Technology will be key to coming back stronger after coronavirus
The global COVID-19 pandemic will certainly have credit unions evaluating many aspects of their operations. The cornerstone of any post-crisis analysis will be technology. Credit unions who were already pushing the limits of technology will likely fare better than those using dated systems. Yet even after our lives return to “normal,” technology and innovation will be crucial to growth of credit unions nationwide.
Growth opportunities for credit unions exist among segments of the population the Federal Deposit Insurance Corporation categorized in 2016 as underserved. The two groups who comprise the underserved category are “unbanked” and “underbanked” individuals – in other words, those who have no accounts at any federally insured financial institutions and those who do have accounts but use financial products and services from outside the traditional banking system.
Credit unions hoping for branch growth and member retention will require investments in technology for future long-term success. More importantly, however, the pandemic is teaching us technology is not only necessary for growth but for survival.
A 2018 survey by the Federal Reserve Board found 43% of mobile phone users who had bank accounts had accessed mobile banking in the previous 12-month period. The Fed also reported smartphone ownership jumping 10% year over year, with mobile banking usage rising by 22% over a five-year period.
By 2017, smartphone technology had expanded to enable “about half of U.S. adults with bank accounts” who used it to access their accounts in the previous year, according to the Fed. A credit union’s strategic plan would not be complete without addressing the surge in online banking. Competition in mobile lending will only accelerate in the coming years with increased pressure coming from online-only banks who are able to offer products more similar to credit unions than traditional brick-and-mortar banks.
Change is good
The trend toward closing branches seems more apparent in banks than in credit unions, but both types of financial institutions still have a massive number of brick-and-mortar locations. As of 2019, banks had 87,700 physical locations. Credit unions, with their regional constraints, still had more than 20,500.
Banks started reducing their footprint in 2009 to achieve a drop of 11.4%. From June 2016 to June 2017, banks closed more than 1,700 branches. At the same time, credit union branch locations remained about the same. As technology makes branches less essential, the shift can produce a significant change in the way banks and credit unions interact with customers.
With the change toward online and mobile banking, credit unions must find the opportunities for lending growth. Fortunately, the personalized service offered by credit unions pairs up well with online technologies during lending transactions and signing up new members. With the right execution, coupling cutting-edge online capabilities with a physical presence can be a winning combination.
Todd Harper, board member of the National Credit Union Administration (NCUA), recommends learning from the past while keeping a focus on the future. He supports remembering the “lessons learned in the last crisis” while anticipating risks that may appear over the horizon. He sees deficits and the increased national debt as an emerging risk, along with rising consumer debt and liquidity.
As consumer debt reaches an all-time high of $4 trillion, Harper has cautioned credit unions to “carefully evaluate risks when making new loans.” While credit unions are required to adequately manage credit and liquidity, they also have the opportunity to educate their members and help prepare them for uncertain times in step with their own protective measures.
Better tech, better borrowers
Artificial intelligence and machine-language software can help credit unions improve the selection of qualified borrowers, as long as documents and disclosures are on point with compliance regulations. The speed at which qualified borrowers can be identified can also be significantly improved. Having a credit union partner that is reliable and follows the credit union industry standards is key for this process. The combination of increased speed and better qualified data can quickly increase the bottom line for credit unions.
With the range of credit inputs that AI can access and evaluate, the result becomes more predictive than a FICO score, all while reducing the expense of’ risk evaluation. The determination of creditworthiness with AI allows credit unions to consider factors that have been overlooked in less-advanced methods relying upon transaction history.
Lenders can evaluate borrowers’ willingness to pay back debt just as well as their ability to. These are metrics that traditional measures have never accurately assessed. AI allows credit unions to offer financial services and lending documents to more potential clients with less risk and greater profitability.
The importance of loans to the financial industry may exceed that of other products, but the search for new members requires “more than just good rates,” such as compliant disclosures. Many knowledgeable customers prefer to choose financial organizations that offer compatibility with their lifestyles. Using technology can provide the essential link necessary to bring prospective members together with credit unions.
Adoption of the latest innovations may make a critical difference in the highly competitive and crowded market. Credit unions have an abundance of data sources such as ACH, debit cards, credit card forms, membership application forms, and mobile banking solutions. The challenge for leaders requires the ability to examine the data “often and continually” to learn the factors that indicate the needs of the members.
A fertile area may lie with a focus on “organic growth of loans,” particularly those for real estate investments by young adults. Millennials are the largest generation ever, and as they age we will start to see a significant uptick in real estate purchases. A shift in how customers are drawn in will need to include online loan applications and quick approval-making. Credit unions who sit on the sidelines may miss out on what may become the greatest shift in real estate holdings the country has ever seen.
Staying on track
Adherence to a plan for growth requires stakeholders to agree to stay on track by adopting the practice of benchmarking. The process provides a reliable way for credit unions and other financial institutions to “track internal goals, identify lending opportunities, reinforce strengths, and reveal weaknesses.” Once only the purview of CEOs and CFOs, benchmarking can produce valuable results when all C-suite executives adopt and are included in the policy.
Benchmarking establishes foundational information that can contribute to stronger strategic decisions that help credit union board members and management achieve critical goals with compliant lending documents and disclosures. As technology pushes credit unions to innovate faster, establishing a formal benchmarking practice has never been more important.