Coronavirus creating new competition for a core credit union loan product
The coronavirus could shunt growth for a key credit union lending product.
Credit unions have long offered a variety of unsecured loan products as a way to differentiate themselves from the for-profit banking sector. Many banks have stayed away from that space out of a belief that small-dollar loans weren’t profitable enough to be worth the effort. The rise of fintech lenders has created new competition for CUs, but that could get even tougher as more banks signal a willingness to make those loans in order to mitigate the pandemic’s economic fallout.
Even before the spread of COVID-19, credit union loan growth — and particularly in unsecured lending — was already likely to be a challenge in 2020. According to CUNA Mutual Group’s Credit Union Trends Report for March, the most recent data available showed 7.7% year-over-year total loan growth as of January, down from 8.7% in January 2019 and 9.8% one year before that.
Unsecured loans, however, have stayed relatively steady. Year-over-year growth in that sector stood at 7.7% as of January, according to CUNA Mutual. That’s up 40 basis points from one year prior but essentially level with where things stood at the start of 2018.
Banks’ entrance into the small-dollar arena could change that.
With unemployment continuing to rise, financial regulators have urged banks, credit unions and other lenders to increase their small-dollar loan offerings to help consumers impacted by the outbreak. While the National Credit Union Administration already has rules in place to encourage that, banks across the country have quickly jumped on board. The product has already been so popular at one bank that total applications reached management’s cap in just a week.
“This is not a bank-caused crisis like in 2008, so for banks it’s sort of a do-over — a chance to say, ‘We’re the heroes, we care,’” suggested Steve Reider, president of Bancography.
He added that — even after the Wells Fargo scandal — banks’ reputations have recovered from the last crisis, which could make Americans less likely to view them as the bad guy. That’s borne out by a study from late last year that found consumers rated banks’ service levels as slightly superior to that of credit unions, reversing a long-running trend.
Reider added banks may not have the risk appetite to make small-dollar loans beyond their preexisting customer base.
“I can’t imagine banks are taking on new customers to write a $300 loan,” he said, adding, “I have a hard time imagining banks actively marketing that. Not that they wouldn’t provide it to a customer who asked … but I don’t see banks making that an essential part of their offerings the way credit unions historically have.”
There could also be a regulatory angle for banks.
“Candidly, if banks are doing [small-dollar lending], they’re almost doing that as a credit for the Community Reinvestment Act and wanting to be treated fairly by their regulators,” suggested Steve Williams, co-founder of Cornerstone Advisors. “It’s more of a defensive strategy than an offensive strategy. … I think most banks use small-dollar lending not as a profit strategy but a regulatory relations strategy, which is fine. They want to say, ‘If we get the charter and the deposit insurance and the right to earn money the old-fashioned way, we have to be committed to the community, so we have to offer these programs.’”
Disaster loan strikes again
Addition Financial, a credit union based in Lake Mary, Fla., rolled out its disaster assistance loan in mid-March as the coronavirus began to worsen nationwide. While some elements of the product are unique to this situation, the institution offers the loan whenever hurricanes or other disasters strike Central Florida. For COVID-19, the credit union is offering members up to $7,500 for 36 months at 1.5%.
In the few weeks since the product went live, Addition Financial has booked roughly $170,000 of these loans, with an average loan amount of $5,500, though members can request as little as $500.
Other credit unions are offering loans with similar minimums and maximums, though many are pricing them higher.
Miriam Mitchell, SVP of lending at the $2 billion-asset CU, said because Addition Financial has offered this product off-and-on for some time, it is not overly concerned about the possibility of new competition from banks, in part because of the low rate. However, like many banks, the deal is not open to new members. Consumers must have joined the credit union before March 1 to be eligible.
Mitchell said while credit unions tend to have a standard slate of loans, banks sometimes get in and out of a particular space “depending on what they want to participate in at that moment in time.”
“That’s a benefit of credit unions, because we have a product suite and we typically don’t pull the products back out and then reintroduce them,” she added.
Mitchell conceded that the credit union won’t make much money on these loans.
“When we went into it we knew it was not going to be a moneymaker for us. We just wanted to do something for our members,” she said. “We had our CEO and CFO involved in setting the rate so we could make sure it was a break-even, but we really were not looking at this product as a moneymaker.”
To offset that, Addition Financial is examining where it can invest new deposits that may come in, making adjustments to its allowance account to mitigate any future losses and has joined the Small Business Administration’s Paycheck Protection Program in an attempt to help keep its small-business members afloat.
Cornerstone’s Williams said one of the biggest challenges for credit unions won’t be whether they can compete with banks on these products but whether they can actually make money on small-dollar lending.
“The problem today is that the only way to do those profitably — and that’s been proven by [the credit union service organization] QCash — is you have to be a mobile-only product,” he said. “The friction and time spent in both origination and collection has to be incredibly efficient.”
And that could prove a challenge in an industry made up primarily of small institutions that struggle to find efficiencies and stay on top of technology trends.
Reider added that credit unions could benefit from the fact that, because of the limited potential for profitability, banks may not want to offer these products any longer than necessary.
“I don’t think smaller-dollar personal loans is a place most banks want to be in for the long term [but] I do think there’s a willingness — and probably even regulatory encouragement — to maintain what I’d call nontraditional offerings for as long as it is needed,” he said.