Credit Unions on the Leading Edge

When it comes to serving members, credit unions deserve credit.

By Anthony Birritteri, Editor-in-Chief On Jul 11, 2016

When talking to the leaders of a handful of New Jersey credit unions, one gets a strong sense that these institutions, which number 176 in the state, are definitely member driven. Of course, that is how credit unions are structured.

They are not-for-profit, member-owned financial cooperatives – either state or federally chartered – that provide financial services to their respective fields of membership. These fields of membership can include employer groups (many companies sponsor their own credit unions), labor unions, academic institutions, places of worship or geographic areas (municipalities, for example).

The credit union movement traces its roots to Southern Germany, when, in 1849, Friedrich Raiffeisen started a credit union society, leading to the opening of the first credit union in 1864. The first credit union in the US opened in 1909 in New Hampshire. The movement spread quickly in the US and, in 1921, the Credit Union National Extension Bureau was established to work towards establishing credit union laws in all states and at the federal level. In 1934, President Franklin D. Roosevelt signed the FCU Act, which authorized federally chartered credit unions. Throughout the following decades, credit unions were allowed to offer more services and become more flexible in accepting members. Today, there are more than 7,270 credit unions in the US.

It is a long history, but credit unions are not relics of the past. Because they are usually small in staff size compared to larger banks, they are flexible and quick to adapt to the latest technologies, and today, that means online and wireless offerings.

According to Linda McFadden, president and CEO of XCEL Federal Credit Union, for the segment of the general population that doesn’t deal with a credit union, there may be a perception that one can get newer services with larger banks, but the people who deal with credit unions quickly discover that they are nimble because they aren’t so big. “I can sit down with our senior management team and look at innovative technologies and say, ‘Let’s give it a try.’ We don’t have layers of management to go through … that would take months of analyzing something, crunching the numbers and going through the approval process,” she says.

With 37 years of experience in the credit union industry, McFadden says the move to online and wireless services is the biggest change the industry has seen because it is being rapdily adopted. “While ATMs, when first introduced in the 1970s, took about 10 to 15 years to be truly adopted, when we roll something out today, like remote deposit capture, people use it immediately. It’s not just the younger generation, but middle-aged people who are curious and savvy. … We are in a gadget-happy society.”

XCEL rolled out remote deposit capture capabilities to its members last year. It already offers a broad range of Internet and mobile banking services, including its own mobile app. Its members have access to 18 of its own ATMs, but like many other credit unions, it belongs to the Co-Op Shared Branching Network, in which members can access some 30,000 ATM machines – surcharge free – at other credit union locations. XCEL’s 20,000 members can also make deposits and withdrawals at other credit unions, as if they were using one of XCEL’s own branches, through the same network.

XCEL’s main office is in Bloomfield, and additional branches are located in Manhattan and Journal Square in Jersey City. The institution has assets of $180 million and deposits of between $175 million to $180 million. Founded 52 years ago by the employees of the Port Authority of New York and New Jersey, it expanded its membership when the National Credit Union Association (NCUA) asked the credit union if it would take over a struggling federal government credit union. Originally based at the World Trade Center, XCEL lost some 50 members on September 11, 2001. Today, 40 percent of its members are Port Authority employees, another 40 percent are federal agency employees and 20 percent are small employers and associations.

Meanwhile, Aspire Federal Credit Union’s dive into online and mobile technology was so robust that it closed seven branches over a two-year period and now operates one single branch at Clark headquarters. Tom J. O’Shea, president and CEO of the 28,000 member institution, comments, “As we looked at where the world was going and the statistics about branches, usage and technology, we thought we were in a good spot to put our resources into remote delivery services. With their smart phones, everybody basically has their branch in their pocket.”

Aspire was founded some 48 years ago as the FAA Eastern Region FCU, initially serving Federal Aviation Administration employees. It expanded its field of membership over the years to be less reliant on one particular industry or company. Today, its members include UPS employees, the Department of Homeland Security, Whole Foods and others. It has just under $200 million in assets and $164 million in deposits.

“Today, we are pretty much location agnostic, and the average age of our members has been decreasing. Most credit unions members are in their late 40s and 50s. Ours are in their late 30s to early 40s. Our younger members are comfortable with the technology we are offering,” he says.

