Business Banking Is Relationship Gold for Credit Unions

Cheryl Brown

The Purposeful Banker welcomes Caroline Vahrenkamp from the Filene Research Institute to talk about the business banking opportunity for credit unions, how they can take advantage, and the market impact.

Listen

Transcript

Cheryl Brown

Hi, and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2, where we discuss the big topics on the minds of today's best bankers. I'm Cheryl Brown. Welcome to the show.

Today we have Caroline Vahrenkamp on the show. Caroline is a director of Advisory Services with Filene Research Institute, which is an independent consumer finance think tank dedicated to scientific and thoughtful analysis about issues affecting consumer financial wellness, the future of credit unions, and cooperative finance. Welcome to the show, Caroline.

Caroline Vahrenkamp

Thank you, Cheryl. So good to be here.

Cheryl Brown

We go back a long way. Caroline and I used to work together when she was at Raddon and I was at Fiserv, so it's great to talk to you again. And when we decided to do a podcast around credit unions getting into commercial banking, you were at the top of my list of people who I thought, “We need to talk to Caroline,” because of all of your extensive experience in the credit union industry. So since this is your first time on the show, first off, let's get to know you a little bit better, like how you got to where you are today and your experience in the credit union industry.

Caroline Vahrenkamp

Well, I started in credit unions, oh gosh, 23 years ago when I first started at Raddon, and I didn't know much about credit unions. I grew up in the South, in Tennessee. We didn't really have many. And when I started at Raddon, I started working with credit unions around the country, started doing strategic planning sessions and being a strategic advisor. I'd been a banker in a past life, and then one of the credit unions I did strategic planning for hired me as their CFO. I was a CFO for three years for a credit union in Oregon, and then moved to Indiana and became senior vice president of marketing and member experience for a credit union in Indiana.

I know, finance and marketing seems crazy, but they both kind of focus analytically, right? It's all about being able to look at what works, what doesn't, and being data-driven. And I think you can marry those two together really well. And then I was back at Raddon for a while, head of their consumer research program, and then I've been at Filene for two years and we're doing some really great things at Filene. So it's been really exciting to be part of the industry for however long. It's been a very long time.

Cheryl Brown

So it seems like credit unions, that more credit unions are taking steps to begin offering commercial banking services, especially over the past couple of years with using commercial as a way to drive deposits. So does your research support that, that this is something credit unions are doing?

Caroline Vahrenkamp

Yes, and it's something credit unions have been doing and continue to grow, and it's really been the focus of what they need at a given moment. So when the pandemic happened, there were a lot of credit unions that got into the PPP loan business and used their commercial relationships to try to build those to get the loan volume. And then as soon as everyone needed deposits in the aftermath of the pandemic, then it was like, "Hey, let's talk to small businesses to get those."

But what we've seen is that even though more and more credit unions are doing business banking, credit unions still have a minute sliver of the overall banking business. So it is, well, it's growing and they are trying to, some credit unions are butting up against that cap, the federally imposed cap on business lending. They're still just a small portion of that business market overall, and most credit unions still have plenty of opportunity to grow and build those relationships.

Cheryl Brown

Well, and that leads me to a question about, so when you're talking about banks and credit unions, words matter, vocabulary matters, because there's different nomenclature. For example, credit unions, they have members, they don't have customers. They consider providing service, not necessarily making profit and growing. And so when it comes to commercial, is there a line, a fine line in that definition of commercial, the way that credit unions consider commercial compared to the way banks consider commercial?

Caroline Vahrenkamp

I think so. I think credit unions are far more likely to work with small businesses, small meaning one or two employees, in a sense where a bank might consider a small business something with 100 employees. There's revenue streams where credit unions are really focused on revenue under say, $5 million, where banks may not really touch that group.

And actually I think that's where credit unions have the best opportunity and the best opportunity to grow their business relationships and solve their member age issue. Over a very long period of time, we've talked about credit unions having an age problem, that their members keep getting older while America keeps getting younger. And how do credit unions find relevance with younger members? And I think that small business banking for credit unions represents a way to get both birds with one stone.

Cheryl Brown

Yeah, I mean, I'm sure Filene has done research. I know Raddon did research on this back when we were working together, that this next generation, Generation Z, is a very entrepreneurial generation, and a lot of them—I have Gen Z kids myself, and they're in their 20s now, and it's just a common knowledge that this group will probably not just work one job at a time ever. They'll always have side gigs. They'll always have another iron in the fire. And our credit unions, is that where they're getting their small business relationships? They're mining their member data to see who's doing this?

