One Credit Union's Contrarian Approach to Commercial Banking

Cheryl Brown

The Purposeful Banker welcomes back Stacy Armijo from Amplify Credit Union to talk about the credit union’s unique approach to customer experience, non-interest income, and commercial banking.

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Transcript

Jim Young

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 your host, Jim Young, senior content strategist at Q2. Welcome to the show.

Today I'm joined by Stacy Armijo, chief experience officer for Amplify Credit Union based in Austin. Last year at the annual Q2 Excellence Awards, Amplify was honored as Credit Union of the Year. We love Amplify's story, particularly how they approach serving their members and their community. You can find a written version of their story in the Q2 Resource Center at hub.q2.com, and we'll have a link to that in our show notes. But we also wanted to let our listeners hear it straight from the source. And that's Stacy. Stacy, welcome back to the show.

Stacy Armijo

Thank you, Jim.

Jim Young

So why don't we start by having you tell our listeners a little bit about your own personal journey to this point. Because a lot of … and I've been surprised by this on the podcast … a lot of the people we have on here didn't begin their careers in banking. You were in, I think, media communications.

Stacy Armijo

I was. I was in marketing and public relations for the entirety of my career before I became the chief experience officer at Amplify. And I assure you there was no career plan anywhere that said stop being a marketer and start being a banker. That definitely didn't exist, but I have really enjoyed it. So my responsibilities in the role I have now are multifaceted. They include marketing and public relations as well as social impact. So that's really where my passion is, is around how what we do can have ultimately a community impact, but also includes retail. So for us, that's our branches, contact center, and wealth management. It includes payments, so all the money movement in and out of the credit union. And then it includes HR and training, what we call talent, so the personnel management throughout the credit union.

So it's kind of a unique mix of what our industry would call front office, back office. And there's a theory behind it, which is combining the teams who make the promises to the customer, the employee, and the community with the people who have to keep them. And so I spend most of my day sort of going between those teams, making sure that we are clear on strategy, that we're communicating effectively, and that the execution is matching the intention. So, ironically, my work as a banker does actually use a lot more of my communication skills than I would've anticipated, as well as many others of course.

Jim Young

So I am sort of curious, though, if when you were approached for this position or applied, like sort of what Amplify's reasoning was for thinking about someone without a banking background for a chief experience officer position?

Stacy Armijo

Well, it's funny you ask because when that conversation took place, I actually argued, I said, "No, you don't need me. You need somebody with at least retail experience, if not banking specifically. You need somebody who's got an MBA in finance." I had this sort of profile in my mind of who I felt like Amplify needed. And my … he's now the CEO Kendall Garrison … he said, "No, I've got all that as it relates to the team at large. I need the thing that you do," which is, it took me about six months in the job before I think I really understood exactly what he meant by that. And I think what I have come to understand is this industry has a lot of what we consider “conventional wisdom.” Oh, there's the conventional wisdom of how this, that, and the other thing works.

And so when I came into the role not having this background, and one of my strengths and sort of postures in the world is around curiosity, I was like, OK, well I'm going to figure this out. This is a new industry. It's exciting. And so I ask a lot of questions of, OK, well, so here's the challenge that we're working on and how are we approaching it and why are we approaching it that way? And they say, OK, well we're doing this. OK, why are we doing that? Well, this happens when you have that activity. OK, is that what we're seeing in our business? And just by asking that question, these sort of truisms about, well, if somebody starts out and they have an indirect auto loan with you, then you can convert them to a full member in the credit union parlance, for example. Can you? Is that what we see?

And when you just start to ask that next question about are we really seeing that behavior play out the way that the industry has long said it will, often the answer was no. And because I had a lot of naivete, is what I would say, then we went and found some answers that other people would've assumed we had answers to, and it brought us to some new ideas. So I think that was what I realized is what I was able to bring because I was paired with people who had a lot of industry experience.
So what I wouldn't suggest to anybody is, oh, the industry experience in this area, it's not important, it's not relevant and what we need is just all fresh brand new ideas, throw out everything that came before and just do something brand new. I absolutely do not recommend that. I don't think that is a good strategy. But if you can pair some sort of fresh thinking and experience outside the banking industry with people who have deep knowledge of how complex and challenging the industry can be, but also a willingness to try something new so long as what they say is, well, here's what we've done before. It taught us X, Y, and Z and so next we should … So long as your historical performance is understood in context and informative to what should happen next, having somebody in an organization for decades doesn't mean they're complacent, nor does having somebody come from the outside mean that they have fresh ideas that are actually going to work. Either one of those could really be not true. So that's what I found.

