How Credit Unions Can Differentiate Through Trust-Building

[00:00:00] Brian: our strength, and I’ll speak about Navy Federal, but I believe it is credit union wide strength, is really trust and doing the right thing by the member. That is what differentiates us, right? Anybody can get a credit card, anybody can get a mortgage loan. Anybody can lower a rate. But establishing a trust demonstrated actions over many, many years is hard to replicate.

[00:00:51] Vince: Welcome everyone to 22 Minutes in Lending. I’m your host, Vince Passione. I’m happy to introduce Brian Creagh, Senior Vice President of Credit Card and Education Lending at Navy Federal Credit Union. Brian has spent the last 15 years at Navy Federal, previously heading up all the collections, technology and risk, a topic I certainly hope we get to touch on during this podcast. It’s a pleasure to welcome Brian on today’s show. Let’s get started with this 22 Minutes in Lending. Brian, welcome.

[00:01:15] Brian: well, I’m happy to be here. I’m excited to chat about some ED loans and credit loans. Yeah.

[00:01:20] Vince: That’s great. Well, first off, belated congratulations, this past July, I know you welcomed, U. S. Navy Seaman Braden Galvin as the 13th millionth member.

[00:01:29] Brian: Oh,

[00:01:29] Vince: I’m surprised I’m sure he’s never going to forget.

[00:01:32] Brian: yeah.

[00:01:33] Vince: And I also believe it’s Navy’s 90th year of service, which is pretty fascinating because Navy is not just any credit, right? This is the largest financial cooperative in the world, which putting a perspective for our listeners, right? Size and scale, right? So we’re talking about 13 million members, right? 165 billion in assets, and there’s also a big growth story. The deposits are up about almost 7%, membership is up almost [00:02:00] 10%, loans are up 15 percent year over year, credit card balance is 27 billion, which I was looking at the recent quarterly call reports. And that, I think that’s almost a quarter of all balances across the entire credit union industry, if I’m not mistaken.

[00:02:15] Brian: Oh, wow. Did not know that. yeah, but just to correct you, I’m gonna pull it up, but I think we’re 28 now.

[00:02:21] Vince: ah, there we go. And then a student loan portfolio balances today about a billion dollars. So, so really huge. So not just any credit union, right? The largest financial cooperative. So Brian, so Navy federal began originating education loans back in 2015. That’s how, you know, we certainly met and since that time you originated over 2 billion in them. So what kind of education loans are you currently originating?

[00:02:45] Brian: so we offer in swollen refinance, both fixed and variable rate products and terms are five to 15 years, but I believe. 15 years is just for the Requireds. Five.

[00:02:58] Vince: So Brian, how about we talk a little bit about why education lending, right? This is a big contested when we talk to different financial institutions, why to offer it. There was a very specific thesis at Navy. Can you talk to our listeners about why?

[00:03:13] Brian: Well, I mean maybe federal in general. listen, we’re here to serve our member needs. and we know with the rising, tuition and federal coverage not meeting that rising tuition, there was need. There was need out there. And our members that wanted to invest in themselves, you know, grow their knowledge, they didn’t have that opportunity and we wanted to offer it to them.

[00:03:33] Vince: it seemed like a good fit, back to serving our member needs. Now it is a product. And I remember back in the day, right, that when you looked at it, this was a product that could help you get multi-generational. It was part of the thesis. Have you gotten back to test the thesis and what are you finding

[00:03:48] Brian: well, it definitely skews younger is what you’re saying. And it’s one of the entry level products, right? The ones That can bring our members into Navy federal and engage with them in a deeper way. We have found and we’re doing actually, it’s funny that you mentioned that we’re doing a more in depth analysis, as we speak. but it’s something that we revisit from time to time, but we do find that there’s greater product penetration and. Our other traditional products, as somebody comes in to the educational language entry

[00:04:20] Vince: now? When we look, and I remember when we first started, but the average age of your typical credit union member is about 53 Navy skews much younger, so about 38, I think. Is that right?