Caroline Vahrenkamp

No, but they should be. This is my little soapbox is that this is the great opportunity that credit unions have and they haven't been taking advantage of it. We know that 55% of Americans under the age of 40 have a side hustle, which is wild to think about. I've got one. There are other people who have one. It's just a way to sort of make additional money on the side because housing is so expensive and the cost of living is so expensive, and now we're having federal programs cut and it's going to be even harder for people just to make ends meet.

And when you look at the population under 40, 55% is a huge number. It's a huge number. Half of those, 52% of those, rely on that secondary income just to cover basic expenses. So it's not just that they have it to have a little spending money, it's more than half of them are just trying to cover rent and utilities and food, food on the table, and the lights on. They're doing this from e-commerce, they're doing freelancing, they're doing social media, little stores on Etsy, whatever it is. They're trying to find ways to make it work. Maybe they're Uber drivers, maybe they're delivering groceries at Instacart. Whatever they're trying to do, they're trying to find a way to make things happen.

And I think that entrepreneurship is where credit unions can really come in because a lot of these people would love to be able to make that side hustle their main hustle. And if a credit union can step in with loan products and deposit products that can help them take that step, then that's a member for life. That's a member who's going to be connected with you and stay with you and bring all their business, both business and retail business, in a way that is going to get overlooked by banks because they just don't meet the balance threshold or the risk threshold that a bank's going to really take notice of and work with. Whereas for a credit union, it's just an expanded retail relationship. And if they are good at managing consumer relationships, then they should be able to manage these as well.

Cheryl Brown

Well, and what does that expansion entail? What are the key capabilities that these—we call them microbusinesses that size—but what are the key capabilities that these folks need beyond their consumer services that they're receiving from their credit union? What are the must-haves?

Caroline Vahrenkamp

Well, let's think about just some of the basic pieces. When you think about your requirements as a financial institution, how many credit unions require direct deposit and they require direct deposit as a you have to have it every two weeks? Well, if you're running gigs, side hustles, you're not being paid every two weeks on the dot. The traditional ideas of when people are paid, when their life stages happen, what that steady stream of income looks like, it's just very, very different.

And being able to change those and meet those, change your products and experiences to meet those members where they are can really set credit unions apart. Finding ways to help them keep up with what's happening in financial services, have deposit accounts that work for them, do your loan underwriting with the notion that you're not going to expect to see the same standardized income stream that you might have gotten in the past, but the numbers are all going to be there. And maybe there's a way that you structure your loan payments so that they are not expecting a regular monthly cadence, with something that's a little more flexible for the member.

Cheryl Brown

Here at Q2, we talk quite a bit about serving small business, and usually when we're talking about it, we're doing it in that vein of the larger, the small to medium-sized business that you talked about. That's more of in the bank sweet spot. And there are a few things that we talk a lot about. One is that personalized experience, which is I think kind of what you're describing. Figure out how they need to bank and meet them where they are.

But then there's also, when you're a small business, you don't get into that business … If you own a small art store, you want to sell art or your art supplies. You don't do it to bank. Banking's not at the top of your list of things to do. Even running that business beyond banking—payroll—it's not the top of your list of things to do. So we've been encouraging more banks to partner with fintechs and have those capabilities embedded into their digital banking platform. Is that something that credit unions … does that go beyond that microbusiness, or is that really applicable for credit unions as well?

Caroline Vahrenkamp

Absolutely applicable. Absolutely applicable. So many credit unions are worried about scale. They're worried about, I need to be able to offer all of these things to members, and my asset base simply doesn't allow me to do that. It can with partnership, it can with collaboration, and there are great fintechs out there just waiting to help. And so being judicious with choosing your fintech partners is very critical. But yeah, find your opportunities to help take some of the tedium off of your members and offer the best-in-class services through partnerships. Hugely important and valuable.

I always think back to when I was a CFO and I would complain so much about having to deal with health insurance. I'm like, I shouldn't have to pick out health insurance providers. This should not be part of my job. This should not be part of my thing that I have to deal with. Let me deal with accounting, please. There are so many parts of business that take away from the joy of doing the thing that you want to do. And so yeah, if credit unions can help take some of that tedium off of a member's plate, on a small business owner's plate, then that's a huge possibility.

Cheryl Brown

And you point out something that I never really considered until just this moment, and that is that many credit unions are themselves small businesses with maybe three employees total, or there's so many tiny little credit unions out there, that they have a unique perspective that they can really empathize, especially with the microbusinesses.

Caroline Vahrenkamp

Absolutely. And even a decent sized credit union is still far smaller in number of people than some of what we might consider as small businesses or small or midsized businesses. So yeah, there really is a connection of the, I understand how you work because I'm wearing all the hats too, and I'm doing all these things too, and being able to take that personal empathy and sympathy I think could be really a possibility. That's a great point.

