Choosing Survival or Growth during the Current Market Disruption:
Management Lessons Learned from 3 Previous Crises
The Coronavirus pandemic and its economic impact threatens credit unions with a once-in-a-decade (and perhaps once-in-a-generation) market disruption that also provides an unprecedented opportunity for them to grow assets, build brand, evolve digital capabilities, eliminate low value expenses and significantly improve service to their members, during a period when competitors are most likely to be pulling back.
In many respects, the Coronavirus crisis is similar to other unexpected catastrophes – such as the 9/11 terrorist attacks, Super Storm Sandy, and other regional natural disasters. However, the current pandemic will also precipitate significant international economic disruption, similar to the Great Recession.
If the history of past economic disruptions serves as a guide, many credit unions are likely to react to the current crisis in one of the following ways:
Based on my experience as CEO of Bethpage Federal Credit Union during three major market disruptions – including 9/11, Super Storm Sandy and the Great Recession – I know that adoption of any one of those three strategic approaches to the current crisis by a credit union is a recipe for failure. I also know that taking a confident, pro-active approach during a major market disruption can succeed: our team at Bethpage drove annual growth by more than 20% in each of the years following those three historic events.
Here are snapshots of the course of action we followed for each disruption:
The 9/11 Terrorist Attacks – 9/11 was an international event, but it was primarily a New York disaster that affected nearly every family in Bethpage’s membership in some form. Every member knew someone who had perished in the twin towers. Our nation was also facing the prospect of a world war and the significant economic consequences of fear and recession. The Dow Jones Industrial Average dropped by 38%, the Federal Reserve cut rates, and the nation went into recession.
Bethpage reacted by helping members with refinanced mortgages, low rate home equities and auto loans, and by ensuring that each member knew we were there for them. As other institutions pulled back, we stepped up.
We met regularly as a team, acknowledged the personal and economic disruptions, created a realistic assessment of the opportunities, and acted aggressively to address those risks and potential rewards. Bethpage established special programs to help teammates and members, and made a commitment to not back off our plan to grow by 13.5% per year. While many competitors were pulling back during this period, we used capital and invested in growth. By focusing the entire organization on the opportunities to build our mortgage business, and to serve the members, Bethpage not only grew by more than 20%, it created record breaking return on assets.
Super Storm Sandy – This destructive storm caused 75% of Long Island residents to lose power for a week, and some households and business for more than two weeks. There was no gas; grocery stores didn’t have power; and everyone needed money. Bethpage went into full action. Immediately, we identified our teammate needs by booking hotel rooms, to ensure that they had housing. We ordered fuel for generators and set up warming stations for people to stay. We brought up systems for cash options (ATM, debit and credit). We removed loan payment requirements, supported every needy charity, and got our message out in every way we could. Bethpage’s decisive and comprehensive response to this community crisis greatly increased our brand exposure and member loyalty, and also improved our service numbers.
The Great Recession – Bethpage was holding its regular October strategic planning meeting when all hell broke loose in 2008. Financial markets were crashing, interest rates were dropping to record lows, and the public’s fear was rampant. The capital market system was close to collapse, as banking and credit union institutions went bust, and their losses were consuming the insurance funds, which required large payments from the institutions left standing.
At the outset of this crisis, Bethpage applied scenario planning to better understand what might happen in this uncharted territory. This allowed us to focus on what we could accomplish, rather than what we couldn’t. We cut non-essential and non-growth expenses immediately, assured everyone that they had a job, informed our members that we would be there to do whatever was necessary to help them get through the downturn and that they could count on us. Our goal was to let everyone know that we were strong and ready to act.
As interest rates dropped, and as banks were held to task for the turmoil, Bethpage realized that there was immense opportunity. While others stopped marketing, we doubled down. While others saw the challenge of mortgages, we recognized the opportunity of a conservative, employed membership who had less than 50% loan to value mortgages, and record low rates. We changed the competitive landscape on Long Island by being the first to advertise refi mortgage rates, and we stood by them. With unemployment at very high levels nationally, we were willing to bet that interest rates would not go up in the foreseeable future. We created more than $10 million in excess income in the first year of the economic downturn, and grew by nearly 20%, while significantly expanding our brand positioning.
Because Bethpage knew its markets and the opportunities that were specific to New York, we built a billion dollars in commercial lending when liquidly liquidity had dried up in other financial institutions. We believed that New York City would recover, and there would be value in the real estate. In the retail side of the business we created a new HELOC product that no one had previously attempted – 2 years at .99% — which created a billion dollars in lending over the next 3 years.
Our strategy succeeded because the Long Island housing market was not struggling like the rest of the US, and our members were conservative. We knew our members and our community, and we took reasonable bets based on data.