Jim Young

Yeah, and that highlights, I think, one of the things I find really interesting about Amplify, I think it's honestly a big reason why you guys are really thoughtful in your approach to a lot of this, including just a little behind the scenes. We had the background sort of conversation at the beginning where I was being very careful and I said, "Hey, how are we going to refer to the big dreaded … is it going to be member or are we talking customer here?" And you actually had thought about that one as well. Can you kind of explain that from Amplify's point of view?

Stacy Armijo

Absolutely. So in the credit union industry, the term “member” is the one that is used. And I know a lot of credit unioners feel very strongly about always member never customer. And my philosophy on that is different. So I use the words “member” and “customer” interchangeably, and I tend to lean toward customer. And the reason that I lean that direction is because it is easy to take a member for granted. When you call somebody a member, you are implying that they made a conscious decision to join a collection of other people around something that is an important affinity to them. And they are going to be loyal in a certain way. Not that you had the best rate on a mortgage product. And so they opened your mortgage product because you had the best rate at the time that they needed a mortgage. And the reality is that latter example is way more common than the former example.
And as an organization, the reason I want to lean into that is you have to earn a customer every day. You can take a member for granted, but a customer can make a brand new decision anytime that they want. And so we need to acknowledge that the people we serve are choosing us today and they can un-choose us just as fast tomorrow. And so we need to earn their loyalty every day. And if we think of them as customers that behave in the ways that customers do, I think we're more inclined to deliver the experiences that will actually earn their loyalty.

Jim Young

All right. You got me convinced on that one. I'm curious if that sort of thinking is what sort of played a role in your no-fees approach that we again highlighted in that success story. And it seems a little bit, again, is contrarian the right word? Maybe counterintuitive. When I saw, I was like, I literally started reading and I was like, wait, what? So can you explain sort of what you guys did and again, your thought process to get there?

Stacy Armijo

Absolutely. Contrarian is the perfect word. We actually, we use that word a lot. In fact, our CEO has sort of a phrase that he says often, "We're going to fix what's wrong with banking or we're going to die trying." And there's a lot of things that are wrong with banking. So one of the things that's wrong with banking is fees. So just kind of unpacking how did we get there. It started as the same challenge everybody faces: we need more core deposits. Right. Nobody can have enough checking and savings accounts that are going to fund their loan operations as profitably as possible. So an age-old problem that everybody's trying to solve and what we know is that's one of the hardest things in the world, to get somebody to change their checking and savings accounts.

When I actually took this job, people would say, "Oh, you're working for a credit union now. Oh, that's cool. Man, I hate my bank. It's really annoying that, ma, ma, ma, ma," whatever their issue was. And I said, "Oh, that's too bad. How long have you been with them?" "20 years." "How long have you hated them?" "19." So it's an industry where your customer can really avidly dislike your product and remain your customer. And so that is an interesting place to be. So we were thinking, well, what actually gets somebody to change? We did some research, and the research told us there are two things. There are rewards and there are fees. We decided not to play the rewards game because we felt like that it's an arms race. Right? The minute somebody has a reward richer than yours on a dividend or a cash back reward or any of those things, and so we didn't feel like that was going to be a sustainable enduring value driver.

And so we looked at the fee side and, for us, the types of fees that we're talking about, so these are the account service fees that are on all deposit products. For our total revenue picture, that represented about 4% of our income, whereas an organization typically of our size, that would be more like 25% usually. And so it's interesting, that was always considered a “weakness” of our business model, that we didn't have more non-interest income, is the word that the industry would use. And we decided, well, let's turn that weakness into a competitive advantage and let's just get rid of all of them. And now we're the only institution who is the one that is doing that.

And in fact, so that was two and a half years ago, we've been trying to lose this competitive advantage since then. And the reason we have is because what we learned, so we started with, well, if we get rid of fees, maybe we'll get more checking and savings accounts. Spoiler alert, we did. But also over the course of the diligence process of deciding, OK, can we do that? Is it actually feasible from a financial point of view? This is a, I'm telling the story in a few seconds. This was an 18-month process. So,-

Jim Young

I can imagine.

Stacy Armijo

Let's not underplay the work that went into that. What we learned is who pays fees. It is not the people with money, it's the people who don't have money who pay fees in a financial institution. Because think about the times you pay fees. You pay fees if you can't maintain a certain balance. You pay fees if you overdraft your account. You pay fees if you don't have all of the automated transfers and payments that people who have enough money have the ability to have the confidence they're going to have money so they can take advantage of that automation. So those are all the people who pay fees. And what we decided was that doesn't meet our mission. Our mission is to improve the lives of our members and the strength of our community. And a revenue model that takes money from people who have the least and, let's just play it all the way forward, pays that in interest on deposits to people who have the most, that is how the banking system works. And we said, we think that's wrong.

