By Ray Birch
SCOTTSDALE, Ariz.—It's become a “hyper-competitive” lending market for several reasons, according to one person, who says the only way for credit unions to compete is to get away from generic lending products, leverage niches and even redefine what “community” means.
Stirring up the loan market is not just all the liquidity financial institutions have built and which now has them scrambling for ways to lend out the cash, but also a reduction in new car lending driven by the short supply of new cars combined with the growing competition from fintechs, explained Sam Kilmer, a senior director with Cornerstone Advisors.
Kilmer said the shortage of new vehicles on dealer lots has affected indirect lending business and forced some credit unions to return their focus to making direct auto loans to members.
“It's a very, very competitive market with a lot of people chasing loans,” said Kilmer. “Many of the more ambitious, larger, higher-growth credit unions have not exited indirect auto, but they've made it a smaller portion of their portfolio. They are strategically moving more to a direct relationship, and they're not relying on dealers to bring them business.”
New Competition From BNPL
It isn’t just the auto loan market in flux. Kilmer pointed to a marked rise in buy-now-pay later loans that is grabbing lending business away from credit unions at the point of sale.
“It's being caught by the merchants and the dollars are getting routed to companies like Affirm,” he said.
With such a “hyper-competitive” lending landscape, Kilmer said credit unions have no choice to make some strategic changes. First, he emphasized, they simply have to market more aggressively.
“Individual credit unions need to be stepping up their marketing programs. They need to also work with Visa and Mastercard on credit card lending programs to extend their reach,” he advisd. “They just need to put more resources into direct lead-gen-oriented marketing to get more competitive and get the word out they have money to lend.”
The Second Step
Second, credit unions need to learn from the fintechs, according to Kilmer.
“This new competition in the market, they are focusing on specific niches,” said Kilmer of the fintech’s approach to lending.
Kilmer said by focusing more on very specific segments of borrowers, fintechs are producing lending products that are more relevant to their customers, and therefore more effective and even less price sensitive.
He cautioned that as credit unions have moved to community charters they have also moved to more generic lending offerings that can have less appeal to some borrowers.
“Many credit unions have gotten away from what they used to do, and that is develop markets for a specific community of members,” said Kilmer.
Getting Zapped by Zip Codes
Kilmer said for too many CUs “community” is now defined by zip code.
Sam Kilmer
“Instead, they should get back to what they used to do when they were very SEG focused,” said Kilmer. “For example, if they have airline pilots in their field of membership, they should develop specific lending products for the lifestyles of airline pilots.”
By doing so, Kilmer said, credit unions can more easily develop lending products that address the pain points of these types of borrowers.
“It’s about redefining the definition of community a little bit,” said Kilmer. “Many credit unions have simply developed all-purpose generic lending products that are largely indistinguishable from any community bank’s. By focusing more on a niche, credit unions gain a closer, stronger identity with borrowers…This helps humanize your products and address pain points of each market segment. For example, you can really think about what are the borrowing pain-points for teachers or the disabled?”
Get Automated
Finally, to get the dollars to focus more on marketing, credit unions need to automate more of their daily processes.
“They need to mercilessly automate the heck out of their processes, not only to improve efficiency of service delivery, but to save money internally,” Kilmer said. “They need to reduce their costs so they can double their working budget for marketing.”