As we discussed in Part I, the credit union movement needs to reposition itself. We’ve found a new position, but how do we make a business model out of this position?
For that, let’s look at the shared-value concept presented by Harvard Business School Professor Michael Porter in the March 2011 edition of the Harvard Business Review.
The shared-value concept is based on corporations redefining how they do business. In the past, the goal of most companies was to make a profit.
Porter contends that this won’t be a good enough premise to compete in the global economy. He believes businesses should create a shared value that benefits both society and the company.
“At a very basic level, the competitiveness of a company and the health of the communities around it are closely intertwined. A business needs a successful community, not only to create demand for its products but also to provide critical public assets and a supportive environment. A community needs successful businesses to provide jobs and wealth creation opportunities for its citizens. This interdependence means that public policies that undermine the productivity and competitiveness of businesses are self-defeating, especially in a global economy where facilities and jobs can easily move elsewhere.” (Porter and Kramer, 2011).
This new shared-value business model [pdf] connects credit unions to the community in several few key areas:
- Connecting depositors to lenders through a new product called a peer-secured loan [pdf], resulting in increased community involvement between consumers and local businesses;
- Helping to create successful business through its peer secured loans;
- Offering a holistic approach to personal finance;
- Managing operations locally; and
- Working with local government to increase the creation of small businesses.
The shared-value business model also shifts the credit union business model away from a reliance on fees and back to net interest margin, embracing technology to create improved, member-focused products and increase interaction between members and local businesses.
This business model is based on the current credit union business model of net interest margin. However, it embraces the seventh cooperative principle: Concern for the community.
If the credit union industry can embrace its cooperative business structure fully and truly support the community, it can rely on the net interest margin model to be sustainable.
In addition, the credit union industry is tying its sustainability to the community it serves. This is a core value of cooperatives, and makes logical sense to place credit unions in this space.
One solution for the credit union industry is to create low-balance small business loans that are priced competitively, follow existing loan policies and procedures, have mitigated risk and yet produce a positive net interest margin.
This is the premise of a loan I created called the peer-secured loan [pdf]. This is a loan consumers secure for other people, similar to the peer lending that occurs at the Grameen Bank in India.
The peer-secured loan mitigates risk though the peer-to-peer lending concept that Grameen Bank has shown to be effective. In this model, people collectively select the business they want to secure.
The lending peers work in a committee structure with the business owner and a lending/collections representative from the credit union. This committee meets monthly to ensure the loan payments are made and to provide support and/or financial advice to the business.
The risk is also managed in the loan’s payment structure. The principle of each loan payment is deposited back to the peer lender, so as the loan balance declines, the payback of the original deposit increases. This allows for depositors to see their funds return quickly.
The interest rate the credit union provides is a standard secured loan rate or slightly less, but better than a credit card. The pricing includes paying the peer lenders above-market deposit rates while still allowing the credit union to create enough net interest margin to boost capital.
The loan term is 24 months—an acceptable risk because 70% of small businesses remain solvent for at least 24 months, according to the Small Business Administration.
Once a business successfully repays the loan, it’s eligible for a larger amount. But the term remains 24 months.
The peer-secured business loan will provide financial growth for the credit union, member achievement, and community improvement.
There are advantages for every participant in the peer-secured loan. Those who provide the deposit earn more interest from their investment. The business owner secures needed funds within 48 hours of the peer’s commitment to providing funds and gets valuable financial and business advice from the committee. And the community benefits from the jobs the business creates.
The credit union generates the net interest margin needed to be sustainable and manage expenses without hiring additional staff as this loan can be implemented and processed using existing resources and channels.
It also demonstrates its concern for the community by creating businesses through the creation of small business loans and expanding the tax base.
Next: A holistic approach to personal finance