgage process to be paperless.   I’m surprised that isn’t 90%.

53% expect the process can be completed within a few days.  Note: some lenders already promise same day approvals and that will become the new norm. Some promise approval in minutes.  

6% of us expect appraisals to be done by drones in the next 10 years.  Count me in the 6%, at least for production houses and condos. Already many appraisals are drive-bys.  A drone is just an extension of that trend.

What’s the lesson to learn from these many data points? The main one is: go digital. Make sure your credit union has an online application process that works. Really. Honestly. Ideally, both in a mobile app and online – but definitely online.

Lack of a good online mortgage app is becoming a deal breaker for many.

How good is yours? Get a half dozen friends – not credit union employees – to go through the online process. Gather their feedback. Did any quit in exasperation?  How many made it to the finish line? How long did it take them. (And do cancel out all the apps before the process moves to the next stages or you will lose friends.)

Don’t be shocked if there are loud grumbles about your online mortgage processes.  That may be the credit union norm. But it’s not good enough. Not today. Definitely not tomorrow.

We are coming to a time, very soon, when most mortgage applicants will expect to do this online, just as the vast majority of credit card customers expect.

That is tomorrow’s reality.  Get ready for it today.


What Makes a Credit Union a Success?


By Robert McGarvey


For CU2.0

Do you believe Fox Communities Credit Union in Appleton, WI is the nation’s best performing credit union?

S&P Global Market Intelligence does and therein lies the seeds of a fierce debate.

I am not pointing a mocking finger at Fox Communities. No doubt it is a fine institution.

I do have questions about the how of the S&P ratings.

“Their metrics make no sense,” a longtime credit union analyst grumbled to me when he brought this story to my attention. He requested anonymity mainly because credit union people don’t like to be seen as boat rockers.

But two things – he may be absolutely right that the metrics used by S&P Global make little real world sense and just maybe, too, some aggressive boat rocking is exactly what the credit union world needs now as it faces a universe of threats, from mega banks to non banks, all of which want to step on small FIs like so many uninvited ants at a Spring picnic.  

The way forward will be led by great, inspired, energetic credit unions whose tactics and strategies light a path for others that choose to follow.

Do any of the purported “best” credit union rankings actually show the way? Understand: there are many ways to measure a credit union’s purported health. There’s NCUA CAMEL system.  Callahan has its own metrics.  Fiserv’s RADDON has another system., a subsidiary of Lending Tree, now has released its tally of the nation’s “healthiest” banks and credit unions.

What does any of it mean?

Set aside the non public rankings – via Callahan and CAMEL.  Are the public-facing rankings worth much?

Here is how Fox Communities grabbed its top spot in the S&P tally, according to an S&P press release: “Aided by a pair of mergers, Appleton, Wis.-based Fox Communities Credit Union dethroned five-time champion Chubbuck, Idaho-based Idaho Central CU, to grab the No. 1 spot in S&P Global Market Intelligence’s annual ranking of the 50 top-performing credit unions. Last year, 81-year-old Fox Communities merged with two different Green Bay, Wis.-based credit unions — Horizon Community CU and Harbor CU — which helped the credit union post 17.6% membership growth in 2017 and 21.4% market growth.”

Mergers – that is, buying members and market share – equate to “best performing?” Really?

A lot of mergers are shotgun marriages of ailing partners.  That’s just reality.

In the rankings, the Denver Fire Department FCU is the nation’s healthiest. Runner-up is Cascade Community Credit Union in Oregon.

The “healthiest” bank, by the way, is First Commercial in Alhambra, CA and, nope, I haven’t heard of it either.

In the RADDON rankings, winners are presented alphabetically. 23 credit unions – out of 500 analyzed – are cited.  I cannot say I am familiar with many of them.

All these rankings make for press releases and applause.

Does it add up to anything that matters?

Here’s the real question: what makes a credit union successful? What makes it a model for peers to study?

