Amid a pandemic-plagued 2020, community banks and credit unions rose to the occasion as reflected in: the disproportionate number of PPP loans that kept local communities afloat, the emergency loans and accommodations extended to struggling borrowers, and the commitment to community as all of our worlds got a little smaller. Yet, continued encroachment of new market entrants into auto loans and cards, and consumer expectations of digital capabilities are but two challenges that overshadow what should be a shining moment propelling community lenders.
With aggressive growth goals, residual performance concerns and increased competition — especially at the top of the credit spectrum where many focus— why are some community lenders bullish on 2021, while others express unease? In conversation after conversation, three themes emerge with the banks and credit unions feeling confident in the year ahead.
When millions of Americans can’t make loan payments, and a record number of accommodations may have masked certain risks, why are some still lending confidently — and more efficiently than ever? Better data and analytics. In the last 12 months, the utilization of trended risk scores by community banks and credit unions has doubled, narrowing the utilization gap between FinTechs and big bank lenders and fueling growth from these insights (see chart). Incorporating credit use over time, liquidity and capacity measures, and payment data, these scores routinely outperform the point-in-time scores many still use. Additionally, the increased precision of these scores has allowed multiple community lenders to double or triple the number of loans they automatically approve.
Beyond better scores, attributes that pinpoint consumers still showing signs of financial stress give lenders peace of mind in knowing they’re not extending offers to consumers already struggling to manage existing debts.
Better data isn’t just a means to manage risk. By better targeting consumers likely to respond to an offer of a reduced payment through an auto loan refinance, one credit union grew response rates by over 50% and added $23 million in new loans through a single campaign. Another, frustrated with diminishing returns using their historical provider, doubled its monthly loan volume and grew the average loan amount over 40% using TransUnion data to optimize and personalize offers.
Getting a compelling offer in front of the right person doesn’t matter much if it’s hard to convert that into a loan. Beset with deferred projects and mired in 2020 cleanup, there’s little appetite to take on new projects. Yet, community banks and credit unions committed to growth have worked with TransUnion to deploy already-integrated capabilities that offer application experiences in line with leading FintTechs, or continue to present qualified offers across channels. And increasingly, size doesn’t matter. A billion-dollar Midwestern institution easily implemented a perpetual prescreen capability across their digital and team-assisted channels. By doing this, new loans jumped by 50% year-over-year, and their digital app drove 17% of new loan activations — a capability that previously seemed out of reach.
Credit unions and community banks have much to be proud of over the last year. Creating thriving communities by extending credit, demonstrating your brand promise of understanding individual needs, and evolving to meet consumer expectations doesn’t need to be complicated — but not addressing these imperils the long-term relevance of community lending.