Bethpage grew in good years and bad years, in weak economies and strong ones; doubling its size every 5 years. We created a mind-set of growth, member value and success. We were not paralyzed by crises. We sprang into action each time.
What do past market disruptions have in common with the current virus-related market turbulence, record low interest rates and likely recession? Although the catalysts are different, those past crises can provide valuable lessons for credit unions on what to do, and what not to do.
Very broadly, strategic planning, realistic appraisal of opportunities and threats, combined with decisive action will win the day, and seize the opportunity presented by the current disruption. More specifically, here are some best practices to consider:
Set an aggressive goal that promotes winning, action and focus. These might include ambitious goals of 2X growth, and winning market share. You need a center of gravity to ensure constant action and focus. Choose strategic goals that are outside of your comfort zone.
Conduct regular strategy discussions and performance assessments. During times of historic disruption, new strategies are required. Scenario planning is essential to understand a new world that isn’t definable. It’s critical to clearly identify the credit union’s strengths and weaknesses when facing an unclear future.
Commit to taking urgent action. Meet daily to act on two fronts. First, ask what do we need to do today for the business (such as serve members, keep the team informed, take care of sick teammates, etc.) Secondly, ask what should the CU invest in to create growth and seize opportunities. (This is the important one.)
Take a realistic view of the challenges and opportunities with a mindset towards seizing opportunities. Realistic, financial and data-driven analyses remove the emotion from the challenge. A dashboard should be created to identify the primary strategies and risks. Metrics must be created, and each meeting should begin with an assessment of how the CU is performing towards those goals.
Focus on essential tasks. Stop all busy work, and concentrate on the critical business needs. For example, stop all travel, stop analysis of standard processes, and slow down or halt non-essential projects.
Evaluate expenses of non-essential operations. Non-value-added processes – such as accounting, computer operations, back room lending operations, and perhaps branch offices – and keep a keen eye on loss mitigation. Do not stop or reduce marketing, community investment, training, digital or data investments.
Stop all hiring until you assess business needs. Explore elimination of branches in the near term, and redeploy those people in other areas, such as mortgage operations or call center. Consider use of outside managed services providers, rather than full- or part-time employee.
Conduct data-driven measurements of all areas of the business. Determine what is and what isn’t performing. Review digital service levels, and how you can vastly improve digital lending through RPAs, machine learning, bots, outsourcing, etc.
Find a new product that wows the market. Perhaps it’s a simple mortgage modification that provides the membership with digital access, ease and low fees. Members are likely to refinance, so why not win the day and convert them to digital?
Establish cultural transparency and a call to arms. Communications will win or lose the day. Over communicate, over communicate, over communicate. This will eliminate fear, create focus and build momentum and team spirit.
Make winning a priority. Create a culture that serves member values, and that prides itself on winning market share and member wallet share. Pride-based measurements and success will carry the organization through the tough times and keep the team together, even when they are asked to make sacrifices.
Invest in digital disruption and data fundamentals. This is where competitors often pull back during difficult periods. The growth of the digital revolution hasn’t changed, except that the momentum will significantly increase with the pandemic.
Keep your eye on fraud as digital expands. Fraud often increases during a crisis, and digital use will increase during a pandemic, so find ways to get in front of that risk now. Seek vendors that can provide efficiencies and new services across multiple challenges. The investment will pay off for years.
Become a safe haven for your members. Be there when they need you, which is right now. Anticipate and address their needs and risks, and respond with data-driven solutions. Drive a brand message based on safety, member ownership and being a credit union. Be different than a bank and get noticed.
Historically, credit unions have been counter-cyclical, and have served their members and grown during down cycles. Not all credit unions excel during tough times, but yours can with appropriate strategies, plans and actions.
Credit unions that are prepared for growth can accelerate during any market downturn (with less risk on the balance sheet); and are not held back by requirements to cut investments in growth, or by quarterly performance goals. Because of their emphasis on members, they are in a position to accelerate their market responses quickly, compared with more positive environments when urgency is rarely required.
The Coronavirus crisis is growing, and will affect market stability for the foreseeable future. Right now is a time for planning, urgency and action. In any business, in tough times leadership either excels with realistic optimism, or dies from fear and inaction. Your credit union will either look back in 2 years and be proud of how it acted, or be disappointed that it missed a once in a decade opportunity to serve its members and grow stronger as a result.
You get to choose…but this window of opportunity will be open for a relatively brief period of time! Carpe diem.
Kirk Kordeleski is one of the most widely respected individuals in the financial services industry, having served for 22 years as Chief Executive Officer for Bethpage Federal Credit Union, where he achieved remarkable growth during his tenure. Notably, he increased Bethpage’s ranking to 15th from the 40th largest credit union in the nation. Mr. Kordeleski continues to serve in a consulting capacity as an advisor or partner for a number of financial services-related ventures, including Sherpa Technologies and Best Innovation Group.