[00:04:33] Brian: so we definitely skew younger. . I don’t know the exact number, but we skew younger. We have for quite a while, I guess.

[00:04:39] Vince: now do you think some of that’s tied to education lending? Is there some cause and effect or we don’t know yet?

[00:04:45] Brian: well, it’s funny. I think they’re tied together. but I think kind of the direction of it is. Like I mentioned, we have skewed younger for quite some time, and I think it originates from kind of the active duty membership based on the [00:05:00] listings, right? which are going to skew younger as is, right? But that’s what made it such a natural fit to bring education lending into our lending products. because we do some younger, and this is what our members need in that stage of their life cycle. So. They’re directly connected, but I don’t, I think it was really the military base that really brought that skewing, you know,

[00:05:23] Vince: Brian remind me, but I believe when we started with both in school and refi both at the same time, right? and the need was there for both the in school product and the refinance product and still seeing strong need.

[00:05:37] Brian: well, and in in the refinance space, we’ve had a couple of very strong ones as these payments, start back up for federal loans and the last couple of months, you know, it’s prompting members to really revisit their situation realize that they have an opportunity to. Yeah. They were on the sidelines waiting for a lot of the administration stuff to kind [00:06:00] of work its way through and now that it has and repayments have started. We’ve had , some strong months of leave items.

[00:06:07] Vince: Yeah. So speaking of that, right. So we’ve all been anticipating this, lots of press about it, all the economists warning about these big seismic repercussions about consumer finances and the impact it’s going to have. So I’m going to talk to us a little bit about what did you do to prepare your members for this? Repayment? continuation,

[00:06:27] Brian: Yeah, was a lot of discussion about it. It was our radar for a long time. so a couple of things, but the overall goal was to educate our members so that they understood the options they have both through federal programs as well as with us. so. Reaching out over email channels, having resources available online, like making sense and some FAQs.

[00:06:52] Brian: And we distributed FAQs to our frontline, you know, contact center and branch so that they were able to, appropriately inform the member of their options if they were to walk into a branch or pick up a phone. so it was on our mind for a long time and actually, I’m going to comment on like the narrative, about the seismic kind of impact on it. We took a look at it, as I said, it was, constantly discussed and it was on our mind.

[00:07:18] Brian: We took a look at our membership, we found the position that we’re in and those that were going to be impacted by this. And when you really looked at kind of the DTI income situation, these members, their credit positions. The exposure wasn’t quite as bad as you would see in articles, but I think that’s typical of anything, right? That a lot of the headlines like to you know, exaggerate maybe a little bit, but yeah,

[00:07:40] Vince: well, we also, so look, the average payment was about, I think it’s 300 and 380 or 350, right? Is the average payment on that federal loan that was going tostart kicking in again. So, as you said, right, if you start looking at your customers. Your members and think about their and their debt burdens and understanding their capacity. And now they’re going to have to start making this payment again. Right. You know, if they have the capacity, I think, and I obviously intimate in the research, you can understand. Yeah. Right. Not as bad. and also, there’s so many federal programs now for these folks to get forgiveness. we’ve seen probably about 20 billion of it actually being given already,

[00:08:18] Brian: yeah, I was looking at, I’m curious about the updated numbers. I know, that, that same program was very generous. the updates to it, the eligibility criteria, kind of the, you know, zero payment in certain circumstances. And, I saw 4 million, I think it’s up to 5 and a half. So, yeah. and that’s certainly helping, right? for sure.

[00:08:37] Vince: Yeah, I think the change to the SAVE program, the application process, and then there’s a bunch of different tools. I think that are out there today, like this pay it off that we just launched. I think we’ll definitely help as consumers try to find these kinds of programs. So early days, no red flags yet. it’s only been about a month yet, but no red flags that I’m assuming

[00:08:54] Brian: Yeah. Yeah, that’s true. , I’m very conscious of it, so I actually just had a conversation with my peer and collections because a lot of the early indications are what are these, counselors hearing on the phone in terms of members struggling and what are they saying? And we’re not hearing much about, and it’s not coming through as of yet. But I do credit it, as you mentioned, to some of the federal programs. and the fact that our exposure isn’t quite as. Elevated as

[00:09:17] Vince: now we talked about upsell cross sell and certainly look, that’s the Holy grail, right? When we think about, you know, going out there and selling a product like this, especially early in the life cycle of this particular member. What are some of the strategies about upsell cross sell when you, we are getting someone who’s, obviously they’re going to school, they’re, this is probably one of the first products they get right when we think about in their financial lives, strategies that Navy’s deploying today for upsell cross sell for this particular member.

