Credit Union Lending Strategies and Trends

Credit Union Lending Strategies and Trends

Table of Contents Lending Strategies and Trends Executive Summary...3 Introduction...5 Section One: Remote Lending...8 Indirect Lending...8 Internet Lending...9 Call Centers...10 Multiple Channel Delivery...11 Remote Channel Future...12 Section Two: Lending Process and Product...13 Loan Origination Systems...13 Credit Scoring...13 Automated/Instant Approvals or Decisioning...14 Risk-Based Pricing...15 Outsourcing...15 Small Business Lending Products...15 Lending Process and Product Future...16 Section Three: Marketing and Advocacy Issues...17 Cross-Sell Effectiveness...17 Cross-Sell Tracking and Incentives...17 Marketing Tools...17 Marketing Future...18 Section Four: Future Opportunities... 19 1

Table of Figures Lending Strategies and Trends Figure 1 - Credit Unions Doing Indirect Lending...8 Figure 2 - Credit Unions Making Consumer Loans via the Internet...9 Figure 3 - Credit Unions Using Outsourced Call Centers...10 Figure 4 - In-House vs. Outsourced Call Centers...12 Figure 5 - Credit Unions Using Credit Scoring...14 Figure 6 - Credit Unions Using Risk-Based Pricing...15 Figure 7 - Credit Unions Providing Monetary Incentives...18 2

Executive Summary The Lending Strategies and Trends research continues to show that credit unions are working at integrating a mix of channels to deliver lending products and services. Delivery includes not only product, but also marketing communications. The integration of multiple channels puts pressure on marketing. That means channel integration must recognize the increased use of the remote channels for developing a relationship prior to purchase. In 2007, the research shows that: A majority of credit unions are now using indirect lending as a means to compete in the marketplace. However, they will continue to face increased competition. Potentially these pressures have greater impact on those credit unions with fewer assets. Virtually all credit unions surveyed are using the Internet for taking applications (93%). Although a relatively small percent use the Internet for closing, the percentage providing members the option of digital signatures has increased. This provides the possibility of more extensive use for other steps in the process. Outsourced call centers continue to be used to support in-house operations and are not as likely as in-house centers to be used for multiple stages in the lending process. This research does not indicate that the use of outsourced centers is being expanded to cover other functions. Although the overall volume may be going up, the percentage of loan applications taken through remote channels has not increased substantially over the last year, and many borrowers still go into the branch at some point in the process to complete the loan transaction. Until the channel integration is more effective, the use of remote channels may be limited. Meanwhile, Forrester Research shows increases in the percentage of consumers that are using the Internet to research and apply for financial products. As Generation Y enters the marketplace, they are expected to increase the rate of change in the use of technology and the Internet. More than any other generation, Generation Y, or Gen Y, those people primarily in their 20s, makes use of technology related to communications. Their communication style incorporates greater networking capabilities. Financial service providers need to be prepared to meet the needs of this group. Credit unions want to streamline their lending processes. However, asset size does impact the implementation of automated processes. As asset size increases, so does use of efficiency improvements such as automated loan origination systems and instant decisioning. The lending process is core to any credit union s business. Credit unions continue to do relatively little outsourcing. Past research has shown that in areas that are developing, such as indirect lending and small business, credit unions do outsource aspects of the function. Therefore, it may not be the outsourcing itself that is at issue, but rather that the focus is on expertise. Credit unions can effectively manage the lending process and so do not recognize the need to outsource. However, a partnership may augment the internal processes in such a way as to better manage the channel integration. Given this benefit, a partnership could potentially help to build relationships with members. Marketing combines with channel integration to deliver information as well as products and services to members. Borrowers will want more targeted messages based on their own needs. The transfer and use of information within the lending process will help to identify opportunities. Creative use of information in developing marketing and product strategies also differentiates in the marketplace. 3

Generally, industry trends are shaped by consumer preferences and needs. With lending, the process provides the borrower experience. Past research has shown that borrowers believe that the process should be kept simple. Increasingly, consumers will be looking to take a more active role in designing product and process. Trends in other industries such as music and entertainment illustrate the impact of technology and the Internet in shaping these changes. In these industries mass collaboration is influencing their economies. The potential for reshaping service industries such as financial services is even greater than for the packaged goods industries. In service industries, customers can have more complex needs. Customers are more likely to engage in the interactions and to be seeking personalized assistance. Financial needs can serve the basis for greater emotional connections. In order to provide members the type of experience that they want, it is important to assess customer needs, not focus on the product features. Credit unions can create new opportunities when they meet customer needs by cutting across product and service boundaries. The members will look at their borrowing experience from an entirely different view than the credit union. Investments need to be focused on core activities. By better understanding the trends that shape customer preferences as well as industry trends, marketing effectiveness can be improved. 4

