Managing Liquidity Constraints at Small Credit Unions Part 3

April 2, 2024

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Episode Summary

On this episode, host Vince Passione is joined by Dee Edie, President and CEO of Pine Bluff Cotton Belt Federal Credit Union; Tanya Romero-Sturgeon, President and CEO of Guadalupe Credit Union; and Tyler Valentine, President and CEO of StagePoint Federal Credit Union, for a 3-part series. In this final episode of the series, they talk about using loan participations to mitigate geographic risk, dealing with fraud, collaborating with fintechs and the importance of the human element in financial services.


Key Takeaways:

(02:37) Dee’s credit union uses participation loans but lacks liquidity to continue.

(07:29) Tanya’s credit union now uses an early fraud detection report to prevent losses.

(09:00) Small credit unions should unite on technology expectations and innovation.

(14:39) If lending happens in an app, funding should still go to credit unions.

(16:44) Members often want human interaction for finances.

(20:25) Credit unions must observe people and adjust to their changing needs. 


Resources Mentioned:

Meridian Link 

Zest AI 

Felix Pago

Pine Bluff Cotton Belt Federal Credit Union

Guadalupe Credit Union

StagePoint Federal Credit Union

In this episode

Episode Transcript

[00:00:00] Vince: Welcome to the final part of a very special panel discussion on 22 minutes and lending.

[00:00:58] Vince: I’m your host, Vince Passione and a reminder of the three credit union leaders we have on with us today. Joining us are Dee Edie, the president and CEO of Pine Bluff Cotton Belt FCU in Pine Bluff, Arkansas. Tanya Romero Sturgeon, the president and CEO of Guadalupe CU in Santa Fe, New Mexico.

[00:01:16] Vince: And Tyler Valentine, the president and CEO of StagePoint FCU in Laramie, Wyoming.

[00:01:21] Vince: So you’re all deep in your communities and your community lenders. And the positive to that is you help your communities, you know, the people you’re lending to. And as I talk to. Other types of financial institutions, they really feel that creates a much better portfolio, but it also creates geographic risk and credit unions have always used loan participations to my knowledge.

[00:01:41] Vince: And you’ll tell me if I’m right to really create geographic diversity as 1 of the goals of a loan participation program. Obviously, the other is to buy participations to get some yield. How many of you are using loan participation programs and why do you use them? If not, why are you not using them?

[00:01:58] Dee: I used that program and I really, appreciate participation now. We’ve had success with it. My problem is that I’m not continuing with it so much. I don’t have the liquidity. I would prefer to have the community credit union too, and I’m not community named. I mean, the CDFI. I would much prefer to put the money in my own community around that. So that is our emphasis. But, to grow loans and to raise that ratio, so to speak, I’ve done it. And I would do it again , if we had the

[00:02:37] Tyler: I agree with D. . But our goal is to lend to our members in our area and make sure they have access to affordable financial services and products and loans specifically. So we’ve just never had the liquidity to be able to be in that space. we’ve actually looked at it on the other side of selling participations, and have those established agreements ready to go in the event that we have continued liquidity pressure that will actually begin to sell.

[00:03:04] Tyler: pieces of our portfolio, into the participation space. I don’t know,

[00:03:08] Vince: If you had the ability to of retention members and then Instantly sell some percentage of your member loans and acquire loans from other credit unions in the geography so that you’re still serving your members, but you’re sort of, you’re distributing the risk. Would you do it?

[00:03:26] Tyler: So, you’re on the East Coast, right? It’s a very different, and I know nothing about ,, what your market is. factors and influences drive, values and default rates and things like that. and I know Wyoming and the mountain west, and it feels actually more to me to do more lending in a closer geography of something that is known rather than to have a portfolio in a market I’m unfamiliar with.

[00:04:02] Vince: Interesting. Right. what if it was a national network of credit unions? So you had broad geographic distribution. And all of the members of that network agreed that they would be selling some portion of their member loans. So think about it, D sitting there and she’s looking at you, Tyler, and saying, you know, your members, D knows hers, Tanya knows hers.

[00:04:25] Vince: If you’re distributed across the United States and each of you were sharing, right, that risk, does that work? Because you’re building the same portfolio over time, aren’t you? I mean, you’re getting to serve your members. you’re distributing the risk, the geographic risk that’s associated with it.