[00:09:44] Brian: Upsell also, obviously, let me just speak to it at a high level from a developer perspective. we very much look at it more from the unique individual member’s need, right? it isn’t kind of a very rigid program. they have this product, let’s give them this product.

[00:10:05] Brian: You know, Mary says this all the time, our CEO. you know, know me, show me, do it for me. So it’s really we want to understand the member’s situation and get that product that fits with them because getting the right product is the one that’s ultimately going to engage them and keep them coming back to us but mean, if you think about it, some of the younger folks and rushing the typical progression to life cycle. we’re going from, let’s say add loan, credit card, then auto, then, home loan, right? and that, seems to be the way I’m going on these things. so, we’re mindful of it and the thing we’re focusing on very particularly with Ed loans, quite honestly, right now,is , we’re looking at the serialization, right? We want to retain that number through that entirety of college. And we’re focused on retaining them through all their years in college then getting that refinanced after. so that is a lot of our focus, but there are small things around the edges that we’re doing look at credit cards and auto ones.

[00:11:03] Vince: Now makes sense. So as you think forward, challenges, opportunities, obviously we look at tuition, right? Inflation. And tuition go hand in hand, right? These schools are, they’ve got labor costs. They are running a hospitality business. Cost of tuition is back on the rise again. It was sort of flattening out a bit and it was coming down a bit, but now it’s way back up again. I think this year we’ll see it’s probably back up to year over year, five to five and a half percent increase. So it’s not coming down. It’s going to start escalating. But as you think going forward advice to credit unions for providing educational challenges, opportunities, less point on this topic.

[00:11:39] Brian: Yeah, so to break it into 2, right? Refinance, ? You’re going to have some challenges with rising rate environment some of those things, but actually, interesting having you discussed, when you were here for our past quarterly. Some of those variable read books of business from in school that might be coming, that might be coming due where the adjustments were so elevated through that time of rising rates that there might be some opportunity.

[00:12:04] Brian: But really, I think it’s what you’re talking about. . the challenge is you lay them out, right? and the one thing I don’t think you touched on is, enrollment, right? Enrollment continues to drop, But I think to flip that and the opportunity, what we have seen is some of these kind of purpose , purpose-built programs and certifications for different things, on the rise, right? And I think it’s a reaction to some of the rising tuition costs you talked about. So, We’re starting to look at that. We want to see if there’s some opportunity and if there is really member demand and that’s what their need is and see if there’s places we can go with that space.

[00:12:47] Vince: No,it makes a lot of sense, right? a lot of these certificate schools, especially when we look at a tech side. It makes an awful lot of sense in this environment and certainly we have discussed it. Let’s move on to credit cards. so not 27 billion, 28 billion outstanding credit cards. So I appreciate the correction and a lot of credit unions only have sort of one credit card offering, maybe two. But they’re typically a plus paper, but that’s not the way Navy does it, right? You kind of go across the entire sort of spectrum is that right?

[00:13:16] Brian: Yeah, that, that is right. and I think, you know, you’re going to hear probably a few themes. kind of read throughout all these questions in the conversation, but it always comes back to me, right? So, I think we are lucky when you compare it to other credit unions. We are lucky with our size, our reserves, our capital to be able to handle a lot of this. But we see, you know, we skew younger, right? So. print access is a big thing for younger folks as they’re starting out. So, we have a whole suite To kind of serve our members needs as they kind of go through their life cycles with early credit building credit access. You know, middle, maybe you’re getting into a no fee cash card. And then towards the end, where maybe it’s an annual fee travel card. So we have a full suite. We believe that serve our members needs throughout their lives.