Introduction CUNA Mutual s Lending Strategies and Trends research tracks trends in lending products, process, delivery, and marketing, and compares current information with earlier surveys. This research provides a tool for credit unions to use in developing future lending strategies and programs. To shape this report, 311 lenders were randomly selected in July 2007 from credit unions with assets greater than $50 million nationwide. (No study was undertaken in 2006.) Lending managers answered questions about remote delivery channels, lending operations, marketing programs, and customization of lending products and services. When the surveys were analyzed, responses were tabulated for the entire survey universe and for credit unions with assets of $250 million or more. Since these large credit unions tend to be early adopters, tracking their responses can help to identify emerging trends. To translate trends research into actionable strategies, it should be viewed in the context of the larger marketplace and consumer preferences. Market Preferences Credit unions have the opportunity to develop member relationships. According to Forrester Research Inc., 1 credit unions relative to other financial service providers are viewed as member advocates and have greater potential to deliver additional products and services to their members. The percentage of members rating their credit union high on this measure has been consistent over the past three years. On marketing issues, credit unions fluctuate in their assessment. However, an increase in one year doesn t necessarily indicate a trend. In 2007, credit unions surveyed indicated some improvement in certain cross-sell-related capabilities. Past research has shown that members are willing to consider 1 Forrester Research, Customer Advocacy 2007: How Consumers Rate Their Banks, Brokerages, And Insurers, June 2007. additional products and services if credit unions can enhance staff consultative selling skills to deliver them. In order to provide this consultative approach, information related to understanding the customer needs becomes important. Consumer segmentation is used to provide greater clarity, but its objectives need to be well-defined. Borrower research also indicates the importance of providing members with product and delivery options. Forrester Research on borrower needs shows that every generation is borrowing, but their channel preferences and product needs are different. For example, Generation Y (ages 18 to 31), Generation X (ages 32 to 43), and younger baby boomers (ages 44 to 52) are more likely to prefer the Internet for researching a new financial product. Older boomers (ages 53 to 61) and seniors (ages 62 and older) prefer the branch. Channel preference varies by the type of use (research, opening account, and service) as well. Gen Y prefers the Internet for research, but they prefer the branch for opening accounts. Compared to other generations, baby boomers are more likely to be using home equity loans and credit cards, and refinancing mortgages. Gen X is more likely to be taking out auto loans and mortgages, and the Gen Y focus is on student loans. Therefore, it is important to segment markets and find out what the borrower is looking for in a product or service. Product Development The market place is increasingly dynamic. The Internet is providing the opportunity for far greater collaboration. Business will become increasingly shaped by the input of the marketplace. Because of this, we all need to think differently about change and innovation. To innovate and succeed, the new mass collaboration must become part of every development effort. It will become increasingly important to be able to integrate ideas of diverse groups. This mode of innovation and value creation is called peer production, or peering, which describes what happens when masses of people and 5

