How credit unions can drive growth with unsecured lending
Inflation and a rising cost of living are weighing down today’s consumer, leading to record levels of credit card debt and contributing to increased financial stress for individuals and families across the country. According to the Federal Reserve Bank of New York, Americans currently hold $1.12 trillion in credit card debt, which is a leading cause of financial stress. Now more than ever, consumers are looking for convenient and affordable ways to reduce debt and alleviate financial anxieties.
In the digital age, consumers are increasingly looking to online providers for a solution, leaving traditional financial institutions behind. Despite community institutions’ high level of trust, their perceived lack of digital tools and consumers’ tendency to shop rates online has put these financial institutions at a disadvantage. However, this doesn’t have to be the case.
As community-based institutions with a ‘people helping people’ philosophy, credit unions have a significant opportunity to lend a helping hand to debt-laden consumers who need more than budgeting tools or general financial advice. Personal loans to help streamline debt allow members to pay off credit card debt more quickly while saving thousands of dollars in high interest rates. Not only can such an offering help members reach their goals faster and reduce financial stress, but personal loans can also bring significant value to the credit unions, helping them diversify their portfolios and increase their impact.
Credit unions currently only hold a 20 percent market share when it comes to the unsecured lending space according to data from TransUnion, representing notable potential for growth within this more than $356 billion market. While some credit unions have historically shied away from unsecured lending because of the perceived risk, it can be a strong way to optimize the portfolio with a healthy risk/return. Plus, such an offering not only creates a new revenue stream but also ties in directly with the credit union mission, allowing them to help members reduce revolving credit balances and get on the path to a brighter financial future. However, unsecured lending must be approached with the right technology, strategy and partners to be effective.
Most credit unions are already stretched thin, so finding a partner who can help them efficiently underwrite and fulfill these loans is key. Credit unions should prioritize potential partners that share mission alignment and that have a modern approach to determining creditworthiness. While most lenders have traditionally relied primarily on credit scores for lending decisions, such a narrow view leaves many deserving applicants ineligible. There are other, alternative data points that can add much needed context, helping to paint a more accurate and holistic picture of a member’s financial situation and thus their ability and willingness to make payments.
For example, more financial institutions are starting to understand the benefits offered by a cash flow focus when it comes to underwriting. Real-time cash flow analytics, income verification and behavioral data trends can determine creditworthiness with more inclusivity and transparency than FICO scores alone. In fact, Happy Money has found that a lender with a 720+ FICO credit box can increase approvals by about 10% with cash flow underwriting, and within that, the ability to identify prime-plus borrowers (740+ FICO equivalent), is a much larger increase at about 40%. Other information, such as savings and investments and utility and rental payments, should also be considered to provide insight into a consumer’s financial habits.
Using transaction data to automate the process of income verification also streamlines the application process, making for a superior customer experience. Applicants who provide their transaction data are successfully verified at a rate of 85-90%, while those whose income is verified manually via document upload are only verified at a rate of 38-46%. Cash flow focused underwriting ultimately makes lending more inclusive and responsible, enabling credit unions to help more members get a handle on their credit card debt.
With these considerations in mind, unsecured lending can unlock significant benefits for the credit union – optimizing the portfolio and producing returns often not possible with tactics like auto lending alone. Plus, unsecured lending is a valuable way to bring members in the door, engage more deeply with them and ultimately solidify and expand the relationship. After all, streamlining debt reduces stress and helps members improve their financial health faster, something that is sure to foster loyalty. A survey of more than 5,000 Americans found people with no credit card debt experience nearly 50% less financial stress than those with revolving debt. If a member has a good experience with a credit union for their personal loan, they’re likely to come back for additional loans and services – which benefits both the credit union and the consumer. According to recent research from J.D. Power, returning to the same lender is correlated with financial health and satisfaction; more than three-fourths (79%) of customers who are financially healthy are likely to return for their next loan.
As financial struggles persist for many Americans, credit unions have a valuable opportunity to not only act as a pillar of support for communities across the country but also diversify their portfolios and fuel growth. Such a move furthers the credit union mission and ethos while attracting and retaining new members. Those that prioritize finding a trusted partner who can help them make the process efficient and responsible will be well positioned to scale and succeed.
About Author:
Adam Zarlengo is chief operating officer of Happy Money. Happy Money has created a new growth category for credit unions by providing consumers with access to funds in an easier, more responsible and digitally optimized way, ultimately empowering them to meet their goals.