Credit unions saw positive loan growth in many areas in 2015. However, loan growth can be heavily tied to a number of variables, including economic, regional, and seasonal factors. As a result, an ever-increasing number of credit unions have identified the need to diversify their portfolios, seek higher yielding loan opportunities, and pursue areas where they can offer new loan options in their local communities.
We can all agree that loan portfolio diversity is vital to maintaining a healthy credit union lending ecosystem. One way to diversify, reduce concentration risk, and increase profitability is to expand your business to new frontiers. For instance, building out strong retail and medical lending programs can help lead to the growth and diversity credit unions are seeking, while also building new partnerships with local businesses and promoting member loyalty.
A Blue Ocean Lending Opportunity For Credit Unions
The growing retail and medical lending marketplace provides credit unions with a key growth channel that focuses on unmet consumer needs. New opportunities exist for point-of-sale (POS) consumer lending in high-end retail and medical services that can help distinguish local credit unions from large, universal banks.
Research findings from Filene’s and CU Direct’s 2015 Blue Ocean Lending for Credit Unions: Point of Sale Financingreport underscores the growth opportunity for credit unions through consumer lending, offering increased value to members, and, at a low cost. If tapped correctly, this opportunity could generate significant loan growth opportunities for credit unions. The potential size of this market is estimated at $391 billion annually, or approximately 3.5% of annual consumer spending — with health care, electronics and home goods, such as major home appliances and furniture, as the leading spending categories. Other key vertical markets that provide good opportunities include home improvement, heating/air conditioning, and sporting goods.
Credit unions have the ability to focus on untouched niche markets and be successful — if not a leader — in serving smaller, local providers in underserved industries. Credit unions need to look closely at point of sale financing (POSF) as a means to grow and diversify a loan portfolio with higher yield retail loans.
A strong POSF program provides credit unions with a good opportunity to offer members a more affordable alternative to high-rate financing offered by banks and payday lenders. Consumers often need financing for medical and dental services, such as elective surgery or cosmetic dentistry, as well as for landscaping and home improvement services, such as the installation of a new AC or heating unit or large ticket purchases, such as furniture.
By adding POS retail and medical financing to their menu of products and services, credit unions have an ideal opportunity to increase their value to members, expand their member base, and increase opportunities for cross-selling. Current credit union members and new members alike get trusted financing from a local source at competitive rates, while building new relationships they can depend on for future financing.
Retailers and providers benefit from increased sales, improved marketing outreach to the local community, and heightened satisfaction and stronger relationships with existing customers. By partnering with credit unions, they gain access to thousands of potential new customers and eliminate the need to provide layaway plans or in-house financing.
The Bottom Line
The POSF market is large and currently dominated by a small number of major banks. To compete, credit unions must provide their retail lending POS service with best-in-class systems and technology that meet customers’ expectations for fast, efficient, and seamless web-based loan applications, approvals, and documentation.
Credit unions should consider programs that allow them to select the retailers and service providers with whom they wish to partner, in order to focus on one or more particular markets, tailored to their membership, existing business accounts, and the larger community.
By capitalizing on lessons learned in their indirect auto lending POS programs, credit unions can grow their loan portfolios by expanding their lending programs to other types of vendors, including service providers as well as medical and retail businesses. Bottom line, with point-of sale financing, credit unions have a tremendous opportunity to achieve the growth and diversity they are seeking.
Sr. Product Manager, CU Direct.