firms collaborate openly to drive innovation and growth. 2 In order to identify opportunities to develop new products and services, credit unions can use a number of different methods. 3 These methods include: Strategy Identification. Strategy analysis of competitors may show product- or service-related gaps in the marketplace. These gaps provide opportunities in configuration and positioning of products and services. Competitors can become partners in development. Buyer Needs. The needs of buyer segments may impact decision-making differently. Innovation involves assessing members needs in order to identify potential in market segments. Members are critical to collaboration. Solution Assessment. Another option is to look at other products and processes that facilitate the use of core products. The key is to define the total solution and the experience that buyers seek when they choose a product or service. With commodity products, solutions become more important to innovation. Market Positioning. Creative positioning can give your product appeal in the marketplace. Creating either emotional appeals in a functionally driven market or function in a more emotionally driven market can differentiate. Branding involves an emotional connection that transcends the product. Trend Tracking. A final method in discovering opportunities is to look at industry and consumer trends. 2 Don Tapscott and Anthony D. Williams, Wikinomics, 2006. 3 W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy, 2005. In using trends for development, new opportunities result from understanding the change in consumer values and building business models that respond to the trends. For example, members are using technology to facilitate gathering information related to products and services. Over time, developments recognizing this trend will have greater market impact. It is about finding insight in trends that are observable today and using that information to develop innovative new products. Trends need to be used to change value to meet customer needs. By working with these trends, credit unions will in turn help to shape them. An ultimate goal is to understand the borrower preferences for product, service, and delivery. These preferences can be found through research on the borrower experience and competitive initiatives that then drive marketplace trends. Trends are the outcome of collaboration between all those that are vested in that market, most of all, the member. Lending Strategies and Trends Research The research describes trends in the credit union industry and addresses the impact of trends on future development. The paper is divided into three sections. Remote Lending. This section highlights delivery channel trends and development. The percentage of consumer loans being made through remote channels continues to remain fairly constant. Credit unions and their members rely on face-to-face interaction for significant steps in the process. Innovation can focus on coordinating these channels. With increased integration, remote channel use may increase. Process and Product Development. Borrowers expect a streamlined experience that addresses their needs. Members will increasingly make themselves available to be involved in that process. Market leaders develop new products that meet or anticipate the needs of the customer. With commodity products, like loans, differentiation can be achieved by marketing (delivery, pricing, communications) and service factors. 6

Marketing and Advocacy. Given the multi-channel environment, marketing has become more complex. Generational differences demand different types of approaches to the market. Generation Y wants communication that fit with their social networking type of framework and integrate communication channels effectively. However, baby boomers may never be ready for this type of communication style. Advocacy requires a different type of relationship than the traditional cross-sell. Marketing must communicate with members using styles preferred by its members. Other financial services providers are faced with similar challenges. Those that are able to increase their marketing effectiveness will be successful. It is not just about what is said; it is about how it is said. Cross-selling must be integrated into an overall communication plan. By understanding member issues and preferences, changes can be made that create value and build that relationship. 7

Section One: Remote Lending Credit union adoption of the remote channels has slowed. Over time, the percentage of consumer lending dollars transacted with a member face-to-face (the member comes into the credit union at some point during the loan transaction) has not changed (65% in 2007). On average, the research shows that the percentage of auto loans that are indirect has grown. Generally, percentages through other remote channels have not grown substantially. A sizable number of credit unions expect to see the percentage of remote volume increase. Indirect Lending A solid majority (70%) of large credit unions (assets of $250 million or more) use the indirect channel. In 2007 the percentage of credit unions with $50 million or more in assets making indirect auto loans is 57%, close to the 2004 percentage. Although the percentage of credit unions doing indirect lending has gone up over time, it fluctuates from year to year. Smaller credit unions appear to be entering and exiting the program. In 2007, the percentage of smaller credit unions ($50 million to $100 million in assets) with indirect programs has increased. This might be due to these credit unions trying to gain market share by developing relationships with the dealers. However in the past, their percentage has gone down. It may be harder for credit unions with fewer assets to compete in this marketplace, hence the fluctuation. Figure 1 - Credit Unions Doing Indirect Lending 100% 90% 80% 70% 60% 50% 40% 30% 34% 38% 40% 48% 42% 48% 46% 59% 49% 57% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 Credit Unions with $50 Million or More in Assets 2007 Lending Strategies Research 8

Credit unions structure their indirect programs in the following ways: 35% have the dealer originate the loan and purchase the loan contract from the dealer. 44% have an agreement with the dealer whereby the credit union is the underwriter and the lender, and the dealer closes the loan transaction. 36% of those doing indirect lending say they use both types of programs. Credit unions are automating their programs with electronic delivery. In 2007, an estimated 55% of credit unions used the Internet to transmit application information to and from the dealer. The volume of loans that these credit unions transacted through the Internet is at 84%. The percentages of indirect loans approved (58%) and of those, the percentage closed (65%), are lower than for consumer loans overall (72% and 77%, respectively). Internet Lending Internet lending has been almost universally adopted by credit unions. Ninety- three percent of credit unions with $50 million or more in assets (and 96% of credit unions with $250 million or more) offer Internet applications. In a month, on average, the percentage of loans taken over the Internet is 21%. Sixty-nine percent of credit unions taking applications via the Internet expect to see growth in the percentage of Internet loans in the future. The percentage of Internet loan applications approved (49%) is lower than the overall consumer loan approval rate and the indirect approval rate. With such a high percentage of credit unions offering Internet loan applications, it is now more insightful to monitor trends in how the Internet is used for other aspects of the lending process, in particular, closings and use of digital signatures. Figure 2 - Credit Unions Making Consumer Loans via the Internet 100% 90% 80% 81% 91% 88% 93% 80% 70% 60% 58% 73% 66% 50% 42% 40% 28% 30% 20% 18% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 Credit Unions with $50 Million or More in Assets Source: 2007 Lending Strategy Research 9

