Reports of credit unions “losing the war” for millennial customers could be negated in 2019 based on shifting mortgage loan preferences, as well as economic forecasts and survey data showing residential property sales being driven by these young adults in the coming years.
At the close of 2018, millennials held the highest share of all new mortgages in the United States at 45 percent, compared to 36 percent for generation X and 17 percent held by baby boomers, according to data from Realtor.com. The data also shows millennials holding mortgages with the highest dollar volume of any generation in 2018, meaning these young adults—those between 23 and 38 years of age—are willing to paying a higher price tag in order to become homeowners.
This millennial homebuyer trend should continue into 2019, according to the latest report from CUNA Mutual Group, published in March with analysis of January 2019 data. From the report:
“Expect home prices to rise between 3% and 4% in 2019 as the economy adds another 2.2 million jobs, potential homebuyers jump off the fence and purchase as interest rates rise and young adults release some of their pent-up demand for housing. Low gas prices are also allowing potential homeowners the ability to increase their pace of savings accumulation for a home down payment. Furthermore, rising rents are tilting the rent-versus-buy calculation more and more in favor of purchasing.”
As a customer, millennial homebuyers tend to have attributes that would be attractive to any financial institution—including credit unions. A 2018 analysis conducted by LendingTree shows millennial homebuyers in the country’s 50 largest metropolitan areas having an average credit score of 656 (the typical minimum credit score for conventional mortgages, based on guidelines from Fannie Mae, is 620). Millennials seem to be becoming more financially stable, poising the generation to be a driving force in residential real estate sales in the coming years.
Suspicious of large, traditional institutions due to many coming of age in the midst of the 2008 financial crisis, what attracts millennials to credit unions is the fact that they have a mandate to serve their members first. Credit union members tend to be happier than customers of other banking institutions, too—92 percent of credit union members surveyed by FIS in 2018 said that they were either “very satisfied” or “extremely satisfied” based on credit unions’ performance against expectations.
Success at a credit union must then mean that members are provided the services they need, when and how they want them. Regardless of the quantity of services the credit union provides to that member, the quality of the service provided is critical to fostering long-term member relationships. This applies to loan payment solutions, which should be simple and designed with the member in mind.
In addition to the mandate of serving members first, credit unions must make it simple for young adults to manage and coordinate loan payments from wherever they are—in the branch, over the phone, or via the web.
When a new member joins a credit union to secure a mortgage loan, it’s often due to competitive rates. Mortgage interest rates are expected to increase in the coming years, hitting 5.5 percent by next year, according to CUNA. Millennials seeking to beat the rate hikes and buy a home this year will look for an institution that can handle their needs, meaning credit unions need to position themselves to prepare for handing both indirect loans and direct loans.
Indirect loan members may be banking with another institution before they arrive at the credit union and, if so, may choose to continue that banking relationship while managing their loan with the credit union. Those indirect loan members without a checking account with the credit union are hesitant to make the switch from their current provider. That hesitation is often born from a stereotype perpetuated about credit unions—that they do not have the capabilities to serve them with digital tools like those offered by large banking institutions.
Indirect loans have helped credit unions build loan portfolios for the past decade, however direct loans create deeper relationships that can potentially ease pressure on credit union liquidity. Loan balances at credit unions are growing faster than savings, tightening up credit union liquidity, according to the Credit Union National Association (CUNA). To combat this trend, credit unions are likely to shift their focus from amassing indirect loans toward growing more direct loans, particularly with millennials who are poised to purchase a home.
Credit unions that are focused on digital transformation can convert those indirect loans to direct loan accounts by providing intuitive technological solutions that members have come to expect in the current economy.
The CUNA March Trends Report indicates that loan balances at credit unions up 9 percent over the past year. Facilitating payments is a significant part of how credit unions serve their members, it’s imperative to simplify the process of paying down member loans. Emerging solutions are helping credit unions make the loan payment experience frictionless for their members. These solutions must have a simple way of scheduling one-time and recurring payments from a web portal, as well as allow members to choose the payment method they prefer.
Credit unions should be able to quickly and easily identify how many members are using external bank accounts to pay their loans, then perhaps filter that list further by identifying how many of those loan holders don’t have checking accounts with the credit union. Credit unions can use such data for marketing outreach and inform loan holders without accounts about the quality services they offer—and do a better job of fulfilling their mandate to serve their members.
From auto loans to mortgages to business loans and personal loans, credit unions are still a popular option for those seeking a loan. However, when credit unions make the necessary shifts to prepare for serving young adults and first-time homebuyers, they are in a stronger position to serve members.
Tiffany Rider is Head of Communications for CheckAlt, a leading provider of lockbox, treasury, and item processing solutions for credit unions and banks across the U.S. From our lockbox processing solution Remit to our loan payment processing solution LoanPay, CheckAlt’s suite of products solves credit unions’ payment needs. Learn more at https://CheckAlt.com.