Debunking the Myth: Credit Unions and ROI on Serving Low to Moderate Income Members

During our last CULytics roundtable, one of the discussion point centered around the perceived return on investment (ROI) when serving low to moderate-income (LMI) members.

Some believe that catering to this demographic results in lower ROI, but this perspective overlooks the core principles of credit unions and the realities of risk management in lending. Here, we will explore why serving LMI members can be just as profitable as any other demographic, if not more so, when approached with the right strategy.

Understanding Credit Union Principles

Credit unions are founded on the philosophy of “people helping people.” Their mission is to serve communities, including those who might be underserved by traditional financial institutions. This mission is not just about fulfilling a social good; it's also about building strong, loyal member bases that contribute to the long-term financial health of the credit union. LMI members often embody this loyalty, valuing the personalized service and community focus that credit unions provide. This, in turn, can lead to increased product usage and member retention, both of which are crucial drivers of ROI.

Risk-Adjusted Pricing: A Fair Approach

One of the primary arguments against serving LMI members is the assumption that lower income equates to higher risk, which would theoretically lead to lower returns. However, this assumption fails to consider that credit unions typically use risk-adjusted pricing models for their loan products. Risk-adjusted pricing ensures that the interest rates charged on loans correspond to the risk level of the borrower, rather than their income level.

For example, a credit union might offer higher interest rates to members with lower credit scores or less stable employment histories, regardless of their income. This approach allows the credit union to mitigate potential losses from higher-risk loans while still serving a broad range of income levels. By using risk-adjusted pricing, credit unions can maintain healthy margins and ensure a positive ROI, even when serving LMI members.

The Case for LMI Members

LMI members often represent a segment of the population that is underserved by traditional banks. By focusing on this demographic, credit unions can tap into a loyal and growing customer base. LMI members typically have fewer financial options, meaning they are more likely to stay with an institution that treats them fairly and offers products tailored to their needs. This loyalty translates into long-term relationships, which are valuable for any financial institution.

Additionally, LMI members may be more likely to seek out financial products that are staples of credit union portfolios, such as auto loans, personal loans, and savings accounts. When these products are priced appropriately and managed effectively, they can provide a steady stream of revenue and contribute to the overall ROI of the credit union.

Beyond Financial ROI: Social Impact and Long-Term Gains

While ROI is often measured in financial terms, it’s important to consider the broader impact of serving LMI members. By supporting this demographic, credit unions fulfill their social mission and contribute to the economic health of their communities. This kind of impact can enhance the credit union’s reputation, attract new members, and even lead to opportunities for partnerships or grants aimed at community development.

Moreover, as credit unions help LMI members improve their financial situations, these members often transition into higher income brackets, becoming even more valuable customers in the long term. Thus, serving LMI members can be seen as an investment in the future growth of both the members and the credit union itself.

Conclusion

The idea that serving low to moderate-income members results in lower ROI for credit unions is a misconception. With risk-adjusted pricing and a focus on member loyalty, credit unions can achieve robust financial returns while fulfilling their mission to serve all members of their communities. By embracing the opportunity to serve LMI members, credit unions not only ensure their own long-term success but also contribute to the broader goal of financial inclusion and community well-being.

The true measure of success for a credit union should be its ability to deliver value to all members, regardless of their income level. When approached strategically, serving LMI members can yield significant benefits, both financially and socially, reinforcing the unique role that credit unions play in the financial services landscape.