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CUs Will Feel the Decline of the Middle Class

January 2018: Vol. 41 No 1
Bill Vogeney 
You’ll need a two-pronged response.
Average family with two kids sitting on bench outdoors

Earlier this year, I read some commentary about President Trump’s promise to bring back manufacturing jobs to the U.S. The analyst’s comments were something like, “Well, that’s all fine and dandy for the next few years, but in the long term, the bots are coming.” More recently, an analyst contemplating the impact of a self-driving semi-trucks speculated that 800,000 jobs in trucking could eventually disappear as well. It’s inevitable that advances in technology will displace a tremendous number of workers and replace their jobs with a smaller number of potentially higher-paying, high-tech jobs. While there have been thousands of articles written on the subject, this is one of my favorites, even though it’s now four years old.
 
The problem for credit unions is that our “sweet spot” in terms of membership is decidedly middle-class consumers. Does a shrinking middle class mean our future business will shrink too? Future strategies have to include a dual approach to this changing economic landscape, or we’ll be left in the dust. First, credit unions need to address the following issues, so they can best serve the displaced middle class:

  1. How can we improve the reach of our financial education initiatives? The middle class is going to need to save more money than ever: a) to be able to eventually retire and pay for future health care needs, and b) to be able to survive a prolonged period of unemployment. My dad was a welder, and when he was working, he made a great income. The problem is that he typically spent every dime of it, so his periods of unemployment, especially during a recession, were painful for the family.
  2. Are we willing to make the tough decisions to support your members’ financial health? I mean loan decisions. Yes, Joe Brown has a decent FICO score and can, on a wing and a prayer, afford a $50,000 truck loan. Someone else will make the loan if you don’t, but the right thing to do is counsel Joe: Encourage him to borrow $40,000 and take the difference in payment and put it in savings. Are you willing to potentially lose that loan by giving Joe the advice he needs?
  3. How can we make it easy—and fun—to save? Quite honestly, none of our members is going to be able to afford to retire by putting money into savings with a .10 percent dividend. The savings account should be for a contingency fund, and retirement funds need to go into the market. We have to be able to build our investment services products and have the sales/referral model to make it happen.
  4. Along with using big data to find members who are ready for their next loan, we need to find those members who have the capacity to save and aren’t doing so. The financial payback of this initiative won’t show on our income statement, yet it certainly will benefit the member. Return on marketing investment has to include the member’s return.
  5. Finally, we have to develop programs to help adults continue their education, so they are less likely to be underemployed in the long term. Solid advice is also part of the equation. Look at the issue of consumers with oppressive student loan debt after being sucked into some of these for-profit trade schools. The schools can’t deliver a job with income sufficient to service the student loan debt.  

Second, credit unions must get better at appealing to the upper-middle class and highly tech-savvy workers who will benefit from the technology explosion. 

  1. These tech-savvy members will likely also have some big-time student loan debt. What can you do to help them consolidate it and get it paid off more quickly? 
  2. How will this debt impact their ability to buy homes? These workers may be more geographically mobile than ever. Will a 30-year, fixed-rate mortgage fit their needs? Probably not, so offering variable rate options will be critical.
  3. They’ll be more likely to live in an urban environment, so will a car loan be in their future? If not, what are the implications for your balance sheet?
  4. Even more importantly, can you reach the parents of these future workers when they’re teenagers and the family is planning for college expenses? We’re starting to see an emphasis on pre-college planning and real-world advice. Not every student needs to go to a private, out-of-state college right out of high school. For financial reasons, my only choice almost 40 years ago was a local community college for two years combined with a full-time job. Two more years at an in-state, four-year university—with minimal help from my parents and an almost full-time job—left me $2,500 in student loan debt at graduation with a $13,000 starting salary in 1983. I’d hazard a guess that most college students today, and their families, would love that kind of debt-to-income ratio when they graduate.

If your credit union hasn’t started addressing these issues, you’re behind the wave of change. It’s never too late to start. Do it today.

CUES member Bill Vogeney is chief revenue officer for $5 billion Ent, Colorado Springs, Colo.