Credit unions with $250 million or more in assets lead the way in expanding Internet functionality beyond the loan application. 48% of credit unions with $50 million or more in assets provide electronic disclosures (65% of credit unions $250 M plus). 57% electronically transmit application information directly to their loan origination system (72% of credit unions $250 M plus). 12% do closings via the Internet (18% of credit unions $250 M plus). 78% have the capability of electronically delivering funds into checking or savings accounts (82% credit unions $250 M plus). 16% offer the option of a digital signature that uses encryption to provide a secure form of identification (14% credit unions $250 M plus). Call Centers Call centers, both in-house and outsourced, are an important delivery channel for lending products, especially in larger credit unions, and their use is expected to grow. Among credit unions with $50 million plus in assets, 48% use a call center either in-house (33%) or outsourced (26%). 44% of those outsourcing also have an in-house call center. 7% of credit unions not currently outsourcing rate their interest high ( as a 6 or 7 on a 7 point scale) in using an outsourced call center to handle all or part of their consumer loan processing. Among credit unions $250 M plus, use of call centers is more prevalent. 81% use a call center either in-house (67%) or outsourced (40%). 65% of those outsourcing also have an in-house call center. Figure 3 - Credit Unions Using Outsourced Call Centers 50% 40% 33% 32% 29% 30% 30% 30% 26% 23% 25% 26% 20% 16% 18% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 Credit Unions with $50 Million or More in Assets Source: 2007 Lending Strategy Research 10

The percentage of loans taken through outsourced and in-house call centers has not grown in 2007, with an average of 15% of consumer loan applications taken through outsourced call centers and 32% taken in-house. Again, credit unions continue to expect the percentage of consumer loans handled via call centers to increase. Thirty-eight percent of credit unions $50 million or more in assets expect increases through outsourced call centers and 62% through in-house operations. Credit unions with an outsourced call center were asked about the type of coverage provided. Seventyeight percent of credit unions used their outsourced call centers to cover both business hours and after business hours, and 21% covered after-business hours only. Of those outsourcing during business hours, 72% outsource only the over flow, with 28% completely outsourcing. Currently, outsourcing focuses primarily on the front end of the lending process loans. These lending centers perform the following functions for these credit unions: Cross-selling the credit union s financial products and services (71%). Communicating back to the member the approval or denial of the consumer loan (58%). Making loan decisions, approving or denying consumer loans (57%). Providing support for loan applications submitted via the Internet by answering member questions or assisting with completing the applications (44%). Completing loan documents (5%). Setting up loan closings (5%). Delivering funds (5%). Transmitting loan information directly to the credit union s database (43%). As Figure 4 on the next page shows, in-house call centers are more involved in processes beyond the initial stages of the loan process than are their outsourced counterparts: Cross-selling products and services (97%). Communicating back to the member the approval or denial of the consumer loan (81%). Supporting lending done via the Internet (76%). Setting up loan closings (67%). Completing the loan documents (58%). Delivering the funds (54%). Approving or denying consumer loans (51%). Multiple Channel Delivery In spite of the growth in Internet applications, members are still coming in to the credit union at some point during the loan transaction. Credit unions report that on average, 65% of their consumer lending dollars is transacted face-to-face. However, percentages do vary by asset size, with 71% of lending dollars transacted face-to-face in credit unions with $50 million to $100 million in assets, compared to 55% in credit unions $250 M plus. Credit unions continue to focus on developing the remote channels. 39% of vehicle loans are indirect (among indirect lenders). 21% of consumer loan applications are taken via the Internet (among Internet lenders). 32% of consumer loan applications are taken over the phone (in credit unions with in-house call centers). 15% of loan applications are taken through outsourced call centers (for credit unions with outsourced centers). Multiple channel delivery is a significant issue for credit unions. Seventy-three percent of credit unions say that a key challenge for their credit union is to integrate delivery channels such as face-to-face, phone, and the Internet to meet member needs. 11

