A recent IBM report showed that web and app-based businesses are disrupting all retail businesses. The largest taxi company in the U.S. (Uber) doesn't own any cabs, the largest accommodation provider (Airbnb) owns no hotels, the largest phone company (Skype) has no telco infrastructure, the largest software vendors (Apple and Google) do not write apps, the most popular media provider (Facebook) creates no content, and now, the fastest growing consumer lenders (Lending Club and Prosper) are not banks and do not have branches.
These changes are in addition to the old news of tech disruption to brick and mortar retail stores, music and video distribution and services, and this was the first holiday season when consumers spent more time online than in stores. And most of their purchases were made on smart devices.
There are many reasons why this shift away from traditional retail is occurring, most of which address an enhanced shopping experience. They include the proliferation of smart devices, the wide availability of Wi-Fi, the use of big data to provide an intuitive shopping experience, the adoption of cloud technology to reach consumers wherever they are, electronic wallets and other mobile payment systems, and the use of social media and device notifications to stay in touch with customers. As a result, technology, coupled with changes involving how customers want to use the web and apps, is causing disruption in the retail space at extraordinary speeds.
This same type of disruption is already happening in banking. Our job is to disrupt the disruptors.
The entire retail banking marketplace is under attack – payments, checking operations, branch utilization and our core lending business are now all targets for disruption. The numbers are extraordinary; Prosper and Lending Club alone will fund more than $8 billion in consumer loans in 2015, compared to less than $1 billion just three years ago. Only two or three credit unions in the United States produce that much business. Quicken, which just announced a completely online application and decision-making process, is often ranked as one of the top three mortgage originators in every major market.
Fintech companies and large financial institutions are investing billions, including in consumer, small business and mortgage lending platforms, digitalization of processes, data analytics, big data, lead generation, mobile first, omnichannel and every other form of marketing and processing across the Internet. New technologies are appealing to younger demographics and to the entire digital-oriented marketplace, which now includes a wide cross section of consumers in the U.S. Think about how many devices each of us use on a daily basis, including laptops, smartphones, tablets, satellite radios and televisions. Many households have more than 10 devices – something that was unheard of only a few years ago.
So much of our business now begins and ends on the web. Our customers do most of their product research on the web, and then use their smart devices to apply for our core products. How long will it be before more lending business is completed online rather than in branches? In our view, it will be soon. If you agree, then it is imperative that your credit union start to invest in the digitized platforms necessary to provide your members with the online services that they have come to expect from other retailers.
The game is on and we need to jump in and attack, especially as our core business – consumer lending – is now being usurped on the Web by new entrants, marketplace lenders and exchanges.
What is amazing about the new marketplace lenders is that they provide an improved member experience. Their processes are significantly more efficient, and they are more effective at managing risk. Their digitized loan processes are easy, intuitive, fast and informative. They use big data to analyze risk and validate everything from credit to income to homeownership, and can do so within minutes.
As part of the peer-to-peer lending process, consumers and small business owners apply for loans on a website, then a decision engine automates the underwriting, renders a decision, and if approved, notifies individuals to fund a portion of the loan. When the exchange identifies enough individuals with the capital to fund the loans, the loans are then approved and funded. This process has been so successful that institutional investors and financial institutions have replaced individuals as the primary funders because they have confidence in the process and are in search of the higher performance and yield that these loans represent.
Credit unions need to adapt to these models now, disrupt the online lenders and get ahead of the banks. We need to create a marketplace lending platform that is uniquely designed for credit unions and can offer a better price point. The platform must evoke a credit union brand, deliver loans to our balance sheets, support member growth and leads to new relationships. In our view, the formation of a new CUSO that uses marketplace lending automation across all major product lines, but is designed and branded exclusively to serve credit union members, is an approach worth investigating.
Credit unions have a window of opportunity to grab significant market share from the disruptors because of our inherent price, service and trust advantages. The ultimate winner in each of the web-based retail models will offer better service at a better price. We can form partnerships today, utilize the proven technologies and processes, build a marketplace lending brand and set a winning price.
Kirk Kordeleski is CEO of Kordeleski Consulting. He can be reached at 516-528-5057 or [email protected].
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