Non-Traditional Competitors

This is bonus coverage from “Lending 2020” in the January 2015 issue of Credit Union Management magazine.

According to a Feb. 25, 2014, report in American Banker, Lending Club had $3.5 million in originations in 2007, its first year of originations. That amount has climbed to $3.4 billion in total loans, with $2 billion originated in 2013. And Lending Club did $1 billion in originations in credit card consolidations during the second quarter of 2014. 

Lending Club is an example of an alternative lender—an organization offering one or more loan options to consumers and business owners, outside of a traditional financial institution loan. These alternative options have been most commonly used when an individual or business owner cannot obtain a traditional loan for any number of reasons.

Notably, alternative lenders are also going after the small loans that banks may find unprofitable or of little interest—credit card debt consolidations, for instance—loans that are traditionally made by credit unions.

Models used by alternative lenders are becoming more significant in the financial services industry, and the companies that espouse them are gaining a greater share of the $11 trillion consumer loan market. So it is imperative that credit union executives understand and adapt to this competitive threat. Consider the following five factors.

1.  Online lending. People historically went online to acquire a loan because they were turned down at a bank or credit union. Today online applications have become the preferred channel for many people, especially young and technically savvy consumers. Developing an effective online lending platform for current and future members is no longer an option for a credit union; it’s a necessity.

2.  Data. Alternative lenders have less regulatory oversight and are using the abundance of online data for credit decisions. Credit unions have more data on their members—information, for example, that flows through a share draft or credit card account—than any retailer, but often fail to use it fully. Alternative providers are analyzing transactions to determine spending patterns and cash flows in real time vs. looking at summary personal financial statements. Alternative lenders have “data scientists” using predictive analytics—that supplement traditional scores like FICO—to determine a borrower’s future behavior and their ability to repay a loan. Statistically valid data sources exist for customer feedback like Yelp and TripAdvisor, which can help assess a business loan as well as determine the health of a business. Once credit unions harness this data to better serve their members, they’ll have the ability for a competitive advantage.

3.  Speed vs. price. In the Internet-based alternative lending world, speed is paramount. A quick glance at any online lender shows the emphasis placed on getting a loan approved and rates determined within a matter of minutes, and funding provided the next day. This speed is a standard credit unions need to match. Notably, the fastest provider of approval and a reasonable rate doesn’t have to be the lowest rate in the market to win the deal.

4.  Personal touch.  Credit unions rightly pride themselves on their philosophy of “people helping people” and their personal relationship with their members. As many members now conduct their financial transactions online, there is understandably a shift that diminishes the personal touch.

Alternative lenders rarely have personal interactions with their customers. While this lack of personal touch is antithetical to the traditional financial institution relationship of credit unions and banks alike, more and more consumers are adapting and welcoming this change.

Alternative lenders typically conduct all their communications online. Credit unions need to adapt to this business model as they develop methods to provide loans without an employee being involved in the transaction. This presents a need for credit union lenders to stay competitive by augmenting the personal approach with technology that consumers want.

5.  Monitoring and fraud detection. Financial fraud—especially online—is a growing concern, but alternative lenders have developed methods to mitigate this risk. Most businesses, for example, have an electronic footprint and most individuals have an electronic profile via Facebook or LinkedIn. A consumer’s home can be located through Google Maps. And through Google Alerts, consumers are mentioned in the news—with good or bad reports. As online organizations already, alternative lenders tend to be adept with these tools. Adopting the use of such online tools should be a high priority for credit unions as well.

Alternative lending has come out of the shadows and is taking a prominent seat at the lending table. A close reading of the data indicates that they are here to stay and are growing at an almost frenzied pace. It is incumbent for credit union executives and lenders to use the best of the alternative lending business models to their members’ advantage, while staying true to the values of the credit union movement.

Brad Kime is chief revenue officer of LendKey Technologies, a provider of cloud-based lending technology based in New York. Kime was president/chairman and chief operating officer at OnDeck, the leading alternative small business lender outside of the financial institution space. He also is an advisor on start-up financial technology companies Fundera and LocalStake.