The NAFCU Journal: Addressing Challenges, Seizing Opportunities for Successful Lending


Innovation and strategy integral to growing a successful lending program

In an ocean of lending options, credit unions can’t just tread water. If they are to swim ahead, they must leverage lending as a key driver of strategic growth, linking their superior products and service to the power of insights and personalization offered by technology.

“Online institutions and larger institutions are taking away some of our traditional customers, and they’re taking them away because customers need convenience,” says Samir Agarwal,
vice president at Wolters Kluwer. “Credit unions can give convenience and then go that extra mile with the relationship to tell each consumer, ‘I understand your needs specifically.’ Using similar tools that all financial institutions have, credit union products will shine.” Today’s credit unions can apply big data, product innovation and engagement strategies to address challenges and seize opportunities in lending in order to continue driving strategic growth, say officials and vendors nationwide.

Harnessing the Power of Big Data

Strategic planning first. Then comes lending, advises David E. Catalano, senior vice president of business development and strategic planning at Baker Hill. It’s all driven by data.

“What are the initiatives we need to put into place to achieve our plan? How do we benchmark against our peers? How will we measure our progress along the way? Now, how do we get there?” says Catalano, whose firm offers normative data for benchmarking against peer institutions. “Wherever we want to go, data will help.”

Big data delivers three powerful punches for boosting lending power and heightening competitive position:

1. Targeting audiences: Data analytics reveals the spending preferences and life phases of members and potential members, for pinpoint offers suiting their needs.

“You want the right product or service sent to the right member at the right time,” says Don DiMatteo, managing director of member experience, State Department Federal Credit Union. “You want that member shopping for a car to get a car offer. You want the member looking at a house to get a mortgage offer. You don’t want the member looking to put a deck on the home to get a car offer. You would want them to get your home equity offer, for example.”

Data offers insights into the concentrations of profit centers, with loans “a material part of this assessment,” says Catalano. Analytics offers opportunities to create “the next best product for your current households and which households to pursue. If you know what a good household looks like, you can find more.” 

Data analytics also allows credit unions to cross-sell suitable products, says Christian Widhalm, senior vice president of lender partnerships, LendKey. “As artificial intelligence becomes more prevalent, these personal touches and recommendations can become even more powerful and accurate in understanding member needs, often before the member even realizes they need it,” he says.

2. Twenty-first-century underwriting: Data offers a different perspective on risk profiles, offering revelations, for instance, that a large unpaid health care bill or burdensome student debt doesn’t necessarily correlate to the consumer paying on time or becoming delinquent on a car loan or mortgage, says Brian Timson, national vice president of lending and innovation at Allied Solutions. By leveraging unstructured data, such as that extracted from social media, credit unions can begin developing profiles showing patterns of behavior and various propensities to rethink risk. The process expands the pool of potential, and profitable, borrowers to those traditionally overlooked by financial institutions. 

“Credit unions have to become more full-spectrum lenders, like they used to be,” Timson says.

3. Internal efficiencies: Smooth workflows heighten competitiveness, says Agarwal. Fixing a data-revealed problem in appraisals, for instance, allows fact-based decisions, rather than management “by what feels right,” he says. “I can get you originated in a shorter period of time, which allows you more competitive rates, and it becomes a competing factor against other institutions.”

While millennials crave the “buy local” experience that credit unions offer, they gravitate toward services offering convenience and a stronger digital and mobile interaction, says Widhalm. Credit unions partnering with financial technology firms, or fintechs, can “bring a superior member experience to market without the need for in-house expertise or added resources,” he says. “This allows the credit union to focus on their strategic advantages while the fintech partner continuously refines the member experience to be best in the market.”

Product Innovation

Rental sunglasses. That’s what Timson sees at a kiosk near his Florida Keys home.

“If that doesn’t tell you how this younger generation behaves, I don’t know what will,” he says. “They're not going to make a commitment to spend $200 on sunglasses. They're going to swap them out on a daily basis.”

In the highly competitive banking area of Sioux Falls, S.D., Service First Federal Credit Union has grown its membership by 8,000 since 2009. Much of the growth is loan-driven, with $100 million in net new loans in that period.

Service First’s product innovations are data-driven, says President Travis Kasten. Risk-based pricing extends loans to consumers with marginal credit ratings, who have proven to be “very loyal,” Kasten says. “They have to pay a little bit more, but they’re going to work hard every day, and we try to reward them for their loyalty.”

In auto financing, many credit unions are delving into indirect loans. The key to success is keeping a close eye on delinquency rates and “making sure your indirect program is profitable in its own right,” says DiMatteo.

Timson advises that credit unions issuing indirect loans remove the veil by sending borrowers data-driven, personalized smart videos, to thank them and inform them about “all the benefits the credit union offers.”

Credit union veteran John Flynn co-founded Open Lending in 2000, riding the data wave into the burgeoning field of pre-owned autos and, specifically, converting the expense item of loans denied solely on middling credit scores into earning assets. Open Lending’s 2 million data points pinpoint precise rates needed for credit unions to cover costs, avoid risk and yield strong returns.

