I’ve been working in and with credit unions for, let’s say, a few decades. As a seasoned lending professional, I’ve experienced the industry’s ups and downs. I’ve witnessed where credit unions have experienced success and where they’ve struggled the most.
Right now, credit unions are facing one of their most difficult challenges yet: remaining relevant.
More people than ever—especially younger consumers—are turning toward FinTechs and digital banking services for their lending needs. At the same time, the number of credit unions is shrinking due to mergers. If credit unions are going to survive and be a relevant player in the lending marketplace, they will need to take some calculated risks while mitigating their portfolio risk.
Risk Is the Name of Credit Unions’ Game
Credit unions tend to be risk averse. They have created obstacles to secure a loan that make the member experience terrible, all based on some real or perceived issue that occurred many years ago. These risk barriers make the credit union products unfriendly, and make members use alternative and more friendly providers. This ultimately turns off prospective members and hurts current members.
Credit unions love to see those A+ loans, but for many credit unions, that type of loan doesn’t reflect the credit status of their field of membership, nor is it a very profitable loan. If there’s one thing credit unions must do, particularly certified Community Development Financial Institutions, it’s to find a creative way to say “yes” to as many members as is possible. Credit unions must be ready and capable of handling the delinquencies and potential charge-offs that will likely result when running a financially inclusive credit union.
Risk-Based Credit Union Lending Deserves Risk-Based Collections
Right now, the number of near-prime and subprime lenders is on the rise. Credit unions can be a large part of the solution, but many need to do more to serve low-income and thin- or no-credit file, in other words, near-prime members.
Of course, the risk associated with these loans requires a commensurate collections program. If credit unions don’t have a risk-based collection paradigm in place when taking on loans in lower credit tiers, they won’t be successful with these types of loans. And these are the loans credit unions were created to make.
We can’t just treat near- and nonprime member loans like any other loan. If we do, we’re sure to be left wondering why charge-offs are higher than projected. It’s like throwing a pail of guppies into the ocean and being able to manage them effectively.
Credit unions have the resources, like our CU Results services, to develop programs to manage these loans effectively. When you use the resources available to credit unions to improve your lending program, the more effective and attractive your lending programs will be, and the happier your members will be, and the higher the ROA on your lending portfolio will be.
Creating a unique borrower member experience that is attractive to a broad credit profile of members, will ensure the credit union remains relevant to its members and prospective members.