And so that's really what gave us the courage to continue to follow through on fee-free and to get all the way to the end. But absolutely that is contrarian thinking, right? So we basically said an absolute pillar of how banking works, we're just going to opt out, we're going to not do that. And that means we're going to have to have a really strong business model to drive the income that we need in order to be a successful and viable financial institution while doing that.

So our bets were twofold. One is if we do this, we'll get more checking and savings accounts. We did. Also, we're a strong mortgage lender. That's the primary type of lending that we do, as well as commercial lending to the extent that credit unions are permitted. And we actually sell participations in those loans to other financial institutions. And then we earn income for servicing those loans. So the member remains an Amplify member and they get their service from Amplify. A loan investor gets 90% of that loan and they get 90% of the income that comes with it. And then we get servicing income. So what we've done is we've taken non-interest income that was on the backs of people who have the least, and we moved it to value-driven income that is from financial institutions who are making money because we're making good loans. So that's kind of how we think about it.

Jim Young

OK, good. And you help me out a little bit because I honestly was getting a little tightness in my chest when you were sort of talking about just completely eliminating non-interest income and everything we've talked about.

Stacy Armijo

No. No.

Jim Young

And that was like, but non-interest income is the holy grail right now. Yeah. OK. You navigated that beautifully. I want to see if you can navigate this one here. You mentioned actually in the previous appearance on The Purposeful Banker about one of the big mistakes FIs can make is trying to be all things to all people. We're going to have every product and everything for every potential solution. And I want to put that sort of into what was the thought process for you guys going into the commercial landscape. What you've described here so far is super warm and fuzzy to me from a retail customer and small business owner point of view, but commercial is a different animal. So I wonder if you could kind of talk through again how you guys were, the thought process in going into that area.

Stacy Armijo

So what motivated … it was actually a really similar exercise … and what initially motivated us to go into commercial banking is if you want deposits at scale, you're going to find them in businesses more than you're going to find them in consumers. So that's not new information to anyone. Right? But what is new information I think is can we do it fee-free? Because that is unprecedented. I say unprecedented because when I say no fees on the consumer side, it actually usually takes me three conversations to convince someone of what I mean by fee-free. Because it's like, "Oh, we're fee-free." They'll say, "Oh, that's cool. Yeah, I don't pay fees at my institution either." I'm like, "No, no, you don't have to maintain any balance. You don't have to have any transaction limits or caps. There's no overdraft fees. You can still have all the same services. You can send a wire, you just don't have to pay for it. You can overdraft your accounts to the same limits you always could. You just no longer have to pay for that,” etc.

And then they'd say, "Oh, well that's interesting," but our industry has talked about “free checking” for so long, free checking that is not free, but it is, so long as you never ever use your checking account and you maintain a really high balance, it can be free. Besides that, if you were outside of any of those boundaries, not free checking. So, but commercial on the other side, when you talk about fee-free commercial banking services, immediately you get a response that is like, wait, what? Really?

Jim Young

Right.

Stacy Armijo

Are you serious? Because business owners and executives—so this is CFOs, controllers, accountants, etc., that are running the numbers behind the scenes of growing businesses. They are very familiar with how much they pay in fees, and it is next to impossible to avoid fees entirely. And it can be tens of thousands of dollars a month depending on what sorts of accounts that you've got. And so when we come in and say, "Nope, it's really free. Yep, we have all the services that you expect your financial institution to have, we can do all those things and it's really free." You get a, "Oh my gosh, you just blew my mind, and how can we change our accounts to you?"

So we've only been underway with this for a handful of months and the reaction has been enthusiastic. So to the extent where we are having to moderate the amount of new opportunities that we have coming in the door to make sure that we can serve them well. Right? You can only onboard so many new customers at one particular time. And so we've had really strong demand.

Jim Young

You say no fees to a commercial customer, and yeah, your issue then is not how am I going to attract them, but more which ones are right for us and which ones, are we right for them? So how have you guys figured out sort of without giving too much of your secret sauce, like who you're going to target and there's a zillion commercial products out there, what products you're going to offer and sort of where you're going to draw the line on that?

Stacy Armijo

So who we're targeting is the organizations that pay a lot in bank fees right now. So that is, I mean, pretty prime for us. Right? Hey, we've got the same banking services that you need. You just don't have to pay anything for them. More specifically, so we're talking about, I know every institution has sort of different parameters for what they're going to call small market, mid-market, etc. In our world, it's kind of mid-market-ish. So this is an organization that has probably between $5 and $25 million in annual revenue, right around there. From an industry point of view, like any institution, we're not targeting cash-heavy businesses. We actually are looking for the business owners and executives who want the same things in their business banking relationship that they already enjoy in their consumer banking relationship.