A handful of measures to me matter:

  • Organic assets growth
  • Organic membership growth (more members without mergers)
  • Bigger local marketshare (how does the CU stack up against local competitors)
  • Solid financials (gleaned from NCUA call reports)
  • Board quality
  • Management quality
  • Readiness for the digital battles ahead
  • Preparedness for the Millennial members of tomorrow

That list can – should – be debated. But what needs to happen is the debate. Now is the time for credit union leadership to doubledown on fostering the survival skills they will need to make it through the banking wars that loom ahead of us.

This is no time to go full out ostrich.  

The next recession – many experts now whisper about a brutal 2020 global economic turndown – will be ugly.  Who will survive? It’s coming, hard to say when, but downturns are inevitable.

Some credit unions are making all the right moves to position themselves to grow. In bad times and good. They are getting out their message that they are all the bank a consumer needs, and a better deal for the members and their communities.

Many, many others are just holding on.

Here is what the industry really needs now: a ranking of the top 10 credit unions for digital excellence, that is, excellence tomorrow and today. 

Who wants to help pick them?

The 21st Century Credit Union Welcome


By Robert McGarvey

For Credit Union 2.0

Sign up as a new member at your credit union – or pick any credit union – and what happens?

Ask yourself a sharper question: what doesn’t happen?  Think hard on that because the future of this new member relationship hangs in the balance.

Amy Downs, CEO at Allegiance Credit Union, a $260 million institution headquartered in Oklahoma City, has been thinking hard on these very questions and she believes she has found an answer that helps bring her credit union squarely into the 21st century’s digital world.

Mind you, Amy has worked at Allegiance for many years, 30 in fact. She remembers the new member welcomes of the old days. Back then Allegiance was officed in the Alfred P. Murrah Federal Building and it serviced federal employees.  As new workers were onboarded by human resources, they ordinarily were brought by the credit union and of course they got a warm welcome from the credit union employees, recalled Amy. Many of those new employees signed up on the spot.  And why not? They had been sincerely greeted by credit union employees – probably including the president, definitely senior managers. They knew they had a name and face they could seek out down the road if they had an issue they wanted to discuss.

What bank could match those human faces at the credit union?

Flashforward to nowadays and what happens when a new member joins a credit union? Increasingly that happens online. Then what? Probably there is a welcome email – and doesn’t that sound warm, friendly and inviting?


Probably, too, there is a welcome packet that arrives by US Mail – along with bunches of postcards from nearby dental offices, solicitations for donations, and maybe a past due notice on an electric bill.

Credit unions are scrambling – and many are failing – to make good, warm ties with new members. And many of those new members drift away or, even more commonly, they never put more than a few dollars into their credit union account. The bulk of their wallet is at another institution.

The future for credit unions is terrible – if things stay like this.

Matters got especially complicated at Allegiance. In 2002, the credit union got a community charter where it now serves people who live or work in the six counties around Oklahoma City.

In that transition, what was lost was that new employee introduction and that was a powerful moment that set up thousands of strong member – credit union relationships.

Amy thought on this and then she heard about an alternative.  What she now sends new members is a welcome video in which her smiling face is on camera, offering a sincere happiness that the new member brought Allegiance their business.

A couple times a week she scans the list of new members and when she recognizes a name, she makes a personal video. When she saw a husband of a close personal friend, she laughingly said in that video, “About time you listened to your wife!”

But even with the members she doesn’t know, what they see in Amy’s video is a person who is glad to meet them.

“We are losing our personal touch, all credit unions are,” said Amy.  “Everything has changed. It’s not the way it was, when we were on a first name basis with all our members. Now we have to work at it.”

When Amy heard about new member welcome videos, she wanted to know more. When she discovered the costs are nominal – she records her own, using a digital video recorder that cost $65 – and the actual time to record is a matter of minutes, she was all in.

Understand: the video is similar to what would have been an in-person meet and greet with a new member a generation ago. Amy’s videos are in the vicinity of 30 seconds. That matters because our attention spans just aren’t suited to movie-length video welcomes.

The bottomline for Amy and Allegiance: “We have to start marketing in different ways, or credit unions will be left behind.”

Use the technology that is readily available to forge stronger ties with new members. Welcome videos – absolutely – are a step in that direction.

