Achieving Sustainable Loan Growth (Part 1)
Framing the Problem
For every credit union that has invested heavily in its lending process, there are plenty more who haven’t. Ok, most haven’t. This is surprising considering the majority of a credit union’s earnings are loan-related and most strive to deliver a quality member experience. This may also be why our industry struggles to gain material market share. Sure, credit unions are growing loans right now, but the industry is riding a consumer wave, and quite frankly, most everyone with an open sign is doing well. In fact, U.S. household debt is up over $300 billion year over year. Times are good. But it’s not the result of deliberate improvements in lending operations.
To prove this point, simply look at income trends through December 2013. After the NCUA insurance fund and stabilization expenses dropped off and provisions for loan losses subsided, the industry should have seen a massive spike in its return on assets (between 2010 and 2013, those two expenses accounted for billions of dollars). Yet, we didn’t see that gain in net income when the market stabilized, as one would have expected.
After pointing this out to a credit union executive recently, I was told the problem was margin compression and not operational inefficiencies, which is what I was opining. He was then surprised when I told him that if you subtract total interest expense from total interest income, and compare 2010 with 2013, the difference is less than $70 million across the entire industry.
Conversely, you’ll see a significant increase in operating expenses during that same time period. Credit unions were on a post-recovery spending spree (think diet rebound effect). Rather than emerge from the economic downturn with improved processes and systems, becoming leaner and meaner, credit unions appear to have simply added bodies to address growing loan demand. Loan demand, mind you, which may trail off in the coming years as consumer demand normalizes or weakens.
Even if we pretend consumers will remain credit eager for years to come, blatantly ignoring the cyclical nature of our business, credit unions will have a tough time maintaining loan growth rates if investments aren’t made to their processes, versus just adding people. Per Dow Jones VentureSource, the first quarter of 2014 saw a record investment in lending startups.
Bottom line, your competitors are no longer just banks, captives, finance companies, or even Walmart; they’re people who believe they can – through the use of new, mostly mobile technology – design a better mousetrap for your members; it may start with small personal loans (e.g. payday loans), but “revolutionizing” the auto loan process may not be far behind. Attend just one Finovate Conference and you’ll see numerous, very creative companies vying for your future borrowers.
Operational efficiency and member service are very much interrelated. What I mean by that is if you want to improve operational efficiencies, revisit the current member experience (from origination to funding, or pending, if the close never closed). For starters, when was the last time you walked the member’s path on a new loan request, from start to finish, including all follow-up? We asked that exact question recently in a large group of lending executives, and unfortunately very few folks had done this. It gets no better when you ask CEOs, CIOs, COOs, and those are the people who write the checks for new technology! Quite simply, a premium isn’t really being placed on the member’s lending experience.
So how do you improve the member experience, lower operating costs, and gain market share? We hit that up in Part 2 of the article, along with discussing some important automation opportunities.