“If you go back to credit unions’ original mission statement, it’s people helping people,” says Flynn. “This is a means to get more working-class people into auto loans that will get them into jobs, and at the same time, help credit unions achieve a yield that’s much greater than they would get anywhere outside.”

“Don’t forget work-life blend, telework options, and flexible schedules,” he adds. “All those things are going to be part of our culture on the go-forward, because that’s what our competition is doing — not only the big banks but the online competitors who create a fintech or website with 80 employees and do $32 billion in loans.”

Personnel and technology changes are also in store for credit unions amping up commercial lending, says Christopher J. Pippett, partner, Fox Rothschild LLP. Bank loan officers build lending practices on relationships, and “if a credit union wants to go down that road, they’re going to have to make an investment,” he says. “They’re going to have to do it for themselves or through a CUSO to make sure they can attract the right loans and not be the lender of last resort.”

Service First builds its strategic plan around lending, developing goals and action steps not only at the board and management levels but also through staff recruited from all departments to share ideas. “They keep telling us more and more information, especially the millennials,” Kasten says.

Young, diverse viewpoints — in board rooms and feedback loops — are crucial for driving strategy and developing products, says Timson. “Just dip your toe in. It doesn’t mean you have to go all in, but you have to start trying things, seeing what sticks and what doesn’t.”

Marketing and Engagement, Personal Touch

Credit unions are “perfect for millennials and the generations after them because we do community service and shareable donations, and we care about the environment,” says DiMatteo. “We’re a not-for-profit. We do all those great things they resonate to and aspire to. They just don’t know it.”

Although it seems counterintuitive, technology can help credit unions burnish the personal touch that differentiates them from competitors. “Branches are still very relevant when it comes to members making major purchases or taking out more complex loans, like mortgages,” notes Widhalm. Putting data and recommendations in front of branch and call center staff enhances those member interactions.

Service First, with roots in the meatpacking industry, employs a diverse, multilingual staff mirroring the population it serves, and deploying the Ritz-Carlton model of servant leadership, says Kasten. The environment attracts clientele seeking “familiarity, understanding and compassion.”

“That helps us serve everything from the $1,500 loan to the $110,000 Cadillac Escalade,” Kasten says.

The need for consumers to talk to someone or feel well-treated when logging in “will never go away,” says DiMatteo. His State Department Federal Credit Union offers educational programming, with more than 120 webinars and seminars on topics around making financial decisions, including lending for first-time homebuyers, the top 10 credit union services, and retirement. Virtually all lead to “some sort of additional service or product,” he says. “That leads to business, because now, we’ve become their trusted source.” 

Using data based on groupings of people most likely to join credit unions versus large or community banks, credit unions can craft marketing campaigns that “entice the individuals who need your service,” says Agarwal. “People are looking for a comfortable partner that’s always going to be there and always going to be accessible to them. It’s too easy to say it’s a millennial, low-touch factor, and no one wants to go to a bank branch. The reality is that even a millennial, when they need to, will want to go and see somebody, as opposed to making a phone call that goes into an abyss somewhere.”

Institutions that don’t offer mobile banking and other electronic services will watch customers leave, says Pippett. Credit unions that choose to create the capacity typically partner outside the credit union, which requires “properly vetting what you’re doing in order to make sure you maintain security.”

“Your system, like any other system, is only as good as its weakest link,” he says.

DiMatteo agrees that, while credit unions must improve processes to create a frictionless environment for members, they must simultaneously protect against cybersecurity and fraud threats. NAFCU’s Preferred Partners take cybersecurity and risk management as seriously as their client credit unions.

“We use the highest level of security,” says Agarwal. “We serve large and small institutions but apply the same standards across the board. The way we store our data, communications and presence on network follows the same security model that the government mandates.”

With plans and action steps in place, precision execution is “the secret sauce,” requiring credit unions to examine their capacities and possibly enhance them through vendors, says Catalano. “At the end of the day, employees just cannot out-execute a services firm focused on client deliverables,” he says. “Clients hire vendors to handle the execution of their data-driven marketing plans. It gets back to the strategic plan and the key goals you’re trying to accomplish.”

In the long-term picture, engagement is the key to seizing lending opportunities for strategic growth — even if it means attracting new audiences and using new tools to reach audiences of all ages now accustomed to Amazon’s “complete digital fulfillment process,” says Timson. 

“You need to be where the consumer wants to meet you, how they want, and when they want,” he says. “The challenge our institutions need to juggle is continuing to support our core, older consumer while we leverage new technology and offers to support millennials. Credit unions need to be there 24/7, wherever the consumer wants to engage, and make the process easy.”

M. Diane McCormick is a Pennsylvania-based freelance writer and a frequent contributor to The NAFCU Journal.

From the November-December 2018 edition of The NAFCU Journal magazine.

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