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FinTechs vs. Traditional Lenders – Is There a Difference?

TransUnion recently released a study comparing FinTechs to other lenders, and used personal loans issued between 2014 and 2016 as the basis for the study.  The study’s objective is to answer the question, “Are FinTechs different from other lenders?”  Interestingly enough, this is a question credit unions have been speculating on for years in an effort to understand the new type of competition FinTechs are bringing to the industry and how to respond.

While the study contains a wealth of fascinating information, we are going to focus on two areas in this blog.  The first is age distribution of consumers by lender type.  Often, credit unions believe that FinTechs are more popular in the younger age demographics, as those age groups are likely more tech savvy and willing to bank in non-traditional ways – two of the main value propositions of FinTechs.

Surprisingly, the following graph indicates that credit unions do better in attracting the younger demographics than any of the lender types – including FinTechs.  Where FinTechs shine is in the 30-64 age range, which is when most consumers are borrowing.

Table:  Age Distribution of Consumers by Lender Type

Graph showing age distribution of consumers by lender type in FinTechs study

This raises a number of questions for credit unions, some of which are:

  • Why are credit unions attracting more 18-29 year olds?
  • What sort of business are credit unions receiving from this group?
  • Is the competition for the younger age demographic detracting from competing in the age demographics where consumers do most of their borrowing?
  • If FinTechs often compete with traditional lenders on technology and non-traditional banking, why are they more successful with the 30-64 group compared to credit unions than the <30 age demographic?

Some of the answers may challenge credit unions, given the strategic focus and discussions about how to increase Millennial membership in recent years.

The second area of the study is on credit risk.  There is often a question about how much credit risk FinTechs are willing to take, with the speculation that they are generally taking riskier loans.  According to the study, the FinTechs’ approach to credit risk is more nuanced.

The chart below show that FinTechs are generally willing to lend more money to consumers.  This does lead to more credit risk exposure, given the higher loan amount.

Table: Average New Loan Amount

Graph showing average new loan amount in FinTechs study

However, when looking at the distribution of originations by credit score, FinTechs’ credit risk is right in line with credit unions.

Table: Risk Distribution of Originations

Graph showing risk distribution of origination at t in FinTechs study

In combination, these two charts suggest that while FinTechs are willing to lend more money, they are not focused only on the near prime and lower credit scores.  This again may challenge credit unions’ view as it suggests competition from FinTechs is not isolated in the lower credit risk tiers and in fact, FinTechs are competing across all credit scores and age ranges.

In light of this information, it would be good for decision-makers to have strategic discussions about how this could impact the credit union and its strategy.  This is a great topic to discuss during a board or ALCO meeting.  Participants can read the study beforehand, and come ready to discuss the impacts – positive and negative – to the credit union, and consider if any changes to the credit union’s strategy need to be discussed.

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Are Today’s Borrowers Finding Your Credit Union?

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Today’s buyers shop differently than in the past. As the first generation of digital natives comes of age and begins to seek loans in earnest, research shows that they go about the buying process differently than previous generations, doing more research and getting more recommendations before interacting with sales people. The Zillow Group Report on Consumer Housing Trends (2016) provides the following insights into the home buying process specifically, but it seems likely that many of the conclusions from the home buying research could be applied to consumer borrowing, as well.

Half of home buyers in the US are under 36 years of age. Half. 42% are Millennials, age 18-34.

In many ways, younger people’s borrowing behaviors don’t vary much from previous generations. They still want to work with agents and value private home tours. But some of the areas where they differ can be useful when rethinking how to reach them. It’s interesting to compare the two biggest generational groups by population—Millennials and Baby Boomers—to highlight how things are changing. When it comes to finding a lender, it’s no surprise that Millennials use online resources more heavily than Baby Boomers, but some of the other areas of resource usage may be more unexpected:

The Zillow Group Report on Consumer Housing Trends

How visible is your credit union to Millennials when they are tapping into these resources?

Millennials use more resources to educate themselves and do more research on agents and lending professionals than any other generation. They make more use of interest rate and affordability tools and mortgage calculators. Are your tools easy to use? Are Millennials finding good content from your credit union as they do their research?

The sheer number of Millennials makes this group hard to ignore, but there are surprising statistics from the study that relate to loyalty—the thing that Millennials “just don’t have” according to some.

Important attributes when selecting a lender:

Important attributes when borrowers select a lender

Before you can build loyalty, you have to be seen. Remember that research is key for Millennials, so making sure that your credit union is visible, provides useful content, and offers easy-to-use tools is important. At the same time, they’ll be looking for positive online reviews as well as referrals from people they know—so fast, friendly, and effective processes are required. Doing an outstanding job for this group might not only help profitability today, but could serve to build member loyalty for years to come.