Here's what I mean by that. Most people very rarely if ever have to walk into a branch. So they might want to, they might choose to, and there's probably a very small number of things that can only be done in the branch. But for the most part, they don't want to have to do that, and they generally choose not to do that. So our relationship with Q2 is a perfect example of that. I actually looked this up once. If we had to support the quantity of transactions in a physical branch that we support through our online banking channels, it would be something like the equivalent of 17 branches based on our typical branch volume and what we do online. So huge delivery channel, right?
But so many traditional institutions, they've had commercial banking for so long that they've got teams that are invested in having an in-person level of interaction. They've got systems and processes that were built when banking was done in person and in this very manual way.

Again, just like when we went fee-free on the consumer side, where we took something that was considered a weakness of our business model and we turned it into a competitive advantage. We haven't had commercial banking services before. We've had business banking services. So this is banking services for small businesses. So think your consumer accounts plus. Yeah, but they aren't historically fundamentally different services. They're just kind of services for a different type of entity. What's new for us is the treasury management services that a larger business would need, but we've not had them before. And so we have an opportunity to establish processes, systems, and customer expectations in a remote-first world. So business owners and corporate executives don't want to walk into a bank any more than they do in their consumer life. They often do, though, because the institutions that they're working with are so set in those patterns, in those ways. And so they've conditioned their customer that that's the only option that they've got. We have a platform like Q2 and we combine it with the other sources that we have to where we can provide virtual service to our commercial banking clients in the same way that we can to our consumer clients.
That controls our cost so we don't have to build out all of that physical cost. That lets us have an addressable market that is not constrained by our branch footprint. However many branches you've got, if you have all of these in-person components, you can only have an addressable market within proximity to those. So our field of membership is the entire state of Texas. We're capable of serving business owners across the entire state of Texas. And then third, this gives us a reason to want to chase the businesses that don't need loans. So I mentioned that last part because every bank wants to chase the businesses that need loans because commercial lending is the most profitable segment of their balance sheet. And then they require those institutions to bring their deposits. Right?

Jim Young

Right.

Stacy Armijo

So many commercial relationships, they didn't choose a commercial depository, they chose a commercial loan, and then this is who they now have to do their deposits with. And so if you aren't in that world and all you've got is deposits, most of those that have built their commercial banking businesses, they aren't really motivated to serve you. That's not how they're making money, that's not what they want. Our MO is different. So when you think about how on earth can you pay for the cost of commercial banking services and not charge fees, how could that make any sense? Well, it's all about cost of funds. So right now we have sources of funds in borrowings and in non-member CDs. And because we've been in this rising interest rate environment now for 18 to 24 months, the rates on those are painful. And so I'm not looking at how much revenue am I “giving up” from this commercial deposit customer that I've had for a long time, and I've gotten really attached to that non-interest income that comes directly from that customer. What I'm looking at is the couple hundred thousand dollars that you're going to bring us in your operating account is free money for me instead of having to get that couple hundred thousand dollars in the wholesale deposit market. And so now I'm looking at the cost of my operations is, can I earn and keep your deposit over time by giving you a valuable service instead of giving my money away to third-party deposit sources? So again, our MO is different. I get why those who have an established banking service, this doesn't make sense to them, but because we don't and we're trying to solve a different problem than they are, then our economics look different.

Jim Young

Yeah, I can see that. And I would imagine, too, you don't have to, and tell me if I'm reading, you don't have to rejigger incentive structures for your frontline relationship managers, that sort of thing, who in the past, a lot of places are ordered on growth. How many loans can I bring in, basically. Interesting.

Stacy Armijo

Absolutely.

Jim Young

OK.

Stacy Armijo

Yeah. Well, and similarly again, so a constraint to our businesses, as a credit union, we are only permitted to lend 12.25% of our balance sheet or 1.7 times net worth in commercial loans. That's a statutory cap that we can't exceed. So we only get to do a little bit of commercial lending. And so we do and have lent up to the commercial lending cap for many years. So that's already been a well-established part of our business model. And so I don't have to focus all my resources on chasing commercial loans because I'm capped there. So I've got resources, ability, and appetite to just chase the commercial deposits. And so it's a different way of thinking about it.

Jim Young

I am curious though, was there anything when you guys moved into this area that took a little bit of getting used to, I guess, a little bit different in the way that commercial customers think or what they expect?