Cheryl Brown

So are you guys seeing all sizes of credit unions trying to enter this business banking market? Or is it really relegated to the larger credit unions?

Caroline Vahrenkamp

We're seeing all sizes. We're seeing all sizes being interested and all sizes trying to find ways to make it work. What we're generally finding is that smaller credit unions are really just adapting their retail product mix for DBAs, for just entrepreneurs, single person entrepreneurs, things like that, where they're not offering the analysis banking or analysis checking. They're not offering payroll management, they're not offering merchant card services. But we are seeing all members of credit unions recognize that if you're serving a community, that means not just the people, but the people's passions and the entrepreneurs that are in that community as well.

Cheryl Brown

Right. I mean, I know what I think I would do if I were in a credit union. Where would I find my business customers? I would mine them from my member roles. Is that how they're approaching it or is it more like a let's get the word out, let's promote ourselves in the market?

Caroline Vahrenkamp

It's really more, let's get the word out. A lot of it isn't even much let's get the word out. A lot of it is let's just rely on word of mouth. We aren't seeing credit unions take advantage of the data as much as they should, but that's across the board. Credit unions are really generally pretty terrible about using the data that they have at their fingertips anyway, because a lot of it's just hard to get to and hard to really understand with those transaction data. But if you see a member retail account that has lots of transactions coming in and out, especially coming in, that's a business. Reach out to them, say, "Hey, can we help make this easier for you?"

Cheryl Brown

Absolutely. I always approach small business from the fact that I'm a Girl Scout leader. And it is cookie season.

Caroline Vahrenkamp

Yes, it is.

Cheryl Brown

It is cookie season.

Caroline Vahrenkamp

My closet needs Samosas. I mean Samoas. Samosas are different.

Cheryl Brown

You know what? That is something, people mess that up all the time. And depending on where you are in the country, those are not, they're called Caramel Delights in some areas.

Caroline Vahrenkamp

I know. And that happened to me in Oregon and it freaked me out.

Cheryl Brown

Same cookie, though.

Caroline Vahrenkamp

I know, but it freaked me out. This isn't right.

Cheryl Brown

If you grew up with something different, calling it by a different name is shocking. But during cookies—I have three troops—and so during cookie season, we have a lot of transactions coming in, a lot. And so if you don't already know that we're a nonprofit Girl Scout account, to me that should trigger something at the credit union or at the bank, saying, hey, these folks are doing a lot of transactions. They're small transactions. They're $20, $30 at a time. Or they're coming in and they're making large cash deposits, huge cash deposits, which is something we do less of these days now that Digital Cookie … We're more digital. Even Girl Scouts are in the Digital Age.

Caroline Vahrenkamp

As long as the cookies themselves aren't digital, we're fine.

Cheryl Brown

We'll see what happens in the next 20 years. But I don't know. Who knows? The world is crazy right now. So are there specific niches or industries where they have a competitive advantage, and what strategies would you recommend for them to reach those industries?

Caroline Vahrenkamp

Again, I think it really is that entrepreneur group. I think it really is young entrepreneurs, young side giggers. I think that is a huge space that is currently not being met, needs that are not being met effectively by the banking industry that credit unions could really make waves in. I think it's a huge place of potential. And I think they, again, finding those, mining the data themselves, and then also just marketing that you are there for the side gigger, for the Uber driver, for the Etsy crafter. Find ways to make those connections. It's not going to be, honestly, it's not going to be huge dollars, right?

But there could very well be great balances on the retail side that you can also capture, and what happens when that person makes it big? What happens when that business succeeds? Then you're there and have made a relationship that's going to last, and you've made a relationship with a young person, ideally, who's going to have years and decades with you ideally, to be able to build that relationship as well. So it's there for your retail loan volume, it's there for your mortgage volume, it's there for your equity volume, it's there for your credit card volume. All of those things come from these relationships with young people.

So it's about education, about, hey, let's help you understand what you need to do to be an entrepreneur. You mentioned earlier about health insurance, like what? I don't know anything about this. But taxation is different. Regulations are different. There's a lot of pieces to running a business that they don't teach you anywhere.

I got an MBA and I have no idea how to run a business. You don't learn that in business school. You learn strategies, but you don't learn how to start a company. You don't learn how to file the paperwork. You don't learn how to do a lot of the pieces that come with running a business. So a credit union can really help with that. Help with education, design products and services that make sense, curate that unique set of experiences that meet the needs of those members who have nontraditional paths, retool your products and processes to understand that life in the 2020s is manifestly different than it was 20 years ago. And make it stand out in your community, create a connection in the community to show that you're there helping those people who are, again, trying to make their side gig their main gig.

