Imagine being an entrepreneur in 2005. Your sights are set on opening a new restaurant. You have most of the finer details planned: the style of food, name, location, and architectural design. But you have one major hoop to jump through: financing.
You go to the credit union, get your loan, and break ground on that new restaurant. Bon appétit.
Now, imagine opening that same restaurant today—and again, 10 years from now.
Already, you can turn to options other than credit unions, banks, and friends and family for that loan. In addition to traditional funding sources, sophisticated startups and monoline lenders (national companies that focus only on mortgages) are rampant. Lending competition is changing. These new rivals are nibbling away (and soon might be chomping away) at not just business loans, but unsecured loans, auto loans, and mortgages, too.
Over the next decade, expect to see a continued rise in online lending, consumer peer-to-peer lending, and crowdfunding, according to “Credit Unions in 2025,” a new research report by Filene Research Institute. And while you’ll likely maintain your advantage in pricing, that might not cut it. Lenders that make the entire borrowing process as easy as possible for consumers will emerge as the winners.
Crowdfunding — through services such as Kickstarter, Fundable, and Indiegogo — allows a large number of people to pool their money to fund a particular person, project, or cause, with no financial payback. Normally, the “ask” is for a specific amount, and the service will release the money only when project creators reach a target.
If the project creator don’t meet that target in a specified period of time, the service returns the accumulated money to the dozens, hundreds, or thousands of contributors. Crowdfunding platforms usually take a commission to support the marketplace they provide.
The rise of powerhouse online mortgage brokers such as QuickenLoans and aggregators such as LendingTree has proven that most households no longer need a face-to-face transaction for even their largest loans.
In the U.S. in 2012, about 50% of lenders received more than 25% of their mortgage applications online, and issued online approvals to 61% of applications submitted through third-party underwriting systems, according to Brett King, author of “Bank 3.0.”
Mortgage specialists such as QuickenLoans and PennyMac, which focus on easy applications and processing, have jumped in the mortgage share rankings since 2012, according to Kathleen Pender of the San Francisco Chronicle.
Person-to-person (P2P) lenders present a real risk to credit unions, too. Prosper and Lending Club, which allow individuals to lend money to others online, have taken steps to add business lending to their rapidly growing consumer portfolios, and they’ll continue to eat their way up the value chain. In September, The New York Times quoted a borrower who had just consolidated some debt online. Notably, he described the process with a mantra credit unions have celebrated for decades:
The industry’s nonbank qualities appealed to Eric Kim, 33, who lives outside San Francisco. “I liked that it wasn’t a bank,” said Mr. Kim, who took out a $21,000 loan from Lending Club with a roughly 9% interest rate to clear his credit card debt. “It felt more like people helping people,” he said, “not some multibillion-dollar conglomerate.”
And here’s Goldman Sachs describing emerging players in P2P lending:
“We see significant risk of disruption as less regulatory burden and a slimmer cost structure (over time) drives pricing advantages for new players. Of the $843 billion of consumer loans outstanding, we see $209 billion ‘at risk’ to move to new players over the longer-term. With less than 2% of the market today, we estimate new entrants could control up to 15% of the market over the next 10 years.”
As P2P and alternative lending platforms master the art of automatic underwriting, expect them to move up the value chain toward auto loans, mortgages, and especially, business loans.
Will auto lending decline?
Millennials won’t suddenly abandon cars and create a giant hole in the market. In fact, thanks to burgeoning sales across the spectrum of consumers based on pent-up demand, 2015 is on track to be one of the best auto sales years ever.
But unlike their parents, young adults won’t own two or three vehicles. Urbanization, changing employment prospects, and the skyrocketing use of ride-share services such as Uber mean we might see a national decline in traditional auto purchases. As auto growth declines and ownership models change, loans will decline.
But this won’t lead to the end of auto lending. Consumers will continue to demand transportation. Instead of reactive measures, credit unions can become proactive in learning how to finance new transportation models. The market for autonomous drivers will reach $42 billion by 2025, according to Barclays analysts.
The same report predicts self-driving cars will comprise 25% of the autos on the road by 2035. Consumers will still need to finance autonomous vehicles, but they won’t replace existing vehicles on a 1-to-1 basis.
Why do members choose credit unions for auto loans? Price is the primary reason, according to the Filene white paper, “A Wallet Allocation Rule Approach to New Car Loans.”
But even with indirect lending, banks consistently demonstrate much stronger connections to car dealerships. To that end, credit unions can compete on pricing against their bank competitors but still lose out on auto-dealer influenced loans, Filene research shows.
If the problem lies in a lack of awareness or consideration at dealerships, credit unions should double-down on awareness strategies.
Alternatively, credit unions could find ways to pre-emptively encourage or offer incentives to members to initiate contact with their credit union before considering referrals from an auto dealer.
Business lending is a must
Gradually, credit unions are gaining more access to business lending. The regulatory cap of 12.25% of assets slows many credit unions from venturing into business lending. And low income-designated credit unions don’t have that restriction.
Long-term lobbying will bear fruit as people realize credit unions can be easier to work with than other financial institutions, and are eager to inject capital into small businesses.
But again, technology will disrupt traditional business lending. Alternative or online lenders can generate quicker loan approvals by analyzing businesses’ balance sheets. Lenders such as Kabbage and OnDeck have higher commercial loan approval rates (62%) than small banks (50%), credit unions (43%), and big banks (21%).
Goldman Sachs projects $178 billion of small business loans in the banking system could be “at risk” of disintermediation, with $1.6 billion of banking industry profits attached to those loans. Regulatory constraints aside, credit unions must figure out how to generate quicker loan responses. This will require adjustments to current risk models and lending approaches.
In 2025, will credit unions’ reputation as superior lenders inspire the same kind of loyalty and respect as today? Only if credit unions, together and apart, ride these trends toward ever better ways to provide member value. That value can shine through in interest rates, in access, in convenience, in service, and in communities, but it needs to be tangible for credit unions to grow.