Credit Union 2.0 has developed video solutions for new member welcomes – they in fact facilitated the work for Allegiance. For more info, here’s the contact.

Want to see Amy’s video? Click here.


The 50 Most Convenient Credit Unions


By Robert McGarvey


For Credit Union 2.0


Did your credit union make the 50 most convenient list?  Stop wondering, click to see the MagnifyMoney ranking.

What this ranking is about is how easy it is for a member to access the services he/she wants, when he wants them, and so it looks at both the analog and digital worlds, branches and mobile apps, among other touchpoints.

Understand a couple things about the ranking: it ranks only the 50 biggest credit unions and, according to the data, the top rated credit union notched 90 points out of a possible 100. The lowest rated pulled down only 46.6 points.

That represents a huge spread.  The #1 credit union in this convenience scorecard – Alliant – literally grabbed twice as many points as the lowest scorer, Mountain America.

There may well be many more credit unions, outside the biggest 50, that also outscore Mountain America.

So what exactly is getting scored?  MagnifyMoney looked at 5 fields: opening hours (more means more points); how many ATMs; telephone service hours; mobile app (how satisfied are users); and data portability (do accounts sync with Quicken, etc.)?

A complaint about that group of five is that different members want very different touchpoints. I couldn’t care less about branch hours because I live around 2500 miles from the nearest branch at my chief credit union.  I care only about digital access. But I have relatives who care only about branches and phone services. So it makes sense that MagnifyMoney sifts different channels.

It also breaks out top 10 scores in each category.  Here, for instance, are the top five scorers for mobile app:  Eastman Credit Union; ESL Federal Credit Union; Redstone Federal Credit Union; SEFCU; Wright-Patt Credit Union.

Here are the credit unions with the best surcharge-free ATM coverage: Alliant Federal Credit Union; Hudson Valley Federal Credit Union; Northwest Federal Credit Union; OnPoint Community Credit Union; Suncoast Federal Credit Union; Wings Financial Credit Union and Wright-Patt Credit Union.

As for longest hours, the winner is Hudson Valley Federal Credit Union, with 59.9 hours per week.

You want 24/7 access? MagnifyMoney found a handful of top 50 credit unions that in fact offer exactly that via phone: Alaska USA Federal Credit Union

  • Alliant Credit Union
  • BECU
  • Delta Community Credit Union
  • First Technology Federal Credit Union
  • Navy Federal Credit Union
  • Redwood Credit Union
  • Security Service Federal Credit Union

How did credit unions do as a whole? MagnifyMoney co-founder Brian Karimzad said that generally credit unions are not competitive with big banks on branch opening hours and telephone service hours. But, in the other categories, credit unions do very well.  Shared ATM networks – via CO-OP and CuLiance, for instance – give participants ATM networks numbering in the many thousands and those are numbers that stand tall against the ATM fleets of the biggest banks (more than 15,000 each at Chase and Bank of America; CuLiance claims more than 75,000 surcharge-free ATMs in its network).

As for how credit unions fare on convenience against other credit unions Karimzad stressed that there are “wide disparities.”  But the key is providing what matters to this member. A generic score is good to know but where the pedal hits this metal is in measuring how convenient the credit union is to this member.

Karimzad, incidentally, said in an interview that MagnifyMoney readers express a lot of interest in credit unions, usually because credit unions typically offer some of the best deals on loans, credit cards, and similar.  The movement already has significant recognition for its highly competitive rates.

And maybe now more consumers will understand that credit unions also can be very competitive on convenience, too. The reputation endures that credit unions keep short, banker’s hours, are laggards in technology, and are nearly impossible to join. The reality of course is very different.

And that’s why, despite the quibbles, it’s a good thing that rankings such as MagnifyMoney’s convenience scorecard get out the message that in many ways credit unions equal – maybe even beat – banks when it comes to how easy they are to use.

The more consumers that get that, the better for all credit unions.

Now, where did your credit union rank?


Realtime Banking Is Coming at You: Ready or Not


By Robert McGarvey


For CU2.0


A new report out of Celent asks a question that just may terrify you: Are banks ready for a real time world?

