The financial services business model is perpetually at a crossroads and too often faces crosswinds. An uncertain economy like we see today often breeds hesitation; financial institutions may be tempted to slow down or pause technology investments not geared toward tightening balance sheets or finding greater efficiencies.
However, those institutions that will come out of this period stronger than their peers are reading the tea leaves quite differently and planning accordingly. This is a universal strategy, true in any sector, but it is especially important to financial institutions today as the competition for profitable, credit-worthy customers is always shifting. Lending technologies, in particular, can help credit unions and banks continue to grow into this future model, despite any economic downturn.
New technologies and partnerships are critical to explore, as many financial institutions have tightened their lending criteria. In fact, many lenders have decided to only lend to their existing customers or membership base in an effort to retain their high-value customers. While being smarter about how they lend is the right strategy, only lending to existing customers isn’t. To remain profitable, financial institutions need to generate loan volume from new clients, even if it is at a slower pace. Only lending to existing customers slows down future growth as well as financial institutions’ ability to truly meet the financial needs of the communities they serve.
Institutions should consider leveraging responsible lending technology partnerships that can help them attract new segments of borrowers. For example, participating in digital loan marketplaces that provide credit-worthy consumers a selection of firm, one-click offers of credit in their everyday retail and financial experiences. Unlike indirect lending through third parties (e.g., car dealerships), which is riskier as there is less control over which borrowers financial institutions get access to, a lending marketplace facilitates the acquisition of consumers that are credit-worthy, local, low-risk, and that skew younger. These new borrowers can then be converted into long-term, stable relationships, driving growth for the institution in the long term. This is the edge that can help community financial institutions thrive during any economic crosswind.
Today’s lending environment is the perfect time to prepare for the future. As financial institutions are competing over a smaller pool of borrowers, new fintech partnerships can help them maintain a proactive lending approach, with increased selectivity that acts as a safer, more controllable acquisition tool. Re-imagining, developing, testing, and optimizing lending technologies should be done now to avoid operating with outdated systems and processes. This will be especially critical as demand for different forms of credit rebounds and the march of post-pandemic consumer expectations of transparent, always on, always easy access to financial services continues.
Credit unions and banks should take the time to analyze the fintech market and see what new solutions best fit their organization, looking for vendors that are investing in the future. Adopting new technology during an economic downturn is not a new concept. History shows that some of the fastest-growing technology companies, from Airbnb to Instagram to Microsoft to Uber, were founded during recessions. The same can be said with the financial services business model, as the expansive fintech ecosystem had its genesis in the Great Recession. Engaging with fintechs now will lead to unique growth opportunities that are best gained during such crosswinds.
By embracing modern technology and partnerships and preparing their teams now, community institutions will be ready to capitalize on the inevitable shift in the lending environment. Moreover, credit unions and banks that leverage new technologies to continue acquiring credit-worthy consumers, while their competitors focus only on existing relationships, will continue growing at a steady pace, even in downturns – gaining a huge advantage within their market. This is one crossroad that financial institutions can certainly be more prepared for.
Dave Buerger is co-founder and CEO of fintech startup Union Credit, the first marketplace for credit unions to make firm offers at the decision of purchase. He previously co-founded CuneXus, where he served as CEO for over 15 years, and has worked within the credit union movement across several decades. Buerger's companies focus on providing consumer lending automation and loan acquisition technology to financial institutions and have been recognized for excellence in fintech innovation by organizations such as NAFCU, KPMG, Fintech Breakthrough, American Banker, Fintech Nexus, and more.