Over the past few years, most loan growth has been driven by consumer lending through loan recapture and indirect lending.
However, when interest rates start to increase—which appears likely to happen this year—consumer lending opportunities may begin to decline.
In order to replace the lending pipeline and revenue stream over the next few years, credit unions may want to emphasize small business lending, an area where recent regulatory changes and market demand herald significant opportunity.
An emerging opportunity
The NCUA Board recently and unanimously approved proposed changes to member business lending (MBL) regulations.
NCUA guidelines historically have restricted MBL opportunities and, as a result, MBLs currently represent just $51 billion of the $746.1 billion U.S. credit union loan portfolio—less than 7% of all loans.
The proposed NCUA changes should allow credit unions to more effectively compete for business loans, as some of the hurdles that can slow the approval and funding process will be removed.
According to the latest research from Raddon Financial Group, the opportunity for small business lending is strong, as 39% of small business respondents plan on seeking a new loan or adding balances to existing lines in the next 12 months.
This figure represents a sizable increase from 2012, when just 19% of small business respondents stating having such plans.
Raddon data also shows that 56% of small business respondents expect their sales to increase this year, compared to 29% in 2012 and 14% in 2010.
Based on these metrics, small business respondents appear more optimistic about the future of their firms, and thus are likely to be looking for funding to help fuel their growth.
Challenges and competition
One of the challenges that exists for credit unions is that the market for small business lending is very competitive. Due to legacy MBL restrictions, many credit unions do not currently have a strong presence in this market.
Raddon data shows that 67% of small businesses collectively identify the six largest U.S. banks as their primary financial institution—and only 5% cite a credit union. While this is a challenge, it also presents a large opportunity for credit unions looking to expand in this area.
Another area of competition comes from alternative lenders, many of which are based online. Alternative lenders are capitalizing on their ability to swiftly approve and fund loans—usually within minutes.
Raddon research finds that 15% of small businesses have used an alternative lender, with 24% anticipating they’ll use one in the future.
Millennial small business owners are most likely to use alternative lenders, with 51% saying they are extremely or very likely to use one in the future.
The proposed MBL changes may be helpful in enabling credit unions to compete more effectively by facilitating faster, more efficient loan approvals and funding.
The value of relationships and technology
Seventy five percent of credit union members with business accounts are very likely to recommend the credit union to a family member or friend, according to Raddon data. This indicates a significant growth opportunity for credit unions under the revised MBL regulations.
It is also important to note that technology plays a major role in serving small businesses. According to Raddon, 51% of small business respondents indicate that a financial institution’s technology resources have an impact on their decision to use the institution’s services.
In addition, among those who use mobile banking, 47% of small business respondents and 60% of millennial small business respondents say they would consider changing institutions if better mobile banking tools were offered elsewhere.
This is a clear indication that small businesses place great emphasis on the technology offerings of their financial institutions. Credit unions can capitalize on this by effectively communicating the availability and value of their innovative technology, such as remote deposit capture, mobile banking and payments, and bill pay.
Credit unions have an unprecedented opportunity to tap into the small business market through lending and other account services as new MBL protocols go live.
Credit unions already enjoy strong word of mouth endorsements from satisfied members, and those that seize the opportunity to expand their services to small businesses are most likely to experience growth from this market.
MARCUS ROTHAAR is senior research analyst for Raddon Financial Group.