Stacy Armijo

There was. I mean, certainly this is a different business line. So structurally, the way that we support this, so we have retail. So when we talk about retail, that's really where our deposit gathering resides. And we have our physical branches and we have a virtual branch. And so that's generally where kind of all of that is supported. We have a separate function that is treasury management. We also have a separate function that's payments. We also have a separate function that's risk. Every one of those three have some interplay as it relates to treasury management specifically. So we use the term treasury management, we're talking about the particular services. And so treasury management has its own team that is onboarding new commercial banking customers.

So in some cases, we've got people who have been business banking members with us for a long time, but they've had a limited relationship with us because we haven't had these expanded services. They find out we have these expanded services, we're now transitioning them to become a commercial customer. And so that’s a different way of interacting with them. They have access to a different team. The level of diligence that we do on our relationship with them is different because the level of risk is different. And so it really is, it is a brand new product even though it's still a deposit. And so you have to support it differently, the level of risk that we have to assess and manage, the level of reporting, what needs they have from a payments point of view and how we can support that. So in some cases we're supporting it through our treasury management team directly. And then in other cases, we're adapting existing departments to make sure that they can also support treasury management.

Jim Young

OK. This has been really, really fascinating. I have one more question for you, which would be for listeners out there who are maybe at a smaller community bank or another credit union, and they're considering sort of moving into that commercial field and offering those services for the first time. And you've obviously thought a lot about, sort of, y’all’s thought process, but what would be some advice you would give for someone if, say they approached you at a conference and said, we're thinking about doing this?

Stacy Armijo

My biggest piece of advice would be, how does your revenue stream align with your customer's interest? And I say it that way because nobody woke up today and said, I feel like buying a bank fee. No one said that. It didn't happen. They didn't even say, I want a banking service. So our industry calls it services, right? And they didn't even say that. They said, I'm trying to run my business in an environment where costs are continually increasing, inflation is making it harder for me to run my business. Margins are decreasing. I mean, all the things that we're dealing with inside the banking industry, commercial clients are dealing with in their businesses. Money's not getting any cheaper. No one's ever going to get cheaper money and no one's ever going to want to pay more for money.

So if your business model is still reliant on hoping your customer doesn't notice what they pay in fees … and here's how I know that that's part of it. When we talk to perspective commercial customers, we say, "Go request an account analysis statement from your current financial institution to find out how much you're paying in fees." Because it's so opaque. The attempt to try to not have it be so visible tells us, is that really a value proposition to your customer or do you just hope you can continue to get away with this business model as long as possible? My warning would be we're just the first. Right? We're just the first to do this. But the minute that people realize they have a quality offering that they don't have to pay out of pocket for because the institution that they're working with is actually just doing good old-fashioned banking … What we're actually trying to, so it's ironic, like we're oh so contrarian, and this is new and different and innovative. What we're actually doing is just going back to the time where a bank held your deposits, kept them safe, and then they used those deposits to lend them out and they made money on the difference between the deposits and the loans.

Our industry has gotten so addicted to non-interest income, but that's not value-driven by the customer. The FI is in love with non-interest income. The customer is not. And so the more that the customer has options to get what they need without having to pay for it, the more they're going to. And so when you think about your business model in the long term of your business model, how well prepared is it for that? So I mentioned this sort of trade off in non-interest income of, OK, well we don't have bank fees anymore, but we have loan servicing income that is also non-interest income.

That's the culmination of a 10-year strategy. So it took us 10 years to shift our loan portfolio away from primarily consumer lending—auto loans, think traditional credit union sort of profile—to shift it away from that toward longer, more value-driven assets like mortgages and commercial lending.

And so we can only have a loan servicing income stream because we took 10 years to shift our business model toward something that would give us a value-driven income stream. Similarly, we've been in process on the commercial side for, all in from first idea to launching it a few months ago, it was probably three years. I mean, between really getting serious about it and then operationally, it's been about a year, and now we're able to be live with it. That takes us a really long time to do that. So if you aren't today thinking about which aspects of your revenue stream are not actually driven by consumer preference and figuring out how to slowly shift that to something that is, then you're going to be in a world of hurt.

Jim Young

Alrighty. It's quite the pitch. Quite the pitch you have made on that. Stacy, thank you so much for coming on and talking about Amplify and your really interesting approach to banking in general, but specifically commercial banking.

Stacy Armijo

My pleasure. Thank you for having me.

Jim Young

All right, and that will do it 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 Podcasts, Spotify, Stitcher, iHeartRadio. As always, we'd 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 Jim Young and you've been listening to The Purposeful Banker.