In October 2023 we were host to a packed event with credit unions and stakeholders to discuss growing the mutual sector during a tougher lending climate. Expert speakers discussed the data, lending risk and Information Technology.
Tough times for mortgagees
We kicked off the event by looking at the data. Borrowers to credit unions are certainly poorer. But those with mortgages are faring the worst. For homeowners with a good credit profile mortgage payments increased by 40%. After other loan repayments most people in this situation had a negative disposable income. However, only one in five applicants to credit unions with good credit scores had a mortgage. As a result, there’s still plenty of opportunity to grow the loan book. Furthermore traditional credit union borrowers, those with poorer credit scores on the lowest incomes have not seen such a big hit to their affordability.
There are 17.5m people in need of credit
Across the six segments identified by Fair4All Finance, people who have loans are falling behind with their credit repayments, and many are struggling to access affordable sources of credit. The starkest increases are for those in near-prime segments, such as Squeezed and Sliding, who have had to utilise more of their savings safety nets over the last year. Creating propositions that are designed for the consumer needs is more important than ever. For example, benefit calculators, deduction lending and Save as You Borrow are useful tools to improve financial resilience across all segments.
Mortgages, not now but maybe later?
Borrowing secured on property is, by its nature, lower risk. Moreover it only takes one mortgage to replace dozens of declines for smaller personal loans. However the margins are tight. The difference between the interest rate for a mortgage and putting that money on longer-term deposit has been shrinking. For example a 2 year fixed rate mortgage (75% Loan to Value) is typically 6.5%. At the same time, a two year fixed term savings bond is 6%.
Nevertheless, mortgage lending forms the majority of credit union assets in other countries. Finding a niche and ensuring that members renew, can form a foundation for a growing loan book. Whilst the way forward might not be worth the cost right now, it may be in the near future. Furthermore it takes time to get the systems, controls and permissions in place and so planning ahead is essential.
Risk, reward and new growth
Expanding your common bond is another way to grow, however lending to new members is often riskier. Getting the right balance between interest earned and loans lost to arrears has always been tricky, and it’s even harder now. With tightening affordability, decline rates will inevitably rise. To meet these challenges, a mixed approach is best. Simply raising loan prices can alienate lower-risk borrowers. It’s essential to boost the number of applications with effective marketing. And automating declines frees up loan officers’ time for more valuable tasks.
The convenience of credit cards
A group of credit unions will soon be offering physical cards. However, the cards in credit cards may be a misnomer. Revolving credit is often linked to a mobile phone. The plastic is virtual. Monzo and Apple are now providing short-term small loans for a fixed fee straight from a mobile device. As a result, credit unions need to compete even more on convenience. Providing a line of credit is an effective way to compete with Buy Now Pay Later. Often there are concerns about credit card fraud. However these are typically overstated. With technological solutions, such as Two Factor Authentication, fraud is decreasing. In fact the charge backs through the Consumer Credit Act only accounts for 0.1% of all transactions.
Will the sector have enough to lend?
There was a mix of credit unions with plenty in the bank and those with very high loans to savings ratios. Nevertheless, all recognised liquidity is becoming an issue. Given that it is easy to find high return savings accounts, providing a small dividend isn’t providing enough to encourage people to deposit at a credit union. Strategies including offering interest bearing deposits, increasingly the required amount to save as members borrow and attracting more corporate deposits.
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Let’s not forget technology
The event’s focus was on how technology can be used to grow the loan book. With awareness of credit unions & CDFIs low, attracting members is a necessary but insufficient first step. Using digital marketing tools isn’t easy when there are over 11,000 technology solutions and hundreds of strategies to choose from, get right and align. But finding and convincing people to want to borrow is only part of the story. They need to be delighted by intuitive and easy to use online experiences, for example to find out if they can join, discover the right loan, and follow through with an online application. Keeping up with ever-changing market conditions and competition, means choosing technology providers with a proven track-record of delivering ongoing improvements and new features.
Look for providers with a constructive and collaborative mindset and open APIs for example. None of the above is easy and yet your growth prospects are critically dependent on your ability to identify, implement and use the right combination of digital technology tools, techniques and strategies effectively – as measured against clear business Key Performance Indicators.
The current landscape for community finance core platforms is dominated by a few incumbent providers which has presented some challenges in lenders’ ability to adopt and integrate new digital solutions. The sector doesn’t naturally attract new suppliers of core banking or loan management systems due to fragmentation amongst lenders, budgetary constraints and limited technology capability.
Fair4All Finance is investing to develop a thriving market of suppliers to serve Credit Unions and CDFIs and is seeking further investment opportunities. Beyond core platforms Fair4All Finance is exploring the role that they could play in accelerating the establishment of Credit Union Service Organisations to deliver efficiencies and economies of scale in Credit Unions’ technology and operations. They are also assessing alternative supplementary decisioning data as a means of increasing financial inclusion, and to support growth in the sector they are challenging the commercial and technical constraints in listing community finance providers on Price Comparison Websites. Read more about Fair4All Finance’s key programmes.
From a credit union’s perspective, transformation is not new. And nor are the key questions: Who’s going to migrate first? How much will it cost? What compromises might be needed in relation to functionality? Despite this it is hard to find people in the sector that do not consider transformation well overdue. It’s been more than 20 years since the move to a paperless office. More than a decade has passed when the sector found itself competing with the streamlined application process offered by Wonga. And now the emerging challenges of BNPL, Apple and Monzo are putting smaller loans in a more competitive environment. Credit unions need to move to more open architecture platforms. Removing friction from the application process has been a long-held objective. CitySave Credit Union has a vast amount of data and can gain valuable business intelligence from it. This allows them to offer more products to more people, such as increased deduction lending through payroll deduction and corporate membership.
What about consolidation lending?
Throughout the day the debate turned to consolidation lending. Credit unions are eager to help members budget better with a lower single repayment, especially in January, a traditional time for consolidation lending. However, there is always the risk that members will repay their credit cards and then simply rack up more debt. We will discuss:
- What data can be used to spot these risks?
- What do successful consolidation loans look like?
- Which are the ones to avoid?
Join us for our consolidation lending webinar on 18th January 2024 to find out more.
If you’re a credit union in Northern Ireland don’t forget our Rising interest rates, the cost of living crisis and borrower affordability session later this month.
Thank you to all guest speakers and attendees of this Mutual Growth session. You can download the slides here.