You probably know the answer at your credit union.

Join the club: many – probably most – credit unions are nowhere close to embracing a real time financial services universe.

Tell me why it takes a day – sometimes several days – to move money from an account at my credit union to a payee already in the system when, truly, it simply is a matter of shifting bits and bytes?

Money can – and now should – move as fast as a text message and if a friend in India sends me an SMS via Facebook right about now it is showing up in my FB queue.

It can happen in financial services. With money. Everybody – that means you – will have to climb aboard. “Real time payments,” said Celent, “have moved beyond being an if to a when.”

Here’s a Celent observation: “Most existing payment engines have a number of challenges in delivering real-time payments. First, they are generally batch-driven, rather than single message and instant, and so simply not suitable. The second, and less obvious reason, is that they require downtime for maintenance and upgrades, something that isn’t allowed in a real-time payment solution. Many real-time payment schemes only have downtime over the year measured in seconds. Old technology simply wasn’t designed to support that.”

What Celent is prescribing is adoption of a robust payments hub that can provide the 21st century world what it wants.

“Real-time payments require all the activity in the value chain to be carried out, typically in under a second, if not quicker. If all the processes are within the hub, they are easier to manage and coordinate. But as volumes increase, this becomes more and more essential. Furthermore, functions that sit within the hub will be subject to the same design requirements in terms of availability and maintenance,” wrote the Celent author, Gareth Lodge.

Some real time functions already are in use in the United States.

Digital currencies – the report pointed in particular to Ripple – are paving the way for a shift to real time money movement.

Zelle also is a step into real time for institutions that adopt it (and some credit unions already have – such as America First Credit Union and BECU).  And Dwolla offers real time ACH transfer functionality.

Don’t necessarily expect smooth sailing for your institution into the real time universe. Exactly how – and how well – many competing real time systems will integrate with each other is not yet known.

Then, too, as Celent pointed out: “The term real-time payments perhaps hides an obvious truth: in order to make the payment real-time, everything and anything that touches the payment, including fraud checking, balance checks, and the front end initiation system have also to be real-time…24 hours a day, seven days a week.”

All of that represents a massive change in how credit unions work.  Digital banks, Celent pointed out, are architected from the word “go” to handle real time. A legacy institution has a different, very real set of challenges. Said Celent: “Real-time payments then are the vanguard of the digital bank. New banks, built from the ground up, do not need to give this a second thought, but for any other bank, the task of converting from the existing infrastructure is a huge task.”

And the news gets worse.  Said Celent: “Many banks still run core banking systems that are over a decade old. The chances are that unless it has been replaced within the last five years, it is still a batch system. This poses immediate challenges — how to update the customer balance until the next batch, overnight run.”

Institutions – and their cpre providers – are fiddling with workarounds.  But that’s the point: there will definitely have to be workarounds and they may not always be easy, elegant or even straightforward.

What to do?  The first step is recognizing that now indeed is the start of real time banking.  That, said Celent, is integral to the transformation into the digital bank that just about all now know is the future. Wrote Celent: “Banks may see the need to move to a digital bank, but they may be struggling to make the business case for investing in real-time payments. Yet there is a confluence of the digital banking trend with real-time payments, as they share many of the same attributes and indeed, that make it impossible for a digital bank to truly exist without it.”

Absolutely right. Until real-time payments are part of the package the institution just isn’t a digital bank. Period.

Payday Loans and Your Credit Union


By Robert McGarvey

For Credit Union 2.0


Should your credit union offer payday loans?  Don’t rush to say no. In North Carolina, and spiraling out of there, Self-Help Credit Union and its offshoots such as the Center for Responsible Lending have documented that there is good to be done, and even some money to be made, by offering payday loans.

Technology, by the way, may be the magic that lets this flourish.  Read on.

Start with Pew Charitable Trusts’  blockbuster report that says credit unions should look hard at plunging into payday lending.

Some credit unions already are doing it.  Like Technicolor FCU.  Unify FCU.  Horizon FCU.  Banner FCU. There are others.

But there could be more.

