To compete with the growing number of Internet-based, marketplace or platform lenders, credit unions may need to shift in a number of directions.
For the most part, they do not offer transaction accounts, savings accounts, or, with a few exceptions, mortgage loans. However, they have become efficient at offering auto, personal, and small business loans, experts said.
These lenders generally rely on an online presence, automation and advertising as their outreach to consumers. Their use of investors' money rather than depositors' funds helps keep their lending flexible and inexpensive compared to some bank and credit union offerings.
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In addition, particularly when it comes to banks, consumers have shown they are in the mood for an easier, quicker, more streamlined and transparent approach to borrowing money.
"Consumers are fed up," wrote investment banker Charles Moldow in a research paper about marketplace lending. Moldow is a general partner at Foundation Capital, an investment bank that backs some P2P lenders.
"Banks are no longer part of their communities," Moldow wrote. "Rates are high for borrowers and not even keeping up with inflation for depositors. During the Great Recession of 2008-2009, when consumers and small businesses needed access to credit more than ever, many banks stopped offering loans and lines of credit."
In consumer finance, credit card holders experienced increased effective interest rates and limits reduced, Moldow wrote. Two out of every five small- and medium-sized enterprises saw their credit lines threatened between 2008 and 2012, he added.
According to some estimates, this has resulted in large banks having the lowest net promoter scores in the industry. Surveys found that fewer than one in 10 respondents would recommend their bank to friends or family. simultaneously, the marketplace lenders have seen sharp growth.
"By our estimate, fewer than 200,000 people in the U.S. have ever taken a marketplace loan, which is peanuts compared to the more than 510 million existing credit card accounts in the U.S. today," Moldow wrote. "But, because marketplace customers usually become advocates of marketplace lending, and traditional banking and credit card customers typically serve as detractors of retail banking, we see significant potential for marketplace awareness and excitement to spread exponentially."
This has been borne out, Moldow added, by the performance of marketplace lenders Prosper.com and Lending Club, which collectively issued $871 million in new loans in 2012, and $2.4 billion in 2014.
So, how are credit unions going to compete? One approach would be to join the online movement in some way.
Read more: How credit unions can get in on the action …
Doug Lebda, CEO of LendingTree, an online loan marketplace based in Charlotte, N.C., expressed support for credit unions and openness to working with them as lenders if field of membership questions could be resolved.
"I like credit unions. I think the work they do is very important," Lebda said in an Oct. 2 CUTimes.com article. "I suspect it's the limitations on who they can serve that may have hampered many of them from becoming more involved with us."
While LendingTree does not make loans, it is a loan broker and lead aggregator that collects information from consumers seeking loans and then connects them with lenders willing to make the loans. The site offers a wide variety of loans including housing, auto and personal loans, as well as credit card offers. The company receives a fee for every loan application that is qualified for a loan, Lebda said.
Scott Butterfield, a credit union consultant and founder of Your Credit Union Partner, a Sumner, Wash.-based consultancy, was intrigued to hear of credit unions working with LendingTree, but said he believed they need to compete indirectly with the marketplace firms.
Larger credit unions could establish marketplace lending sites on their own but determining the approach to use remained unclear, Butterfield said. For small- to mid-size credit unions, he urged them to seek out people in their fields of membership who are not likely to qualify for or use the marketplace lenders.
"My exclusive focus is on small -and medium-sized credit unions," Butterfield explained. "And, I have been regularly surprised at how few of them are marketing their loans to some of the same people who may not have the A paper but, which nonetheless, need loans and are not likely to be customers of one of the platform lenders."
This approach may be one of the only ways these smaller and medium-sized credit unions can compete since they tend to lack the scale of the larger lenders. In addition, offering these types of loans will make the credit union relevant to its members and help with growth, Butterfield suggested.
"People so widely complain that it's regulation that is killing credit unions," he said. "While regulation isn't great, credit unions aren't growing because they are not making loans."
Steve Williams, a principal with the Phoenix-based research firm Cornerstone Advisors, agreed.
"Marketplace lenders have largely demystified what credit unions do when they lend and argued they are overpaid for doing it," he said. "The challenge will be for credit unions to figure out what it is about the ways they lend that makes them move valuable than the marketplace lenders."
One barrier that credit unions may encounter is that marketplace lenders have a cost structure that can be 300 to 400 basis points less than a credit union with brick and mortar branches, Williams said. In addition, because the marketplace lenders are not depository institutions, they lack what he described as the "army of examiners" ready to pounce.
Marketplace lenders do have regulations, Williams emphasized, however, they do not have supervisors. They do not take deposits, so they do not have to carry deposit insurance and the whole regime of regulatory precaution that comes with that.
Williams said no one or two regulations necessarily make credit unions and banks less nimble lenders than the marketplace firms; it is the complete regulatory structure and attitude that comes with deposit insurance.
Knowing a robust examination team is going to descend on a credit union to evaluate and judge decisions can make management more risk averse and slower to react to the market, Williams said. Still banks and credit unions consistently tell surveyors that having deposit insurance is better than not having it, he added.
Williams advocated an approach similar to Butterfield's. Larger credit unions should explore what they can do to start their own marketplace lending sites such as using a CUSO structure to enable more of them to pool available capital, he recommended.
Small- to mid-size credit unions should go back to their lending roots and focus less on serving the members they have to compete with the marketplace lenders for, Williams said. Rather, he explained, credit unions should focus on the people the new banking structure overlooks.
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