[00:04:42] Vince: And when a single loan goes bad, , you don’t take the entire hit, right? You’re distributing it to the network. It’s like insurance, ? The law of large numbers really loves underwriting.

[00:04:50] Tyler: Yeah, I think it could work. I mean, obviously with parameters, with card rails on the loans that are in the space

[00:04:57] Tyler: and the loans that you’re buying. and if it is distributed across the nation to where you don’t have concentration in any other one geography besides your own, I think that there’s opportunity for that.

[00:05:10] Dee: I do too. I agree with that.

[00:05:12] Tanya: It’s an interesting concept and I would always just have to go back to does it fit our mission and vision and who we’re here to serve? You know, like I said earlier, that’s gotta be our guide in, how we move forward in our credit union.

[00:05:28] Vince: That makes sense. There’s always a great deal of focus on quote unquote, small credit unions. And I promised myself I wasn’t going to say that more than three times during this panel, but the fact remains, right? There are trade associations, all kinds of focus groups. if you take a look at the industry, we all know that 80 percent of what’s in the credit industry is comprised of credit unions that are less than 300 million of assets.

[00:05:51] Vince: So I guess you kind of speak for what the majority of credit unions look like. So what keeps you all up at night?

[00:05:58] Dee: It’s broad, cyber, events kind of thing. I can’t take over. In my opinion, all I can do is what we’re already doing, the best we can do, and a lot of education. We are upping our education to the members to try to help with that. But that’s the kind of thing that gives me pause. Well, we have

[00:06:21] Vince: and from a fraud perspective, what kind of technologies are you looking at the aside from education to, to sort of mitigate some of it,

[00:06:38] Dee: have, you train the staff so thoroughly, and that, you just do everything you possibly can to mitigate it.

[00:06:46] Tanya: I’d have to agree. Fraud has, it’s been tense and some of these losses are just becoming so extreme. We’re having to engage with attorneys a lot more frequently than ever before. The scenarios are becoming more unique as they come, like they’re different, they’re bigger and, something that we did to try and offset the fraud that we’ve been seeing is we started using a, early detection report with Catalyst so they can tell us the next day, the likelihood of a check that we process is going to be returned.

[00:07:24] Tanya: And gives us the opportunity to do some extended hold. That’s something really new, we’ve been implementing in the last, like, almost 60 days now. So I don’t have real numbers of success of it. but it has helped us prevent some losses so far. And check loss just seems to be the biggest hype that we’re seeing.

[00:07:43] Tanya: So many members repeatedly falling for scam and not ready to be open and honest about what they’re going through. so I feel like that’s definitely a concern and keeping me up at night.

[00:07:54] Vince: Tyler,

[00:07:55] Tyler: Yeah, I agree, . We’ve definitely seen an uptick in fraud over the past year in comparison to prior years. It’s really crazy what we’re seeing on the fraud side, so I agree with, Dee and Tanya around that. I think you know, something that, future looking, all credit unions that I think especially small credit unions, really have to come to terms with is around technology and this tech debt that we carry and the core systems that we have to buy in these long-term contracts and the termination fees to get out of these contracts.

[00:08:27] Tyler: And I think we as an industry of the movement. Need to have a really frank conversation amongst ourselves on what our expectation is around technology and this particular when it comes to our core processor and then decide how we together are going to move forward to lower costs, ramp up innovation, make sure that the investment into that core technology.

[00:08:53] Tyler: Benefit to all credit unions, regardless of their size but particularly small credit unions that were really focused on making sure that we’re a player in. the technology kind of the movement or the advancement of technology, the innovation that’s going to happen instead of just having to buy whatever comes out of the box and pay a lot of money for those technologies out of the box.

[00:09:17] Tyler: and then also be beholden to these companies that may or may not have our best interests at heart. We’re either could in some of those cases be just a line item. And I think that we really. second to our people in our deposits, our core is our next largest expense.

[00:09:33] Tyler: So what are we going to do about it? And I think we all, especially small credit unions need to come together and move forward as one with one voice,and do a lot more cooperation around technology.

