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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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Balancing Credit Union IT Projects Using A Member-Centric Approach

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Technology innovation is exciting!  The newest technologies can change credit union business models, create a new customer experience, improve service, and reduce costs.  Consumers have more choices for ways to conduct their financial transactions than ever before, and we are a culture that values choices.

Leaders face questions about how to best utilize the credit union’s limited resources to keep up with the newest technologies, while having to make educated bets on which ones will survive long term.  In many cases, implementing new technologies does not mean replacing and removing older technologies (e.g., the costs for new technologies are not being offset by retiring old technologies).

For credit unions, navigating today’s digital transformation can be challenging.  Consider payment processing where a wide array of products are available including, among others,  checks, ACH, wire transfer, debit card, credit card, bill pay, interactive voice response (IVR), remote deposit capture (RDC), PayPal™, Apple Pay®, mobile wallets, person-to-person (P2P), Bitcoin, etc.  Many of the newest technologies are growing in acceptance rapidly.  Older payment methods, like paper checks, also continue to have a following even though they’re clearly less efficient for the credit union, the member, and the payee.  In fact, some innovations in recent years have focused on making paper checks more efficient, while other innovations look to supplant paper checks altogether.  As shown below, while declining materially, check volumes continue to be a significant number of payment transactions.

Chart by Bloomberg News shows decline of check usage worldwide in favor of newer technology

Both new and legacy systems require development and infrastructure for ongoing support, as well as integration to work together seamlessly with the member’s account. Front-line staff need training to support every product. As members’ expectations drive new technology, what can credit unions do to prioritize their portfolio of projects and limit their support of legacy services?

A member-centric approach can be the foundation for establishing the long-term technology strategy and making tough technology decisions. As credit unions are compelled to invest in a broader array of products to serve members, a parallel effort to better understand member demographics and behaviors can serve as a navigation beacon. By deepening the understanding of the membership and the target market, credit unions can be better prepared to simplify and narrow their product offerings while maximizing member service. It begins by gathering relevant data.

What are the utilizations of the credit union’s products? Typically, it’s a straightforward exercise to determine the number of transactions that occur for a particular product. Does the credit union have this information for all of the product offerings? Is the number of transactions increasing or decreasing over time? What is the trend of utilization? Are there products today that are minimally used by the membership? If so, what is the cost of that ongoing support (i.e., technology support, front-line support, training, risk, etc.)?

Beyond general utilization metrics, which members are using the products? This information requires more effort, but the value can be significant. By understanding which products and services members use, analytics can be applied to assess each member’s overall participation in the cooperative while identifying opportunities to increase engagement. By associating usage with individual members, data can be further refined by demographic segments, revealing which segments are using products more or using them less.

Armed with a better understanding of their membership along with their preferred products and behaviors, the credit union could then look to its target market strategy. Where will membership growth come from? How does the credit union market to acquire new members? What is the ideal product suite to support the credit union’s target market? By blending a deeper understanding of the credit union’s unique membership and target market, credit unions can better inform their long-term technology strategy.

For some credit unions whose membership is comprised of more early adopters of technology, this analysis will confirm the need for strategy to address quicker implementation of new trends. For others, continued investment in maintaining and integrating legacy systems may need to remain a key focus. In either case, the credit union could begin making decisions today to promote certain technologies in support of their target market, while establishing longer-term objectives to retire other products and services that are waning in use and not aligned with the credit union’s future strategy.

Managing the portfolio of current and potential projects to keep up with technology can seem overwhelming. Technology and member expectations are moving fast, and member expectations are being influenced by experiences in all their consumer activities, not just financial services. The environment today is creating greater challenges for leaders to make effective, timely technology strategy decisions. By remaining member-centric and developing a deeper understanding of member and target market behaviors and expectations, credit union leaders can be better prepared to successfully navigate technology strategy and associated decisions.