[00:14:10] Vince: so when you think about the leading with the card and given the global nature of your client base, It really is about access, isn’t it? When you think about the strategy, as I hear you talk about it, right? I mean, it makes sense, right? That this is a product that for your particular member, ? This is the right lead product. am I paraphrasing correctly?

[00:14:32] Brian: no, that’s right. And it’s back to that beginning part about Our specific member needs. It’s because of our member in that global access. That is for sure the case. and a lot of these product designs,are built with that in mind for things like no foreign transaction fees for some of our military folks that are overseas. So that’s certainly is a large part. Yep.

[00:15:17] Vince: then what’s the process then? So you start with, let’s say that entry level and then how do you deepen the relationship?

[00:15:23] Brian: so a lot of the entry level, we’re going to, you know, pick one channel. Right. we have a credibility bar. That is to really start them on their journey. And a lot of the pieces around the credit-building are education, how to manage that debt responsibly right? and we grow their unsecured access on that card over time as they demonstrate and grow and manage their debt responsibly at that point, we have strategies in which. we see them in kind of their spend behaviors, their life cycle and so on, transitioning and we’ll be proactive

[00:16:00] With a separate unsecured card. with maybe a higher line. That’s a 2 cash back. So, we can up the rewards that they get, grow some of their access to credit. And then it goes beyond that, right. As we talked like auto, home loanbut it’s all geared around knowing our member and what is right for them. You know, going back to the Wells thing, like eight products, right? Shoving eight products. No it is what fits for them in their lifestyle.

[00:16:27] Vince: So now major announcement, right? PSCU and Co op came together. What’s the impact of the industry of all that? I mean, obviously they’ve outsourced a whole bunch of work, right. For credit unions, especially smarter credit unions that don’t have the scale to do what Navy does and it makes sense, right? Given the industry and the size of the industry, there’s been some consolidation, so it makes some sense for them to consolidate a bit. What’s the broad implication of the industry? And then is there any implication of Navy?

[00:16:53] Brian: You know, I’d love to hear your thoughts, Because I think you referenced it, right? it’s something that I am not as intelligent about because , we’re very fortunate to have the size scale reserves to do a lot of this. Well, all of it ourselves. Right. But from what I understand, mergers could just grow the scale coverage of the services available, which ultimately makes the product. A better product that the premiums that utilize the service is not right. so. I assume that it is a a very positive for credit games of smaller scale that went off hard. The only thing is I don’t know the risk management. I know keys of that, right? Because that’s a big piece of credit card, especially for a small credit meeting that can’t, maybe doesn’t have that big reserve pile to handle unexpected losses.

[00:17:48] Vince: No, have stellar reputations. I think putting them together is just a recognition that it’s a sign of the times, right? The cost of technology, especially this next stage of technology, when we think about AI platforms and what it’s going to take to deploy them and train models, I think of what’s happening in payments and real time payments and the rails that are going to be need to put in place to do that. All require, right, some new tech stacks and new innovation. And I think putting these companies together, give them the capacity to continue to innovate because they’ve been innovating from the time they started. Right. You know, the sense of creating a cooperative that can deliver real value across any size credit union is what they were founded on.

[00:18:29] Vince: I think now that there’s been consolidation in the industry from the credit union perspective, it makes a little sense in the world that they came together. but also given what’s happening in technology and this next big turn, it made sense that they’re doing what they’re doing for all the reasons you talk about, right? Because you got to get to that next level of managing risk. And let’s face it, right, the tech is getting much more sophisticated. And that means also the bad guys have access to that.

[00:18:56] Vince: Right. and certainly listening to some of the discussions from the folks involved, I think that was a lot of it, getting that critical mass so they can make the necessary investments to keep innovating. And I think overall, it’s good for the industry.

[00:19:09] Brian: yeah. And that’s fair. And then 100%, you know, the startup capital and the investment for all the technology that’s required by now. .

