Peer-to-peer lending, automated loan origination, and digital banking: these are just a few ways the technology revolution has transformed the traditional lending industry! The rise of P2P applications is turning personal and small business loans into a commodity, as fintechs now offer omni-channel lending services once only provided by traditional financial institutions.
Fortunately, this is an excellent opportunity for credit unions to leverage their number one asset: their members! The personal loan market is virtually untapped by credit unions, and now is the right time to expand into this market and provide a needed service for members. Some organizations in the CU and CUSO space have noticed these trends and are taking action. One of the pioneers in this area is CU Lending Cooperative, a CUSO that offers automated high-speed loan origination technology. In the meantime, established financial services CUSOs have begun either on their own or through collaborations, partnerships or acquisitions to build their own digital banking solutions.
In this article we’ve highlighted three important trends all credit unions and CUSOs should be aware of when thinking about future growth.
- Fintechs are disrupting traditional financial services with cost-effective and consumer-friendly mobile platforms that appeal to millennials. Fintechs have assumed a leading position in personal lending capitalizing on their capability to offer a faster and easier loan approval and funding process. Fintech firms benefit from recent technologies such as machine learning algorithms predicting incoming income and bills or nearly instant preapproval using personal data available online to assess creditworthiness. Kabbage, an online loan provider, can approve a personal or a small business loan within seven minutes since borrowers don’t have to fill out loan applications or gather documents. Based on TransUnion data, in the beginning of 2018, fintech companies held more than $45B in personal loans compared to $35B and $27B held by the banks and credit unions, respectively. The share of fintech companies in personal lending increased from 4% in 2012 to 32% in 2017.
- Competition with online lending companies will likely intensify further following recent regulatory changes. In July 2018, the Office of the Comptroller of the Currency (OCC) announced its decision to consider a special-purpose national bank charter for fintech companies. Now, fintech firms have the option to pursue a federal banking charter and directly compete with financial institutions, as long as capital and liquidity requirements are met. Companies like OnDeck Capital, Kabbage and LendingClub can now operate nationwide under a single licensing and regulatory regime instead of multiple state licenses. Prior to the charter, online lenders had to seek licenses in every state, which was time consuming and expensive, or partner with traditional banks to avoid local licensing requirement and interest-rate limits.
- Fintech lending is maturing and is expected to continue to grow. Although a number of new start-ups continue to enter the market space, fintech lending has matured since its inception. More established companies, e.g. Amazon, PayPal and Square, Inc., have moved beyond their niche markets into the lending segment or begun to enhance lending to offer adjacent services, which further should add to their allure making them a one-stop shop. Square, Inc., a provider of P2P payment applications, that already offers small business loans to the users of its POS product, now, contemplates providing broader commercial and investment banking services, including savings accounts and stock trading. The breadth of lending services has also increased, as fintech companies have expanded beyond personal and small business loans making a foray into other products such as student loans, mortgages, factoring loans, invoice financing, business lines of credit and insurance. The next frontier is adoption of AI and IoT to embed financial services into home automation systems and other products.
With so many technological advances in the lending space there are many exciting opportunities available to credit unions and their members, but organizations must act to stay relevant. Because of the rapid nature of technology, credit unions may consider partnering with another organization that has an existing platform or even acquire or invest in fintech through a CUSO to rapidly bring a lending solution to members.
