Last week the Federal Reserve voted nearly unanimously to raise the key interest rate by a quarter percent for the second time in 3 months. The recent increases are part of a rate increase strategy which Fed Chair Janet Yellen says will continue into 2018.
Many see this as a sign that the economy has finally fully recovered from the great recession and is now able to sustain increases to bring rates back in line to a healthy level. “The simple message is the economy is doing well” said Yellen, speaking to the public. The rate increases are largely targeted to sustaining a manageable level of inflation. But, after 8 years, it’s clear rates couldn’t be sustained so low forever. Rate hikes were well overdue.
So the question posed is this, with rates on a sustained upward trajectory is loan recapture dead? If we are talking about the opportunity to recapture fixed rate loan products then possibly. It’s a difficult sell to recapture an auto loan financed with a competitor at 2.74% when your new base rate has increased to 3.74% or higher. I’m not sure from the credit unions position this is the approach they want to take either. But don’t throw your arms in the air and walk away from recapture just yet.
In any market there is opportunity to be had when you know where to look for it, and when you are positioned to capture it. In an increasing rate market yes, the fixed rate options are probably going to be few and far between, but how about the variable rate products?
Next month every consumer with a variable rate loan will get a .25% rate hike, the second in 3 months with another 4 to 5 scheduled over the next 2 years. By the end of 2018 variable rates could increase as much as 1.75%. For an individual with $10,000 in credit card debt they can plan to pay nearly 10% more annually in interest than they have over the past 8 years. Do your credit union members know this? And is it time to help them restructure their debt to avoid these increases?
According to Nerd Wallet’s *Household Debt Study, at the end of 2016 the average US household owed just under $17,000 in credit card debt. This equates to about $2,400 per person. How much credit card debt do your members have with other institutions? And what percentage of that opportunity could your credit union recapture with marketing and outbound initiatives?
Credit card debt is only one example of the variable rate recapture opportunities. The other variable rate products out there such as home equity lines, student loans, and business lines are also poised to be recaptured. Those credit unions prepared with fixed rate and fixed term programs to restructure this debt will have an offer that not many members will be able to pass up.
In 2008, when the recession hit and rates dropped by 5% many credit unions were not prepared to take advantage of the significant recapture opportunity. They did not have the strategy in place and their employees hadn’t been trained to have those discussions with their members. As a result these credit unions missed a key lending channel which would have provided loan growth opportunity during the lean years that followed. I am not saying this market will be as abundant and I am not projecting significant loan downturns ahead, but it is a recapture market your credit union doesn’t want to miss.
To gear up for the opportunity I suggest, from a sales perspective, a few things.
1: Create a compelling product
Your sales and marketing teams will need products they can promote to recapture the different variable rate loans. For example to recapture credit card debt this could be as simple as offering an extended term signature loan. For the HELOC opportunity this could also be as simple as an enticing 2nd position home equity option. Regardless of the solution, it needs to make sense to the member and be simple for employees to sell.
2: Create a marketing strategy
Start by identify the data and information that will target those members with recapturable loans. Your credit union will see a much higher marketing ROI when specifically target those members who have a need. The data is there for your marketing team and they can use this information to drive members into the branch who have recapturable loans. If you’re not sure where to locate this data or just need some fresh ideas on the resources available to your credit union take a look here.
3: Deliver training to your employees
Credit unions invest in a lot of time on operational training to ensure their employees are able to navigate products, processes and systems. Don’t get me wrong, this training is important. But equally important, and often overlooked is sales training and coaching. Key sales training your employees need to succeed with this specific initiative would include lending product sales training, loan recapture sales training, and outbound/phone sales training.
4: Be in compliance
Most credit unions likely understand the marketing and lending compliance involved in the CAN-SPAM Act and the FCRA. They have generally taken steps to be in compliance, updating membership agreements, sig cards and so forth. And to capture the opportunity with this initiative and others in the future, your credit union needs to reach out through calling initiatives. This will require a review of your TCPA and TSR procedures to ensure you are in compliance. If not, now is the best time to take action to align with the new stipulations.
As Heraclitus so famously said “Change is the only constant in life”. It was true in 500 BC and it is true today. It’s been a long time since we’ve had to deal with rate increases. From a sales perspective we have had it pretty good. But while we say goodbye to low interest rates for a while, we say hello to the potential that can be created in this new market. Those that see the opportunities that change brings and align with the future “new norm” first will have the best chance at capturing it.