 

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Know Your Numbers: 4 Questions You Should Answer About Your Lending Experience

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Interest rates may go up and interest rates may go down, but a laser focus on your member experience is essential, regardless of what interest rates do. Just about every credit union has easy access to the data needed to answer the following 4 key questions about the lending experience:

  1. Are we attracting enough of the right types of lending opportunities? In other words, is our appetite for credit risk aligned with our marketing efforts? Quality applications from identified target markets outweigh volume
  2. From the consumer’s perspective, how long does it take before they get a decision? Auto-decisioning is not being fully utilized in the industry. Remember auto-decisioning is not just saying yes. Often, credit unions that auto-decline actually fund more of the loans that they approve because they have more time to devote to the loans they want to make
  3. What is our look-to-book by branch and digital delivery channels? It is not uncommon to see that the digital delivery channel is not truly “owned” in the credit union. Service level agreements and processes are not clear
  4. What are our funding rates for applications taken outside of normal business hours? Credit unions that study this metric find huge opportunity to increase funding. The digital world increases expectations exponentially. Waiting to get a decision on Monday for a loan application submitted on Saturday will not cut it

The questions above simply scratch the surface. Credit unions have access to high-quality data. Credit unions that turn this data into easily digestible, actionable business intelligence enjoy higher funding ratios. Equally important, their member experience is truly rewarding.

You can’t control interest rates but you can control your member’s experience. Maintaining a laser focus on that experience is a key to success in every rate environment.

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Member Acquisition: A Relevant Strategic Planning Topic

Where will your next members come from? This question often comes up during credit union strategic planning sessions and it can spark great strategic discussions. The conversation usually starts with understanding and quantifying where current members come from and how trends have been changing. Common sources for new member acquisition include:

  • Indirect source: Auto dealerships, realtors, etc.
  • Branch visibility: Branch location prompted member to join
  • Internet: Member was looking for a product or service and found the credit union online
  • Advertising: Radio, television, billboard, etc.
  • Word of mouth: Friends, family, coworkers, etc.

Additionally, understanding where members that the credit union desires come from is a key point. Desired members are typically those who have been identified as contributors or part of the target market. Credit unions that do not understand where desired members come from run the risk of allocating resources to attract members who will not contribute to the cooperative.

In thinking about acquiring future members, consider the following:

  • Will the ways in which the credit union acquires new members today look the same 5 years from now? 10 years from now?
  • How will changes in trends such as online searching, indirect sources, social media, new technologies and changes in the branching structure affect member acquisition?
  • What could be done to leverage changes in trends to acquire more desired members?
  • What are the strategic implications of the answers you’ve found? Do they mesh with the credit union’s existing strategy?
  • What other questions should be asked?

Answers will be unique for each credit union, but having this type of conversation can spotlight bigger strategic issues, as well as help with resource allocation for marketing, HR and IT expenses.

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Linking Strategy With Desired Financial Performance

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The strategic planning season is right around the corner. At the end of their overall strategic planning process, many credit unions believe they have linked strategy with their desired financial performance. Some credit unions decide on targeted financial ratios and believe they are linking strategy with financial performance, but not high-functioning credit unions. They simulate the long-term earnings and risk to earnings of their strategy to understand if it is positioned to produce the credit union’s desired financial performance.

High-functioning credit unions focus on what it will take to keep a business model fine tuned, not allowing it to get stale. They make sure they are more stellar than their competition at one, two or three things. They also make sure they are delivering a unique value proposition for the markets they are targeting. They dig into the data that is at their fingertips because, for example, they know how many approved loan applications were actually funded and they do everything possible to not let approved loan applicants slip away. High-functioning credit unions also know what percentage of transactions happen in branches, the call center and electronically – and they consider those transaction trends in their strategic planning process.

They also focus on creating and maintaining a sustainable ROA, long term. With margins in the 2s for the overall industry, figuring out how to do this is tough work – but critical. For example, high-functioning credit unions are constantly on the lookout for additional sources of non-interest income without taking advantage of members. They make sure their limited resources are being allocated appropriately. In other words, they make sure there is an ROI for every expense.

There are a number of other things high-functioning credit unions habitually do, but what we have included here should help credit unions focus on the right questions to be asking – and answering.