[00:09:47] Vince: you know, I think based on the prep, we probably could have an episode for just on course. So we won’t go there yet. But you talk about tech, fintechs and collaborating with fintechs. It seems that, , the regulator, I was really fascinated to see, right? Your prudential regulator, the NCOA, community banks, prudential regulator, they have office hours, embracing fintech, innovation changes to the regulatory environment to foster innovation.

[00:10:11] Vince: So how are you all working with fintechs? As far as, you know, how do you choose who you’re working with? Do you collaborate with other credit unions? Because , there are , awful lot of companies that are being started right now.

[00:10:23] Vince: You know, the venture world has funded and really seized upon this financial technology trend. So thoughts on Fintech, Tonya, you’re working with anyone special concerns. How do you work with them? How do you choose them?


[00:11:15] Tanya: usually we choose who we work with based off of, well, what products or services we’re needing. sometimes our core can, pitch to us something, for example. We just started working with Felix Pago, to do money remittances through our mobile app. And we decided to work with them because they built an integration with our core who runs our mobile app.

[00:11:40] Tanya: It was a great way, to serve our specific demographic, for a low cost service that was out there. And so it was a good advantage for us. to do that. , we rolled that out just now in January and we’ve had some good feedback from it so far. So it’s really new.but it’s been, a great partnership.

[00:12:02] Tanya: And so I’m not opposed to them. It just depends on. How they operate, you know, do we have similar goals in mind? And again,does it fit our mission?

[00:12:12] Vince: Tyler partnerships that you have.

[00:12:16] Tyler: I, on the lending side we work with, Meridian Link. We’re in tox with s ai, things like that to ensure that we’re getting as much automation as possible within those, loan decisioning. That it’s as broad and as and inclusive as possible, and as easy and quick response as possible. Back to the dealers, I think that.

[00:12:38] Tyler: You know, on the account side, we’ve been for years in discussions with a company called ASA and ASA. and that is what they do is they’re building a platform, basically a Syntech platform. and so through the API from the core, it will connect into the platform. And then any of the Syntex that are on that platform, our members can connect. And I think that’s an amazing way to be able to offer a wide range of FinType to our membership. in a secure way, their PII isn’t getting past that syntax. We each become the holder and maintain the holder of that. and so I think that there’s some real opportunity for that long term. Our core isn’t quite there in terms of being able to give us a fully functional API.

[00:13:25] Tyler: And so that’s been a limiting factor for us to be able to fully participate with them. In that space, but I do think that there’s a lot of opportunity there on the lending side. I think we’re going to continue to see people getting approved through, you know, apps and things like that. And hopefully we can be in that space to where that even if it’s happening.

[00:13:45] Tyler: If the entire transaction one day happens exclusively in an ad, we still get the funding, right? It still flows back to the credit unit. That’s our goal in terms of making sure that we’re at the leading edge or at least as close as we can be to the front lines of fintech and making sure, as Tanya said, it meets our mission and vision and values.

[00:14:06] Tyler: and there’s going to be starts and stops, right? There’s going to be upstarts who are going to jump into things and then that company may go away and we’re going to have to bid it. I think that’s going to be somewhat the nature of continuing to collaborate with FinTech. I think we all here, as I see the nods, acknowledge we’re going to have to collaborate.

[00:14:26] Tyler: We can’t have this as the thing where we Say that’s not us and we push it off to the side and we just keep doing what we’re we’ve been doing That isn’t gonna work in the long term

[00:14:38] Vince: Now, you touched on AI thoughts on AI. And you touched on Zest AI. There’s Posh AI. That’s a that was recently established and doing more work on things like chatbots and automating customer service. Your thoughts on artificial intelligence, how it’s going to impact the way you do business and how does it shift the competitive landscape around you?

[00:15:01] I think you’ve always got to have the human side to anything we’re doing. It’s even, everything I read on these, surveys and all that. When people really get serious about their financial stuff, a lot of times they want to talk to a person. And so, I think it’s important that we have both available. Utilize everything we can, like Tyler was saying, for cooperation between credit unions because it’s so important that we help each other. And I think we’re missing a lot of that. As our links have gotten bigger, it seems to me that our, cooperation has gotten less.

