The topic may not make you jump off your couch like winning the mega millions, but we’re about to tell you why right now is a really good time to be a credit union.
Turning Credit Cycle
Let’s start with the not-so-good news.
Not only are delinquencies ticking up, but interest rates are still rising and the Fed Funds Rate is at its highest in more than two decades. This means that the cost of funds is also much higher than it has been for the last few years.
As a result, there are few changes to be aware of within the financial market:
Increased Risk of Default As businesses and consumers use up savings and interest rates rise, it becomes more likely that delinquencies will keep rising, as will credit losses.
Higher Cost of Service Lenders will likely have to allocate more resources to manage and monitor loans in a delinquency-prone environment, meaning that expenses associated with servicing loans will likely grow as well.
Rising Funding Costs for Lenders Fintechs and lending companies will rely on borrowing money themselves to fund the loans they are originating in the marketplace. We’ll also see a higher cost of funds as margins decrease.
The “Niche” Advantage
Credit unions often operate within a niche area. That might be focusing on veterans, a local community, or employees of a specific company. As a result of servicing a specialized group, they have lots of data on people’s employment, their income, and money in deposits with big allotments of savings accounts, pension money, and 401(k) plans.
In a rising delinquency environment, having this information is like striking gold. The data on specialized audiences helps credit unions to take on more credit risk, as their deposit base offsets the need to keep expensive loan loss reserves for rising delinquencies.
For instance, State Employees Credit Union offers a Summer Cash Account since many of its members are part of the education system and only receive salaries nine to ten months of the year. This is a nice way to show empathy for the members and is a prime example for credit unions to consider when thinking of how to strengthen their own customer relationships via personalized offerings.
To build on this, credit unions may offer a credit card, or a “pay in four” product to help folks who are paid on a unique cadence to accelerate costly transactions such as vacations, additional education, or home improvement projects.
Hard to Get Creative with Legacy Tech
At the same time, many credit unions don’t have the infrastructure in place to get creative and quickly add or tweak current loan products to meet the demand of the marketplace. Most credit unions are likely run on older technology, making it hard to tweak current offerings or create new ones.
Imagine trying to win the Tour de France with a bike from the 1990’s that just had new wheels added. When servicing systems were created decades ago, there was no need to be able to offer Buy Now Pay Later or a 2.5-year loan option rather than a 3-year loan. Fast forward to today, end-to-end technology and automation are more important than ever to the consumer experience.
Having the right servicing and digital architecture can help credit unions to deliver relevant messaging and decrease delinquencies, while improving customer relationships with highly personalized banking experiences.
According to a recent survey from PYMNTS and Payment Systems for Credit Unions (PSCU), the largest credit union service organization in the US, the top two challenges for credit unions when it comes to innovation are integrating various systems at once and the time it takes to bring innovations to market.
How to Evolve Your Credit Union’s Product Offerings
By working with a modern-day lending core, a credit union can build and launch new offerings for customers more easily and quickly with less development resources. Using flexible, API-based technology, modern loan management platforms enable lenders to service customers in a compliant, more personalized manner.
Whether it be a BNPL offering, commercial or personal loans, or specialty credit cards, today’s servicing architecture makes it quicker and more cost efficient to create and test your offerings for a niche audience.
Want to explore a new solution for your customers? Reach out to learn how Canopy empowers a better borrower experience through next-gen credit and lending products.
Ready to test a new product now? Explore LoanLab, where you can simulate the entire lifecycle of a loan, test different policies and actions, and observe the effects over time.