[00:19:17] Vince: so Navy Federal, about a third of the nation, about 30 percent is eligible to join Navy Federal. But over two thirds of consumers already have a credit card. I think I got all those sort of percentages right. So, how does that affect the way you thread the needle and you think about credit card growth? You know, how you think about the market, is it saturated? where do you market? What’s next? Where do you get your growth from

[00:19:42] Brian: Yeah. good question. And I mean, you know, the numbers. Quite honestly, I don’t know, but I mean, I think with the expansion of veterans, which has been pretty recent for us, and that was, I think what really not too sure of the Senate, but it really grew our eligibility throughout the population. I think that’s the 1st part of my answer right there. There are some newer. Expanded field of membership, spots where we’re not penetrating as much as you want. Now, to your point, I think in terms of how many people have a card, right. and , whether it’s saturated or not, some of those veterans are older, right. And they probably already have an established PFI and maybe a credit card. So , it’s more of a switch, right. Play or a multi card play. And I think that’ll be the other answer is that. We are seeing a larger trend, you know, our members, but larger customers, having more cards in their wall. so that has been encouraging and we’re evaluating that whether or not we want to double down on that strategy, but we’re evaluating it because it comes with some risks. and the last part, which is interesting, which I just heard with some of the younger generations, specifically Gen Z as compared to millennials, they are getting their first hard product earlier than prior generation at the same time. think there’s opportunity out there. For sure, amongst some of those pockets of our membership base,

[00:21:10] Vince: so you touched on that and that’s a big step, right? The credit card debts increase. I think it’s by more than 16%, through the year, ending the Q2. And there’s a lot being written that this is the younger consumer. Now. It also can just be demographically, right? That’s what we can expect because they’re becoming a larger portion of the workforce. Is that right? Is that what’s happening or should we be concerned about this growth? It

[00:21:37] Brian: it’s funny. this is similar to answer I’ve needed before about kind of a tag headline, but if you actually look at the credit card debt over longer timeline. And there was a large drawdown during the pandemic for obvious reasons. and the acceleration has been ramped, but if you draw a line from the prior time frame before pre pandemic, we’re right about at that linear progression, what credit card debt was rising.

[00:22:06] Brian: So while it has been wrapping over the past year, it’s really falling in line with the longer term trend, right? And in terms of the younger generation, and how much they’re a driver of that, I do believe it is a bit more demographics, right? We are seeing more strength among the Gen Z and some of our purchase. behaviors, amongst our portfolio, but it’s a lot of them entering worse, worse, , they’re increased earning power. and she’s more of a demographic than anything else that I’ve seen. Right.

[00:22:37] Vince: makes sense. Collections. You spent a lot of time in collections when I first met you, right? you were managing collections and risk. you have a very specific philosophy and I think it’s the Navy philosophy, right? this is managing, this is a member. Right. you’re helping them with a solution. This is a point in time, but let’s talk about the different ways that you think about collections, right?, so does FICO play a role in how collections are actually managed?

[00:23:04] Brian: So, Michael plays a role,and there are many attributes about a member that play a role in how we. That is the collection of a debt, but more importantly, all of these attributes are just picture of a member and understanding how to work with them. one of those opportunities, we have this division, which is called personal financial management, and it’s unique, I believe, to credit unions, I think, as a whole, certainly every federal, and what it is, is that it’s going beyond just FICO and some of those attributes, it’s actually sitting down and talking to you about your holistic situation. Not just your credit card debt, because an account doesn’t go bad, a member is struggling, right? So let’s talk to that member, understand the full picture of what’s going on, and then we can work with all of the individual accounts that we have within Navy Federal to understand the best way [00:24:00] that, that we’re not just going to kick the can, we’re going to put you on a path to become a More financially secure by looking at you as a home.

[00:24:08] Vince: Yeah. Look,they’re a member for life, right? So this is a stumble along the way.

[00:24:13] Brian: yeah, and we went back on their feet. Yep.