[00:15:49] Vince: Yeah, a lot to be said for human assisted, right? AI and enhancements. And if you talk to, certainly I just came back from a conference, the major money center banks, that’s where they sit. They are, they’re taking their sort of top tier executives, the CFO of the firm, the CLO of the firm, chief marketing officer, and providing AI tools to make them more productive in their jobs.

[00:16:13] Vince: so to, to your point, , this whole idea of. the AI assisted human and how to enhance their ability to determine fraud, right? Because fraudsters are getting smarter all the time. We get, you know, they have power tools and they are organizing the same way we organize defense.

[00:16:31] Vince: They’re organizing their offense all the time. Tonya, any thoughts on the AI question?

[00:16:37] Tanya: I think there’s definitely a, a place for it in our credit union, to a point, you know, to a level, we’ve barely, chipped at the tip of the iceberg with what it can do for us. I was talking a minute ago about Felix Pago and having money remittances that uses AI. it’s so cool. Like our members can go into their mobile app and hit transfers and say, yeah, I want to send money.

[00:17:02] Tanya: And, what I would do is I’m going to send money to my mom who might live in Mexico, and I can either send it to her bank account or to a place where she can pick up cash. But I’m using AI versus staff. to help me, process that. So when I click on that button, it populates into a WhatsApp, screen, and it just starts talking to me.

[00:17:26] Tanya: And just like an employee would, and it’s like, what can I help you with? Where are you sending money? It asks me all the questions that’s needed and that’s it. I’m done. So I get to do it in like a texting format. And it covers both English and Spanish, so I feel like it’s really advancing when we first started looking at using, like, chatbots and things like that, the language was more choppy than it is now, sometimes even in voice, it’s hard to tell if you’re talking to a person or AI, so I just think as it continues to enhance, as costs continue to decrease, we’ll see more of it in smaller credit unions.

[00:18:02] Vince: So let’s look over the horizon. So lots of change. We talked about technology and clearly members of becoming more tech savvy. We saw a whole bunch of people have to become very tech savvy, during the pandemic.

[00:18:14] Vince: So if you look in your, all their trends or changes in your community, Or your membership. Either because of technology aptitude or changes in demographic or changes in the economy, you see, you’re going to have to somehow make some changes to your strategy and your credit union, the products that you provide as you look out over the horizon over the next five years.

[00:18:39] Tanya: Well, COVID was certainly a lesson for us in how things in our area get impacted. For example, a large portion of our membership , works in a hospitality industry. And when COVID hit and people weren’t traveling and restaurants and hotels and things weren’t being open that had a huge impact on our members, their ability to repay.

[00:19:02] Tanya: And so we had to get really creative in that moment, and figure out what we could do with extensions and financial education and, creative ways to get income. , like we started seeing more people doing, DoorDash services as, supplement income, those type of things, you know, the delivery services.

[00:19:21] Tanya: And so it’s, it was really interesting to see what people do and observe, listen, and adjust based off of what we’re observing and hearing. And I think that strategy just is a good one and no matter what’s hitting us, we have to move quick, and really listen to our membership so that we can. Alter what is needed to serve them appropriately.

[00:19:43] Vince: Yeah, well, look, you all have that benefit, right? You are enmeshed in your community. So changes in the community, you, you react to, right? Just like 20 years ago, doing ITIN lending, it came because there was a reason for it. Or, you know, Dee saying, look, we’re a CDFI and , we pursued it because of the economy and what was happening in Pine Bluff.

[00:20:04] Vince: You know, I think Tyler in the indirect side of it. So I do think it’s community , focused lenders. That’s the advantage you have is you have your finger on the pulse of what’s happening in your communities. And, you know, I go to these conferences sometimes and you kind of hear that, , the industry is going to bifurcate the fed just wants a bunch of very large major money center banks that they can control.

[00:20:24] Vince: The economy through and everybody in between, they’ll regulate out of existence. And then what it leaves is this huge sort of financial desert that we hear about, right? Where community lenders like yourselves make all the difference. and you can be fleet of foot and you can be reactive.

[00:20:41] Vince: So, Well, D, Tonya, Tyler, thank you so much for your time with this special series on 22 Minutes in Lending. I found it extremely interesting and I hope our listeners did as well. Speaking of our listeners, remember to hit the subscribe button so you can enjoy future episodes and I’ll meet you right here back for the next 22 Minutes in Lending.