Understand: according to Self-Help’s CRL, the average rate for a payday loan is 391%.

In bygone days, when the Mafia offered street lending at shipyards and factories in north Jersey and New York City the typical term was “five for six.”  Borrow $5 on Tuesday and when payday came on Friday the borrower owed $6. If he couldn’t pay in full, he could pay $1 to stay current. Many borrowers did exactly that, forever paying interest on a principal that long before was spent.

Everybody knew those loansharks were evil.

But – and this is the point that often is missed – they thrived because they lent money when others said no, and there weren’t that many others anyway. Banks and credit unions had no interest in small dollar, unsecured personal loans. There were no consumer credit vehicles in mass distribution (a la Visa and Mastercard).  Mainly there were relatives and friends and when they said no, borrowers turned to loansharks.

An estimated 10 to 12 million of us want payday loans every year today.

Everybody knows these loans, too, are evil.  

The market continues to thrive however. People need these loans, to feed their families, to keep the lights on, to stop an eviction.

So why aren’t more traditional lenders wading into these waters? Regulators are dragging their feet in enabling small dollar loans and many institutions just don’t like the smell of them, said Pew.  “Because regulators have not yet issued guidance for how banks and credit unions should offer small-dollar installment loans, or granted specific regulatory approvals for offering a high volume of such loans, these programs have not achieved a scale to rival the 100 million or so payday loans issued annually.”

The Center for Responsible Lending has campaigned to cap interest rates on small dollar loans at 36% – enough, said CRL, for a smart institution to make some money but not so much as to bury the borrower in a spiral of indebtedness.  According to CRL, 15 states plus the District of Columbia have enacted caps of 36% or less.

Payday loans to members of the military already are capped at 36% APR.

What needs to happen to get more credit unions making small dollar, personal loans? Said Pew: “banks and credit unions will need to develop small-loan products, and their primary regulators—the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board of Governors, the Federal Deposit Insurance Corp. (FDIC), and the National Credit Union Administration (NCUA)—will need to approve the products.”

The NCUA has given a green light of sorts to credit unions to proceed, cautiously: “NCUA is aware that an increasing number of FCUs are interested in establishing short- term loan programs that are more advantageous to their members than programs available from traditional payday lenders and pawn shops. NCUA believes a well-run loan program can be an opportunity for an FCU to improve the lives of its members by providing low cost, small loans.”

Just offering such loans isn’t enough. Pew stressed that credit unions would have to get the word out that they in fact offer low interest payday loans.  Just as cucially, noted Pew, “banks and credit unions would need to compete with nonbank lenders on speed, likelihood of approval, and ease of application.”

Pew did note that credit unions entering payday lending could do so with a lot of advantages: “banks and credit unions would also enter the market with large comparative advantages over nonbank lenders, with their lower costs of doing business allowing them to offer loans profitably to many of the same borrowers at prices six times lower than those of payday and other similar lenders.”

Note: Pew, in its report, persuasively argues that credit unions have enormous cost advantages when it comes to issuing payday loans versus a standalone paycheck loan operator.  That can translate into much lower – but still profitable – interest rates.

Pew added: “The average payday loan customer borrows $375 over five months of the year and pays $520 in fees, while banks and credit unions could profitably offer that same $375 over five months for less than $100.”

A key to doing this profitably, said Pew, is to embrace automation: “The cost of manually processing applications is too high to offer small loans at scale. So, to keep the cost of origination low—and to compete with nonbank lenders on speed and ease—banks and credit unions will need to largely automate the lending process, including determining eligibility, establishing the maximum loan size, processing applications, and disbursing funds.”

What about provisions for losses? According to Pew, in pilots, charge offs have been comparatively few.  

A bottomline: many Americans want credit unions to make payday loans and they are willing to pay for them.  The regulators, admittedly slowly, have signaled support for cautious entry into payday lending. Smart, community focused credit unions will take the cue and get out the word that they are there to make loans to the very needy.

That’s a win in terms of community relations, it’s a win for the borrowers, and – according to the Pew and CRL data – it’s a win for the credit unions.