[00:24:16] Vince: Exactly. No, it makes a lot of sense, Brian. and do you see AI playing a role in this? So you feel like. It becomes like, like certainly some of the things that we’ve seen in our shops is, consumers react in some cases better to, oh, SMS. it gives me a little more privacy. I can make a decision very quickly if I want to make a payment, are you seeing things similar, Brian or not?

[00:24:40] Brian: Yeah. So it’s interesting. So, I’ve been in cars and a lot of them for about three years now. Prior to that, as you were talking about, I was with collections for about five or six years. Very early on, and I point that out to say it’s nearly eight years ago, I was looking at an AI solution for text messaging, but it was overseas because, you know, there’s a lot more regulatory hurdles and concerns about stuff in the United States, but their solution was ingenious. Right. It’s just all of the stuff we’re doing with modeling. It’s just trying to understand and honing the best solution for that. I mean, AI is just a better thing for us to get to that point. And in this case, it was very specific texting solution. And it did kind of what you a little bit, what you look to, it would. It would basically set up a whole string of champion challengers about time, language, all of that. And it’s just a constant run where it then learns from itself for individual members and it hones in on best time. The best way and the best messaging in order to get to that dependent variable of whether it’s helping them with their situation or getting a [00:26:00] payment or whatever it is.

[00:26:01] Vince: on which one of yours by now pay later, so explosive growth, right? Major concerns, right? You know, does the consumer really understand as they go from site to site and start making these great payments? There was a great comment that was made by one of the founders of one of these by now pay later companies. He said, you know, credit cards are a great way to pay, but they’re a horrible way to pay back. And, you know, BMPL is a great way to pay and also a great way to pay back. Except. Who the hell remembers, right? All the different things I purchased. And now there’s a bunch of stops being funded to help you pull together, right? All the different BNPL, you know, orders you put in so you can keep track of them. But it up until now, there hasn’t been how much of this is a concern to you that, you know, there’s also concerns that all being reported to the bureaus correctly. So are you seeing this affecting your members and affecting their credit and , impacting their ability to pay?

[00:26:56] Brian: so you touched on it. I mean, my biggest concern is the transparency, right?

[00:27:01] Brian: you alluded to the transparency of the member, just the breadth of what they have taken on, right? And how it’s scattered and it’s not layered together. And maybe that overwhelms though, but for the financial institution, broad credit, we don’t have a transparency into a lot of this, right? Some of the longer term kind of, you know, three months, 12 months margining the buy now pay later, you maybe see, but the vast majority of that chunk of those big boards.

[00:27:30] Brian: We don’t see them and that’s where a lot of reactions happen. so do have a concern now, is it impacting us? Hard to say without the transparency, right? 1 of the reasons that we evaluated it, we wanted to. If it was a really good service for a member who wanted to participate and figure out a way. to offer a chair membership, what we found was that a vast majority of our members. That we saw were participating already through a or an after pay. Already had a card had exhausted their open to buy, and then they go, that is a real concern. So, it’s more about the underwriting and risk management on that side and what they’re doing. Right. so all that to say, we do have concerns, but the biggest thing is transparency. And I really hope there was a push. From the regulators for some of these folks to start employing, and I haven’t seen it happen.

[00:28:27] Vince: Yeah. I think there is, and I also think some of these other companies that are trying to aggregate up all of these, out for the consumer are inadvertently going to be able to do that. Right. cause they’ll be collecting it. Now the consumer is going to see it the same way they see, right. What their open lines are. and I think the consumer is going to start to see it, Cause that’s the challenge. The consumer can’t even self regulate cause they’re losing track. But yeah, interesting. So look, we talked about your untapped markets, certainly veterans big for you. You’re adding about a million members a month, but last question. So where do you see the growth for credit unions over the next sort of three to four years? Where do you see big growth opportunities?  very solid point, Brian. Well, listen, that’s all the time we had. I do appreciate it. This was great. I appreciate you sharing your insights. Thanks for our listeners for tuning in, make sure to subscribe so you can enjoy future episodes and I will meet you back here for our next 22 minutes in lending.