Can Credit Unions Afford to Not Provide Credit Scores?
CU Today reported that CUNA and NAFCU told the Consumer Financial Protection Bureau in separate letters that they don't believe it's feasible for all credit unions to offer their members credit scores free of charge. CUNA's letter said:
“We support and encourage voluntary efforts to increase the financial well-being of credit union members, including through easy access to credit scores. However, we urge the CFPB and other agencies to provide financial institutions with guidance intended to achieve this goal but not to go so far as to prescribe unnecessary requirements.”
NAFCU believes that compelling credit unions to offer free credit scores "could restrict credit unions' flexibility in what products and services they offer to members." The association's Regulatory Affairs Counsel, Andrew Morris, added, "If the CFPB were to require credit unions to offer free credit scores, it could increase costs or draw resources away from more essential products or services."
We need food to live, so maybe credit unions should be compelled to offer free food to their members. And it's kind of a necessity to have clothes on our back, so maybe credit unions should be required to provide clothing to their members, too. After all, good physical health is a contributor to good financial health, you know.
You're thinking: "That's nonsense. Credit unions don't make food or manufacture clothing--and they have nothing to do with financial services--so why should they be compelled to provide those things to members?"
You're right. But credit unions don't "make" or "manufacture" credit scores, either. So why should they be forced to provide them to members?
The thought of requiring credit unions (and/or banks) to provide credit scores for free is part of the CFPB past, not present. It's a holdover from a CFPB that thought those letters meant Civil-servants Fixated on Punishing Banks.
Funny that NAFCU would comment on the regulatory cost impact when it was CUNA that came out with the study two years ago (led by two of my Cornerstone colleagues, and which will be updated shortly) that showed that, at the median, 10% to 15% of credit unions' total non-interest expenses are compliance-related.
Mr. Morris should have said that if the CFPB were to require credit unions to offer free credit scores, it would increase costs--not could.
But would such a ruling "draw resources away from more essential products or services"? Despite the regulatory cost burden, credit unions have been proud of their market gains in membership growth, lending volume and market share increases, and digitally-driven improvements in the member experience.
So what "essential" products or services are seeing resources being drawn away?
I could argue that requiring credit unions to offer free credit scores actually strengthens "essential" products and services. After all, how many credit unions claim that their point of differentiation is their focus on improving consumers' financial health? And how can you purport to help improve your members' financial health without providing them with some measure of that health?
Don't get me wrong: I'm not arguing that the CFPB should require credit unions (or banks) to offer free credit scores. What I am arguing is that, for a large majority of credit unions, the strategic reality is that they can't afford to not offer free credit scores.
Behaviors, Not Literacy
The press is filled with study after study demonstrating that Americans' level of financial literacy is low. Oh boo hoo. My level of literacy regarding automotive technology is non-existent, yet I haven't been in an accident in a long time (knock on wood) because my driving behavior is pretty good (or so I think).
Could it be the same with finances? Sure can, according to a study from a professor at the University of Colorado. His study of the Fed's Survey of Consumer Finances found that:
"57% of US households exhibit signs of financial illiteracy, a phenomenon even among college degree holders. Financial illiterates report that they are aware of their lack of financial knowledge, and thus they bear less financial risk and allocate less money in risky assets, and are constructively less overconfident. Collectively, financial illiterates’ households adopt a portfolio choice strategy that is fully rational."
In other words, households that are financially "illiterate" may actually be exhibiting smarter financial behaviors, and making smarter financial decisions, than so-called financially literate households.
So, tell me again why you're so confident that your financial literacy are so important to your competitive positioning? (Answer: They're not). There's more evidence that education efforts fall short. In a study titled So Many Courses, So Little Progress: Why Financial Education Doesn’t Work — And What Does, the author found:
"One-size-fits-all financial education has been demonstrated to have little to no effect on changing real-world financial behaviors. A meta-analysis of more than 200 studies found that educational interventions explained only 0.1% of the financial behaviors studied."
Financial Health Management
“Credit union members are financially healthier consumers” might not be the slickest advertising slogan ever coined, but it captures the essence of how credit unions can position themselves to compete in the banking market. According to CFSI:
“Because people’s capabilities, habits, and tools differ, financial service providers must better understand the unique characteristics of their customers, and invest in innovative technologies, policies, and practices that help them thrive financially. In an increasingly competitive landscape, the ability to address and increase consumers’ financial health will become the new competitive frontier.”
This will require credit unions to measure the financial health of their members. Credit unions have two choices: 1) Provide free credit scores, and then follow up with programs, tools, etc. to help members manage their score, or 2) Devise an alternative measure of financial health, supported by programs and tools to help members manage that score, and the implications of their score.
A proprietary financial health score--based on account balances, rates of return, and trackable behavior--could enable credit unions to:
- Quantify the impact of financial behaviors and products on members’ scores. What’s the impact of saving a higher percentage of one’s paycheck? What’s the benefit of reducing the level of student or household debt? Would getting another quarter of a percentage point on the savings account interest rate make a difference? A quantitative financial health score will help quantify the impact of financial behaviors and actions.
- Create engagement strategies around financial health. Mobile apps that employ gamification techniques—i.e., the application of game playing elements like point scoring or competition with others—like Farmville and FourSquare are popular with Millennials (or at least they used to be). Credit unions can create a gaming aspect to financial health by establishing incentives for members to reach certain levels of financial health or improve certain financial health metrics.
- Brag about their members’ financial health improvements. With a widely accepted financial health score, credit unions can compete on the basis of how well they help members improve their financial health score. For example, instead of touting rates and fees, credit unions will boast that “Last year, 50% of our members improved their financial health score by more than 50 points!”
Director of Research