Cheryl Brown

That's always been credit unions' sweet spot, is that relationship-building. And I know that when you were at Raddon and I was at Fiserv, we did a lot of research around how Gen Z banks, and it was always revealing to me that Gen Z still wants a personal relationship with their financial institution. And it may just look a little bit different. They may not come into the branch the same way that their grandparents came into the branch, but they do still come into the branch for some things and they want a personal relationship with their financial institution.

Caroline Vahrenkamp

It's been one of the hardest things I've had to deal with with credit unions, is trying to get them to understand, especially leaders who have been with credit unions for a very long time, understanding that branches don't exist for transactions, they exist for interactions. Don't ever judge a branch based on the number of transactions that you do. It's a metric that doesn't make any sense anymore. Focus instead on what kind of loan volume are we generating? What kind of deposit volume are we generating? What kind of interactions are we having with members? What's the quality of those interactions like?

Look at the conversations that you're having, conversations about let's help you apply for the mortgage. Let's help you save up for that down payment. Let's help you budget effectively. Those are the conversations that members really crave, and that's where credit unions need to be focusing their efforts. Measure those pieces, not how many checks are tellers cashing or how many deposits are they handling, because that's a meaningless stat now.

Cheryl Brown

So if you are a credit union and you want to build up your business banking portfolio, maybe one way to do it is to invite members in for some of that education and training that they so sorely need when they're trying to either get their microbusiness and turn it into a small business. They're taking those steps to grow that you don't learn anywhere except for by doing. You don't learn by learning. You learn by doing.

And to provide that kind of training, and then imagine how powerful that can be if you then follow that up, well, here is your very customized digital banking experience that's going to meet all these needs that you have. Wow, talk about a member for life. I mean, I would never leave that credit union ever.

Caroline Vahrenkamp

Well, and we finally, we've come up with a name for it, which is a small business boot camp.

Cheryl Brown

Oh, I love it.

Caroline Vahrenkamp

Something that shows the basics of how to run a business, to help you take that dream that you have and make it into a reality. Because again, there's a lot of information out there, but how much information that's out there is true?

Cheryl Brown

Yeah.

Caroline Vahrenkamp

We don't have a sense of what's true anymore. And that sense of trust is gone, and people crave trust. They crave the ability to just know that they can trust someone or something to do what's in their best interest. And sometimes they make bad decisions based on that, but they just feel like they have to trust something. A credit union has trust, and just like a community bank would have trust.

I think being present in your community and being local helps generate that. So use that to your advantage to give them honest, real knowledge and information on how to improve their business. And I think there's a lot of opportunity there that, again, gets that loyalty, gets that business, makes sense both from a, it's doing what's right as well as doing what's right for the balance sheet.

Cheryl Brown

Right. It kind of goes back to the principle that banking was founded on. I always think back of Hank Seale was the founder of Q2, and he was a rancher. His ranch was suffering financial troubles. And so his dad said, "I want you to go work at the bank. I want you to learn everything about banking."

In doing so, he learned how critical banks are to their local communities, and that fed his vision for Q2, which is to provide financial institutions the tools that they need to better serve their communities. And so this conversation gets back to the very tenet of what banking is supposed to be, and that's serving the banking needs of the communities. We want small businesses to succeed because let's face it, America's built on small business. I mean, it's what, 99% of the businesses in America are small businesses, something like that?

So a couple of questions around specific technology capabilities and just tell me what you're seeing. We talk a lot about instant payments. FedNow came out in July 2023 to join RTP as the first new payments rail in 40 years.

Caroline Vahrenkamp

It's crazy. I still cannot believe that it's taken us this long to do it when a place like Kenya has had it for 20 years. I'm sorry.

Cheryl Brown

It is kind of crazy. But one thing that we talk a lot about is the true value of the instant payments ecosystem is not even speed. From a B2B perspective, it's the ability for the payment information—that invoice and the accompanying information—to travel on the rail with the payment, rather than having to be sent separately via email or via postal mail even.

We got a question recently because we just did our State of Commercial Banking report, which talked a little bit about payments modernization and instant payments. And we got a question, are small businesses clamoring for this? And I don't know that they are because I think it's an education thing, right? It's like teaching small businesses the value of positive pay. Well, you're not really going to get it until you get it, and then it's going to hurt.

