The market has since changed and consumers today want instant gratification. In the lending world, that means the ease of automated applications and instant approval or denial at the end of the application process. Providers lacking that capability soon find themselves losing consumers to others that are in better tune with borrowers' demands.

In the current market, full end-to-end online lending capabilities have moved from the added-benefits category to a must-have service for credit unions that want to continue to compete and grow, according to Vince Passione, CEO and founder of LendKey Technologies, a New York firm that provides automated private student loan and other lending services to some 300 credit unions nationwide.

“Alternative providers don't look like standard financial institutions, and they have spent a lot of money building competitive brands that can be a huge threat to credit unions,” Passione said. “They built their businesses to be disruptive to existing institutions, and there are online lenders for any loan product you can imagine.”

Passione pointed to the feeding frenzy that surrounded the December initial public offering by Lending Club, the San Francisco-based online lending services provider. Investors snapped up 66.7 million shares at $15 per share, raising $1 billion.

Within the same week, the IPO for On Deck Capital Inc., a New York City-based provider of small business loans, sold investors 10 million shares at $20 per share, raising $200 million in capital and giving the company a market value of some $1.32 billion, according to a Reuters online report.

“These companies are growing very quickly and the market has rewarded them for their growth,” Passione said. “The Lending Club IPO was validation that online lending is real and opportunity for growth is enormous.”

Despite the increased service and cost advantage, there are also distinct disadvantages that boil down to whose brand is stronger, Passione said.

“Picking the wrong lending platform can be a major disadvantage,” Passione said. “When financial institutions get involved with a major customer-facing brand [like Lending Club], you have to be careful about who is selling what to whom.”

LendKey operates similarly to services like Lending Club in providing end-to-end lending services to credit unions and community banks, Passione said. The primary difference is that LendKey operates on a more cooperative level, supporting and conforming to individual credit union underwriting standards and preserving the institution's brand in the eyes of its members.

“My vision was how we could transform local institutions into online lenders,” said Passione of his firm, formed in 2007 initially as a peer-to-peer private student lending firm. “We have since pivoted that business and moved to a white label platform solutions that supports the institutions' lending brands.”

LendKey is one of two firms Garden Savings FCU used to service different aspects of its $298 million loan portfolio. LendKey manages the credit union's $7 million in private student loans and $1 million in green energy loans, a relatively new LendKey product available only to financial institutions in New Jersey.

Garden Savings FCU also administered $6 million of its $72 million auto loan portfolio through another online provider, the name of which Powers declined to disclose for competitive reasons.

“We don't have a hard ROI on these providers, but we make sure they make sense before starting out,” Powers said. “The beauty of these programs is that there are no startup costs and if you don't want to do the loans you just say, 'I don't want it.'”

Powers uses the services, each of which has a different rate structure, primarily to generate loan leads. LendKey provides what he described as a cleaner package when it comes to both generating and servicing loans and has helped offset some credit union costs to a moderate degree.

If there is any drawback at all, it's that leads generated through online engines may be a tough cross-sell when it comes to other credit union services. Ease of application and cost are drawing factors more so than the desire to set up a banking relationship with the institution, Powers explained.

The need for credit union alliances with online lending engines is only going to increase in the years to come, he predicted. Powers said he is already exploring similar relationships with credit card and home equity online options.

“It's important and it's probably something relevant for the majority of credit unions to at least explore,” Powers said. “This is how people shop for loans now and we need to be in that space as well.”

Daniel Harp, vice president of lending for the $610 million Dort Federal Credit Union in Flint, Mich., finds his cooperative's attitude towards online lending in much the same position.

Dort has been involved automated lending since 2004 when it incorporated Digital Dialogue, a product of technology CUSO veteran PSCU. Dort also uses LendKey for its private student loan business.

Online lending has played an increasingly important role in helping generate Dort's $398 million loan portfolio.

“We're in a rural area and once you get outside of Flint, there are just a lot of corn fields,” Harp said. “But people have computers and online lending is moving forward for us.”

The credit union's online function was largely dormant until Harp took it under his wing and established an e-lending department, which began to take off in 2012.

“I estimated that we'd do $3 million during the first year, but we did $8 million in eight months,” Harp said. “I knew if we did this right that online lending would pay for itself.”

Each provider charges differently, with Digital Dialogue fees based on the number of applications and how involved PSCU becomes in preparing applications. LendKey charges based on a percentage of the loan amount itself, Harp said.

“LendKey is the more convenient way to get a program up and running immediately,” he noted. According to Harp, Dort's student loan portfolio has grown to $6.4 million since bringing LendKey in in 2011. Harp said he is seeking other ways to automate more loans. Trained lending staff to manage the programs and service the loans are critical.

Outside of mortgages, consumer credit is a $3.2 trillion market of which only 1% is originated through online lending, Passione said.

“It's still small, but it's a great opportunity to convert existing loans and write new loans to those online platforms.”