When asked if eliminating the branches and the related overhead costs results in better rates and fees for members, O’Shea says there are two answers to the question: “One is, yes. We try to offer a better value proposition to our members, so we want better loan rates, better deposit rates, and lower fees and charges. Right now, that is a little difficult when there is really no interest rate spread … it is difficult for anybody in this environment to stand out and differentiate themselves with rates and charges.

“The other side of that is we do save a good amount of money, so we reinvest that back into technology and related cybersecurity expenses,” he says. “We have to stay on top of the security and fraud issues that occur when we are more faceless than having typical branch [face-to-face] relationships.”

Like XCEL, Aspire is part of the Co-Op Shared Branching Network.

Concerning cybersecurity, O’Shea says, “We try to stay ahead of the criminal, and that gets down to a big [financial] investment. For example, we use a lot of technologies that help us authenticate someone when they join the credit union. We want to validate who they are. We also have people who spend their day looking at transactions for fraud activity.”

Last year, Aspire invested several hundred thousands of dollars on a new data processing banking system that O’Shea describes as state of the art. “In our quest to become more efficient, save money and become more leading edge, we partnered with two other credit unions in the state to share back office operations. An LLC, called Members Support Services, was created to operate the system. It is a partnership that includes Aspire, United Teletech Financial FCU and the Credit Union of New Jersey.

The Credit Union of New Jersey (CUNJ) is also vigilant when it comes to cybersecurity. The state-chartered Ewing-based institution has 42,000 members to protect throughout Mercer and Burlington counties. Its field of membership includes state employees, city of Trenton employees, Mid-Jersey Chamber of Commerce members, people who live in Ewing, and some 200 employer groups around the state.

Andrew L. Jaeger, president and CEO of CUNJ, explains the credit union’s cybersecurity initiatives: “The first thing we do is go through a very rigorous due diligence process with our Internet provider, ensuring it has the latest and highest level of security measures in place. We engage expert information security advisors to work with our own information security staff to implement and manage security programs, which entails regular testing of our firewalls. We have regular intrusion protection tests. … In many cases, we exceed federal and state requirements to protect sensitive member information.”

CUNJ has $330 million in assets and $305 million in deposits, six branches and 25 ATMs (it also participates in the national co-op network).

This credit union actively promotes its small business lending services, which it began offering in 2006. It entered this arena because it realized that 14 percent of its members were either involved in a small business or had a family member running a small business. “So we had to fill a need that was there,” Jaeger explains. “We also saw this as a way to meet a need for potential members who hadn’t considered the credit union in the past, but perhaps would find us more attractive because of the small business services.”

Candidly, he adds, “We knew there were members using those [lending] services elsewhere, and we thought we could provide these loans at lower costs and with better rates and service.”

Jaeger says CUNJ’s average business loan is $253,000. When asked what the cost and rate differences might be between his institution and a bank, he says, “One of the first things we focus on is the loan origination fee; we tend to price it lower. Elsewhere, the fee can range from .75 to 2 percentage points, while ours typically comes in at .50 percent … that is the average.

“We are also willing to accept a smaller margin on a loan, so we are able to offer a lower interest rate,” he says, adding that is difficult to quote an exact interest rate due to the many factors involved in loan requirements and types of loan.

Traditionally, products and services offered by credit unions are less expensive than what banks offer because of the structure and charter of credit unions. “We are first and foremost not-for-profit financial cooperatives owned by our members and run for the benefit of our members. … For business services, the reason we can offer lower pricing or extremely competitive pricing is because we exist for the benefit of our membership. We are trying to earn enough to ensure fiduciary responsibility and stability while providing the maximum economic benefit to the owners of the organization,” Jaeger explains.

XCEL also offers business loans – up to $400,000, with the average loan between $80,000 to $90,000 – but the credit union doesn’t promote the fact that it does. “We don’t want to advertise small business [lending] and get people outside of our field of membership,” she says. “There is some loyalty involved with membership and we want to retain that loyalty.”

One thing that Jaeger says would help small businesses and credit unions tremendously is the raising of a federally-placed small business lending cap from 12.25 percent of a credit union’s assets to 27.5 percent. “If Congress lifted the cap [there was no cap up until 1998] it would immediately free $16 billion in capital for small businesses and create an additional 150,000 jobs,” he explains.

It is evident that credit unions are more than willing and ready to serve their members. It is how they are structured … it is in their blood. In meeting member needs, they are offering new products and services and are making the technological investments to ensure those products are safe and secure in today’s online and mobile world.

When it comes to credit unions meeting member needs, one must give credit where credit it due.

 

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