Technology loans: Is your credit union ready?
The growing asset-backed securities market – or ABS, as it is known – could soon open up new opportunities for your credit union. You may be surprised to learn the reason. With automobiles increasingly becoming less relevant as a central asset, what’s taking their place? Smartphones.
In 2016, Verizon launched the tech sector into the ABS market by securing Bank of America, Merrill Lynch, MUFG and Barclays to manage the $1.169 billion deal. And what was the backing for this new security bond? Consumer cell phone contracts.
Many mobile carriers offer consumers the option of financing their cell phone via their service contract. A portion of their service agreement goes towards the balance owed on the phone, making them operate much like traditional auto loans. However, Verizon is the first to create an entirely new asset lending class by using their service contracts as collateral.
Moody’s Investors Service announced the deal could become a new asset class worth ten of billions of dollars. And while Verizon has already securitized almost $2 billion worth of finance plans through deals struck with private banks, those are short term. Eventually, those deals will be phased out and replaced by public ABS financing. So how is cell phone debt sold as public security even a possibility?
The smartphone market has grown immensely, with 95 percent of Americans owning a cell phone today and smartphone ownership growing from 35 percent in 2011 to 77 percent in 2018, according to the Pew Research Center. It is clear that the demand for smartphones is rising and becoming more widespread.
Recent data from Bloomberg shows consumers are more concerned with paying their cell phone bill on time than keeping their automobile notes current. In fact, the priority ranks as high as making timely mortgage payments. Technology is at the forefront of the new asset class because phones are more than just a means of communication. Today’s smartphones allow consumers to order food through an app, conduct business, hail a ride and make payments. All of that has driven a shift in the value consumers place on technology. Smartphones are positioned as a high-priority device because we live so much of our lives with them close at hand.
While bond markets are still trying to wrap their head around the idea of a new kid on the block (Verizon has since brokered its third deal), credit unions should prepare for tech loans now. There is good reason to believe this market will enlarge and solidify into a mainstay. For instance, while these types of securities are new to the United States, Moody’s reports Japan has brokered more than 60 deals.
Tech loans are here and credit unions are in a perfect position to deliver that product to members. Rather than finance a device through a cellular provider, members could instead finance through their credit union, much like a traditional automobile loan.
Credit unions interested in pursuing this offering should check that your consumer lending documents are ready to fulfill members’ tech loan needs and that your forms are compliant with all state and federal regulations. Meet with your marketing department to help craft the perfect technology loan campaign. The shift is happening now. Don’t get behind the curve. Stay ahead with reliable forms vendors. With lackluster performance in the automobile market, technology loans and a well-crafted marketing campaign can pick up the slack.