An increasingly competitive and rapidly changing financial services marketplace is putting pressure on traditional lenders to evolve in order to preserve and grow their business, and credit unions are no exception.
The competition is getting fierce out there: You have online banks advertising lower cost, higher-yield savings and checking accounts, mobile apps for making payments and transferring funds, a glut of alternative lenders and even major wireless carriers now offering banking services.
Bottom line, depositors have more banking options than ever. And while this financial services evolution didn't happen overnight, it's also not showing any signs of slowing.
Credit unions hold unique advantages that inspire loyalty among their membership, including lower rates on loans, higher average rates on savings, money market and other deposit accounts, and fewer fees than traditional banks.
Still, that may not be enough to stem losses as some depositors opt to take their banking business elsewhere. The rate of membership growth for U.S. credit unions slowed in the 12 months that ended June 30, coming in below that of the prior three years, according to data from Credit Union National Association.
Overall loan growth also slowed to 6.6% in the same period, down from 8.9% a year earlier and significantly below the double-digit annual growth rates posted by U.S. credit unions between 2014 and 2017, according to CUNA.
Forward-thinking credit unions are finding ways to innovate by embracing the very fintech-driven changes that are transforming the financial services business. Consider adopting these three strategies to remain competitive as you continue to serve the needs of your depositors in the coming year and beyond.
Expand underwriting models
Alternative lenders have been able to disrupt the banking industry by relying on technology and a broader set of data to gauge credit risk. As a result they can glean a more comprehensive and predictive portrait of a borrower. That's one reason online lenders tend to approve more loan applications than traditional lenders.
The higher degree of accuracy in credit risk management through the smart application of data analysis increases the chances that the lender can safely approve the loan, even if the borrower has less than stellar credit in a traditional sense.
Broaden lending to small businesses
Taking a page from the online lending space can also help with another change credit unions should consider: Doing more to lend to small and mid-size businesses.
One reason loan growth rates have been declining is that small business owners are increasingly turning to alternative lending companies for the financing they aren't getting elsewhere. It doesn't hurt that online lending companies offer a faster and simpler application process than traditional lenders, in addition to quick funding and a higher chance of approval.
Online lenders have approved more small business loans than small and large banks for the past two years, according to the
A credit union that's willing to work with a small business borrower to get them financing not only stands a greater chance of boosting their loan business, but is more likely to stem their rate of attrition in checking, savings and other accounts.
Conversely, signing up a new borrower increases the chance that they will turn into a full-fledged, loyal depositor who will be less likely to take their banking business somewhere else.
Obviously, every credit applicant should be considered on their individual merits, but credit unions that shy away from lending to small businesses because they deem them too risky need to consider whether they’re passing up opportunities for growth in a competitive market.
Consider fintech partnerships
Partnerships between traditional financial institutions and alternative lenders are becoming more common. A credit union can benefit from such a partnership in many ways, freeing them from having to immediately engage in structural changes, or worse, attempt to become a software developer.
By teaming up with alternative lenders, credit unions can leverage their willingness to work with new businesses, broader data-driven underwriting and faster loan processing to win more loan business.
Some partnerships involve a fintech firm that can facilitate relationships with a network of alternative lenders by using data drawn from small businesses that use their integrated accounting software to help lenders generate a comprehensive credit risk profile of the borrower. With a network approach, alternative lenders that span the risk spectrum can be leveraged through a single fintech intermediary.
Such team-ups can help credit unions keep their competitive edge by enabling them to clear some of the obstacles they’ve faced when extending small business loans, including risk, documentation, compliance, cost and underwriting.
As a result, credit unions can offer existing clients a faster, easier loan application experience, while benefiting from a streamlined underwriting process and lower operational costs.
Even with the bevy of financial services options entering the industry, credit unions are in a good position to stay competitive. Embracing the industry changes and staying ahead of the tech-fueled trends can help you cater to your members’ needs better.
These three strategies can help your credit union deepen its existing member relationships and create a potential gateway for new ones.
