Do you own the transactional relationship with your members?
Our lives are complicated today. We have so many financial needs and wants that we didn’t have twenty or even ten years ago. Technology has evolved so quickly that today’s consumers have the world at their fingertips, so they’ve grown more demanding and less loyal. In your goal to become your members’ primary financial institution, what are you doing to satisfy their demands and secure their loyalty?
There are many ways and many channels for your members to obtain financial services and solutions that provide protection, security and convenience. More and more often, fees for services that members want and need are being paid to other providers, whether it’s competitive financial institutions or non-financial providers. Each time a member travels outside the walls of your credit union to conduct a transaction, you run the risk of losing that transactional relationship.
So, ask yourself – do you own the transactional relationship with your members? Are there any service areas in which you fall short?
Credit Unions are Falling Short in Funding
One of the areas in which many credit unions have “lost the transaction” is in providing short-term, small-dollar liquidity. According to the Federal Reserve Board, nearly half of Americans don’t have enough savings to cover a $400 emergency (Press Release: “Federal Reserve Board Issues Report on the Economic Well-Being of U.S. Households,” May 2016).
This staggering statistic sheds light on a woefully overlooked market: consumers living paycheck-to-paycheck and lacking the necessary funds to cover unforeseen expenses or even their regular household bills. This group of consumers often finds themselves caught in a vicious cycle. Failure to pay their bills on time results in hefty late fees and negative hits on their credit rating, making it difficult or impossible to secure most forms of credit. Further, with a lower credit score, these consumers cannot qualify for affordable short-term loans through traditional sources. Many consumers are then forced to seek payday loans and other high-priced alternatives, plunging them further into debt with exorbitant interest fees. Each year, 12 million Americans take out payday loans, spending $9 billion on loan fees (The Pew Charitable Trusts Press Release: “CFPB’s Proposed Payday Loan Rule Misses Historic Opportunity,” June 2016).
Clearly, the ability to obtain affordable access to liquidity is a glaring consumer need. The need is so glaring, in fact, that the Consumer Financial Protection Bureau has pressed community banks and credit unions to offer better alternatives to high-interest payday loans. In February 2016, Richard Cordray told The Wall Street Journal, “I personally believe banks and credit unions can be low-cost providers of small-dollar loans. I think that working with banks and regulators involved, there would and should be an ability for them to offer decent products.”
Why Aren’t More Credit Unions Cashing in on Cash?
So why aren’t more credit unions dashing to fulfill this need for short-term, affordable funding? It seems like an obvious service to provide, yet it’s surprisingly out of reach for many credit unions. Here’s why:
- Cost and Resource Prohibitive
For many credit unions, introducing small-dollar loan programs is a cost-prohibitive process – not only operationally, but also from a staffing standpoint. From the cost of loan officers to the overhead of paper and manual processes to additional slowdowns in branch traffic, the reality is that it would take time and resources that many credit unions simply do not have.
- Compliance Challenges
Credit union executives also need to be concerned with staying compliant with new and developing guidance in the lending regulatory arena. Any lending solution must be fully compliant with existing federal lending regulations, including recent changes to the Military Lending Act. And once you’ve identified a solution, you must ensure that it’s flexible enough to adapt to a changing regulatory environment and ever-evolving member needs.
- Avoiding Charge Offs
Another challenge for credit unions is the loan approval process and the underwriting function. A determination of creditworthiness by traditional credit check does not adequately predict the consumer’s current ability to repay using very recent behavior instead of patterns over a period of many years. Credit unions cannot introduce a new product or service if it brings the risk of significant charge offs.
The Benefits of Providing Short-Term, Small-Dollar Loans
Adding a short-term loan solution to your product line unquestionably presents many challenges, but they are far outweighed by the potential benefits for your credit union and for your members.
- Offering access to short-term liquidity gives you an opportunity to boost member loyalty, retention, and the lifetime value of your members. It also gives you the chance to rebuild relationships with former account holders or boost activity with low-transacting members.
- You can protect your members from having to resort to predatory lending sources and getting themselves deeper in debt.
- With the option to obtain a small-dollar, short-term loan from their trusted local credit union, your members can avoid incurring pricey late fees on their bills, possibly giving them the opportunity to strengthen their credit standing for future financial needs.
- Many consumers feel that there’s a negative stigma to “asking for cash.” Your members may feel embarrassed or ashamed to request short-term funding in person. Implementing an automated short-term funding solution would give your members the ability to obtain cash easily, efficiently and privately.
- You would generate a new revenue stream for your credit union, while simultaneously saving your members significant amounts in interest fees.
The Top 5 Things to Look for in a Short-Term Lending Partner
The benefits are indisputable, yet unfortunately so are the challenges. So, what’s the best way to proceed?
The most efficient and effective way to implement small-dollar, short-term lending at your credit union is by working with a partner company that offers a comprehensive, automated solution. Here are the most important things to look for in a lending partner:
The partner’s solution must be compliant with all existing federal lending regulations, including the Military Lending Act. Ideally, you should work with a company with an experienced compliance team who will continually monitor the regulatory environment to ensure its solution is fully compliant both now and in the future.
Any small-dollar loan solution should be fully automated, with no additional staff or loan officers required. The solution should give your members the ability to obtain loans easily, conveniently and privately, 24 hours a day, 7 days a week.
- Underwriting Technology
A lending partner should have proven underwriting technology that will help you prevent charge offs and allow you to most accurately determine not just each borrower’s credit score, but that borrower’s current ability to repay as well. The ideal partner will determine this variable using data-driven technology, which takes years to develop – so choose a company with a strong background, plenty of experience and proven results.
An effective solution will generate a new revenue stream for your credit union, with little to zero cannibalization of your NSF/OD revenue. And remember, if you can provide your members with access to short-term liquidity at reasonable interest rates, you will be saving them hundreds or even thousands of dollars over payday loan alternatives (depending on their borrowing frequency).
- Branding & Marketing
A good partner will allow you to provide small-dollar, short-term loans as a white-label product, so it will appear as a seamless addition to your product line. Some companies may even provide branded websites and mobile apps.
Do you really own the transactional relationship with your members? Providing easy, convenient and private access to short-term liquidity will keep your members coming back to transact with you, it will help to improve their overall financial health, and the results will become evident in your bottom line.