I just had a conversation in our last pod with Bank of Ann Arbor, talking about positive pay, and that was kind of the point. It's like they educate their customers so that they understand the value of positive pay. I think instant payments is the same way. They're not really going to clamor for it until they truly realize what it can do for their efficiency of their accounts processing business or their accounts receivable and accounts payable business.

Are there any kind of capabilities or tools .. We talked about fintechs, but are there any specific digital capabilities and tools that credit unions need to be listening for and be on the front end of adoption to help their business banking efforts?

Caroline Vahrenkamp

Wow, where to even begin. I mean, honestly, I think that the instant payments and real-time processing is just so life changing. And the other one that's open banking. I look at that as being, we have that in place where there's consistency in APIs and ability for information to go back and forth. It suddenly opens up a world of opportunity and there's a lot of risks because now you're connecting with in real time, able to connect with other financial institutions immediately.

And what role does the credit union have there? If a small business has an account with you and then also has an account with Bank of America and also has an account with Bank of Ann Arbor and also has an account with, and they could move money back and forth at will, where does that put your compliance team? Where does that put your risk team? And also what does that mean for you and the relationship that you have?

And so I think that's where credit unions, and frankly community banks as well, need to stand as being, again, that trusted provider, that trusted relationship holder who can say, "Look, this is my honest opinion of these options that are available to you and how we put that in place." Because we're going to see that it's going to be massive changes.

I think you're going to see more emphasis on mobile banking, mobile card processing, mobile everything, so that everything, your small business should be able to do everything on the phone as they go about their day and about their work. That means payroll processing on the phone. That means make it as easy as possible to do things with as few clicks as possible. Don't require them to have to do anything else that they should be able to do everything on their phone at once.

I think we're going to see more, it's so hard to say now because honestly, there's so much uncertainty that what ... If you asked me these questions six months ago, I would've talked about the pressure of non-interest income that credit unions are facing and the need to expand services to small businesses outside of core banking products—insurance and merchant service processing and other things. And now I don't know that that threat's there anymore. I don't know what the threats are. There could be other threats coming.

And it's just so much uncertainty that it's really hard to say you need to focus on any one area, because that could be, but you also can't focus on everything, obviously. So I would say the big thing is have your providers that, again, you trust, and you have good, strong relationships with, your mobile banking provider, your core system provider, and focus on that relationship piece. Because as things open via open banking and instant FedNow real-time processing, the trust is going to be more important than ever.

Cheryl Brown

Yeah, and again, that's where credit unions in the past have stood strong. So it'll be interesting to see if that continues. I personally think that credit unions have their membership, it's almost like family, right? It's almost like family, which is a very different situation, let's face it, than any other kind of business relationship. You really rely on your bankers. We don't realize how much we do because we're digital now, but we all rely on our bankers so strongly. And if we can trust our credit union, if we can trust our banking system, well, that's something, right?

Caroline Vahrenkamp

Yeah. I mean-

Cheryl Brown

It's something.

Caroline Vahrenkamp

We hope. We hope. It is just really, we're at a very, this decade, I've been in credit unions since the early 2000s. A lot of people have been in and around banking, have been in banking for longer than that. I can never remember a period of time as absolutely fraught as the last five years have been. Everything that could possibly happen has been thrown at us. And then there's more that you can't even imagine. And it's hard to do business as usual when everything is unusual.

Cheryl Brown

That is so true. So true.

Caroline Vahrenkamp

So there's an element of being back to basics, an element of understanding who do you serve. And I would say this is true, again, for community banks as well. Who is your community? Who are you serving? Who are you developing your products for? And if you understand that and you can focus on giving a delightful experience for those people, then you'll get through this far better than someone who has been fighting for scale and trying to do everything for everyone and come away with just being noise in an AI mess.

Cheryl Brown

Right. Well-

Caroline Vahrenkamp

We didn’t even get into AI. My God.

Cheryl Brown

Yeah. That's a whole other can of worms. Well, and maybe you can come back on and we can open that can of worms in a future episode.

Caroline Vahrenkamp

Oh God, no. (laughs)

Cheryl Brown

Well, Caroline, thank you so much for coming on. I enjoyed very much talking with you again. I always enjoy talking about credit unions with you. You have such great insights. So thank you for joining us.

Caroline Vahrenkamp

Thank you, Cheryl. Thank you so much. It's a pleasure to be here.

Cheryl Brown

And that wraps it up for this episode of The Purposeful Banker. If you want to catch more episodes, subscribe to the show wherever you like to listen to podcasts, including Apple, Spotify, Stitcher, and iHeartRadio. As always, we love to hear what you think in the comments, and you can learn more about the company behind the content by visiting Q2.com. Until next time, this is Cheryl Brown and you've been listening to The Purposeful Banker.