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Remaining Relevant Through Leveraging Technology and Member Needs

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Illustrated Apple® iPhone®As you are probably well aware, Apple’s® iPhone® turned 10 years old recently.  Of the many articles written to commemorate this occasion, a couple in particular caught our eye.  In iPhone Review Redux:  10 Years Later, So Slow, So Small (Source:  The Wall Street Journal), the author describes her experience trying to use an original iPhone for a week in today’s world.  She says, “I made it 12 hours.”  As groundbreaking as the iPhone was back in 2007, that’s a little hard to imagine.  However, given the author’s experience with comparatively slow speeds, poor graphics and sound, a 2-megapixel camera, and no Siri®, we start to realize just how far technology has come in the last decade.  Of course, with these technological developments have come changes in how consumers interact with each other and the organizations with which they do business.  Take stock of how things have changed around your credit union in the last 10 years from a technology perspective.  Have you added new technology?  Upgraded?  Does your credit union have technology today it did not have in 2007?  Is your member interaction different today than it was a decade ago?  The answer to all of these questions is probably a resounding Yes!

Now, fast-forward, as does the article In 10 Years, Your iPhone Won’t Be a Phone Anymore (Source:  The Wall Street Journal).  In this article, the author imagines a future where the consumer is more wired-in than ever before.  Smarter, wearable technology, artificial intelligence, augmented reality—it’s almost overwhelming.  Our gadgets may literally direct our daily lives, according to this article.  Whether or not the future turns out the way this article describes, we can surely bet it will make the technology we have today seem ancient, just as the current iPhone makes the original model look outdated.  How will your credit union’s technology change?  Technology changes how consumers interactWhat new technologies might there be in 10 years that do not exist today?  How might your members choose to do business with you in 2027?  Are you leveraging the data that is already available today, and new data that may be available in the future, to make decisions and anticipate member needs?

These changes not only impact traditional competition, but also have facilitated new entrants looking to disrupt the industry.

How will your value proposition be apparent in this environment?  Consider strategic sessions revolving around this topic with outcomes focused on actions that can be taken in the near term, intermediate term, and long term to be positioned for relevancy in the future.

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Some Things to Consider About a Rising Rate Environment

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The Federal Reserve increased the federal funds target rate to a range of 50-75 bps at its mid-December meeting.  In its forecast (the “dot plot” shown below), the Fed indicates further tightening in 2017.

010517-dot-plot-buz

While credit unions have certainly lived through rising rate environments in the past, few have managed a credit union through a rising rate environment coming from the lowest interest rates our markets have ever experienced.  Combine this with how dramatically the world has changed since the last time rates went up (setting aside the 25 bps increase in December 2015, the last rising rate environment experienced came during 2004 to 2006) and the future is nearly unprecedented.  Can you believe that Apple’s first iPhone came out in 2007 (Source: Time)?

Now that smartphones are ubiquitous and members have access to every financial services “app” in the known universe right in the palm of their hands, what might a rising rate environment mean for your credit union?  Will your members behave differently now than they did in the past?

Using your asset/liability model proactively will allow you to see a range of potential outcomes before they happen.  This will better prepare management and board for both the risks and the opportunities that are out there.

Some questions to consider and then turn into scenarios to model include:

  • Will we be able to increase loan rates?  Or will competition for loans from FinTechs or traditional competition, or the level of long-term rates, keep loan rates stable?
  • When, and by how much, will deposit rates need to increase?  How might this impact our deposit mix?
  • What things are outside of our control – such as a competitor’s liquidity position and the potential impact to us if they have to raise deposit rates dramatically to attract funds?  Or new competition, possibly from non-traditional sources?
  • If deposit rates increase, but loan rates do not, what additional efficiency can the credit union create to have sustainable earnings with a tighter margin?
  • Given the ease of moving money across institutions, are we at risk of seeing members move funds from our credit union?  Or, what if consumers move funds to our credit union that we may not be able to lend out?
  • There are always opportunities.  What opportunities lie ahead for our credit union in this environment?

This list of questions is not meant to be all inclusive, but answering these questions is a great place to start. There are many more questions to be answered.

 

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Focus on Frictionless

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Your competition is not standing still. They are making it faster and easier for a consumer to open an account and get a loan by removing friction in their processes. More and more consumers are getting spoiled by how fast they can now do their banking, and they are telling their friends.

You can easily start removing friction from your processes today. Fortunately, you have data at your fingertips that can be quickly turned into actionable business intelligence. You can use this business intelligence to make the right decisions to streamline processes so they are not only easier for your members, but also for your staff. Wouldn’t it be great if making loans faster and easier – without taking additional credit risk – led to even more loans!

Learn more by watching this interview of our President, John Myers, after he spoke at the CUES CEO/Executive Team Network Conference last month: Watch Now.