With the average age of credit union members currently at 47, capturing a younger demographic has been a topic of interest within the credit union community for some time now. Many conversations have focused (not unexpectedly) on delivering traditional products and services in new ways that appeal to influencers in the Gen Y, Millennial and unbanked segments of the marketplace.
A relatively new conversation is the focus on mobile payment technology and trends. Much of today's mobile payment development is focused on moving money from point A to point B, and for good reason. Device-toting consumers are hungry for quick, secure ways to pay their bills, make purchases and send each other money from wherever they happen to be at the moment.
When these two conversations converge, a great opportunity for credit unions emerges.
Consider a typical shopping experience in the not-so-distant future: A young consumer walks into an electronics store intent on buying that big-screen TV he's been eyeing for weeks. Via his credit union's mobile banking app, he pulls up his account information only to find he doesn't have quite enough to cover the purchase. Having relied mostly on peer-to-peer (P2P) payments as his primary payment vehicle in the past, he has only used a credit product from time to time. So what is his next move? Ideally, the mobile banking app he just accessed will be fully integrated with a mobile wallet solution. With access to such a robust offering, he not only has a view of his "cash on hand;" he can also complete his purchase with a credit product available from his trusted financial institution.
As the financial industry grapples with the best way to enable mobile transactions, mobile lending products are an area with opportunities aplenty for credit unions and should be a critical area of focus. For credit unions, the motivation here is not just to help members short on cash, but to support an entire generation of digital natives as they embrace emerging mobile technologies. Soon credit unions will have a new opportunity to capture a share of the digital wallet from tomorrow's consumers.
In the United States, nearly 96% of people ages 15 to 24 are considered digital natives, defined as people born during the age of digital technology and therefore familiar with connected devices from an early age. That's more than 390 million individuals who may never write a check or use traditional payments products in customary ways. These are your next-generation members — the ones to whom making a purchase from a smartphone or another connected device will be as natural as taking a breath.
Reaching these consumers with lending products will require new ways of thinking about underwriting and delivering credit. That's largely because the impact to a consumer's credit history from still-developing technology and digital payment vehicles is uncertain. If most of an individual's purchase volume has occurred through a P2P payment channel, it is likely not to be reported to a credit bureau. The result is an incomplete picture of that consumer's spending patterns and ability to make payments. It is also likely that this purchasing behavior, if reported, would have a positive impact on credit score — essentially this consumer has been making payment in full for most of his purchases. Without full information, the decision to extend credit and in what capacity will be akin to serving today's "new to credit" consumers. Even though the borrower of tomorrow may be an experienced consumer with a capacity to pay that far exceeds what is indicated by their FICO score, it may not be reflected in any easily obtainable report.
Credit scores for the digital-native age group hover around 625, meaning they require a lender with specialized expertise in evaluating creditworthiness. To develop a foundational relationship with these influential consumers, lenders need to be comfortable with using alternative methods of underwriting — methods that have less reliance on FICO or other traditional underwriting models and more reliance on capturing the "unreported" payment data the credit bureaus never see. This type of information just may be passing through transactional accounts at the credit union, if said credit union was successful in linking traditional transaction accounts to digital wallets.
Early establishment of the credit union's products behind preferred digital payment solutions is critical. The way consumers pay is evolving, and early consumer actions associated with new technologies will evolve into habits the typical consumer may not even realize they have developed years from now. Take the iTunes experience, for example. Many of today's consumers have an iTunes account, but how many of them consciously think about the financial account tied to iTunes? By incentivizing consumers early to connect the credit union's payment products with new technology, the credit union builds the foundation for what may become long-lasting member habits.
It's not difficult to understand why lending often comes second to the simple movement of money for mobile payment developers. Creating the infrastructure, operations, policies and procedures to move funds — that's the easy part (and it's no picnic). Building out the flexibility to also underwrite and offer credit to the consumer is much more challenging. Now you're adding in lending regulations, unique underwriting expertise and sophisticated pricing models to leverage highly specialized knowledge of the consumer. These issues become even more complex when you're talking about lending to a base of consumers who may have a rich history of P2P activity but little borrowing history.
It's one thing to lend money; it's quite another to offer a fully integrated lending toolkit that combines mobile banking and payments in one simple package. It's yet another to lend in a way that promotes overall financial health to a generation of consumers in need of that support. Cooperatives and others in the credit union space have these competencies, providing a compelling reason for mobile technology providers and credit unions to collaborate on development of next-generation payment solutions.
Jon Sarvis is CEO of TMG Financial Services, a credit card agent issuer serving credit unions and other member-based organizations. He can be reached at jons@tmgfinancialservices.com.