Figure 4 In-House vs. Outsourced Call Centers (2007) 100% 97% 90% 80% 70% 60% 71% 81% 76% 58% 67% 58% 54% 57% 51% 50% 44% 40% 30% 20% 10% 5% 5% 5% 0% Cross-sell Comm Internet Closing Loandocs Funds Approval In-house Outsourced Credit Unions with $50 Million or More in Assets Remote Channel Future Based on the remote channel data, the following issues are raised: Although the percentage of credit unions doing indirect lending shows continued growth, credit unions in the indirect lending market will continue to face increased competition, creating barriers to entry. Credit unions have adopted the use of the Internet for taking applications. Generally, credit unions are not using this channel to facilitate the closing. The adoption of digital signatures may help to facilitate closings. Outsourced call centers are still primarily used for the initial stages of the loan process. Outsourcing augments internal operations. Source: 2007 Lending Strategy Research use a remote channel if it is effectively integrated with other channels. A borrower may also be more likely to use the channel if the process is streamlined and well-understood. Multi-channel communications, as well as operations, are important to reach certain segments of the marketplace. Since members may borrow relatively infrequently, changes in the process in terms of options need to be made clear. Borrowers may tend to use the channel that they have used in the past. Therefore, it is important to communicate the options in order to improve on the development, as well as invite feedback on the channel processes. Credit unions have put remote channels in place. The challenge now is to develop them to fit the borrower s needs. A borrower may be more likely to 12

Section Two: Lending Process and Product Research shows that borrowers want a streamlined lending process but don t believe that they are currently getting one. In the 2005 CUNA Mutual Borrower Research, consumer loan borrowers (primarily Generation X and Y) said that the process could be better facilitated. Only 47% said that the process to take out a consumer loan was very streamlined, and 52% believed that the process was more complicated than it needed to be. In the first half of 2007, 72% of consumer loan applications were approved, and of the approved applications, 77% were closed. These percentages are fairly consistent over time. Loan Origination Systems A majority of credit unions are using a loan origination system (LOS) that is at least partially automated. Twenty-three percent of credit unions use a fully automated loan origination system, while 49% use a partially automated one. The remaining credit unions may have a stand-alone system that isn t as integrated. Credit unions with $250 million or more in assets are more likely to say that they have a fully automated system (40%). Of those partially or fully automated, the following functions are being automated: Document generation (81%). Risk-based pricing (78%). Indirect lending (59%). Relationship pricing (31%). Identifying members to cross-sell (45%). Cross-sell reporting (30%). Compared to 2005, more credit unions are using their LOS for risk-based pricing, indirect lending, and cross-selling support. Generally, the percentages for credit unions $250 M plus show a similar priority in terms of adoption. The percentages for credit unions $250 M plus are 37% (data processor) and 63% (third party/inhouse/other), respectively. Of those credit unions using an automated system, 26% with $50 million or more in assets (up from 18% in 2005) use a signature capture tool, such as a signature pad, to place signatures on loan documents. About one-quarter (24%) of the credit unions $250 M plus in assets use a signature tool. Credit Scoring Credit scoring and risk-based pricing are examples of product-related features that increase the efficiency of the lending process. These features demonstrate how product development and process can combine effectively. For this reason, credit union adoption of these practices has increased. Credit scoring is a prerequisite to a risk-based pricing program. Empirically derived and statistically sound credit scoring systems have grown in popularity over the last 10 years: 90% of credit unions (88% of credit unions $250 M plus) say that they use credit scoring to evaluate members, virtually no change from 2005. 13% of credit unions who use credit scoring use a customized credit scoring model to score borrowers, and 87% use a bureau-based score. 34% of credit unions (44% of credit unions $250 M plus) use a bankruptcy indicator to qualify a loan in addition to a credit score. Although a majority of credit unions use credit scores, for most it is only part of the criteria used for granting a loan. Only 3% of credit unions use credit scoring as the sole determinate of approval status. Another 42% (67% of $250 M plus) use credit For 58% of credit unions, the automated LOS is provided by their data processor, and for 42% it is provided by a third-party vendor, in-house or other. 13

Figure 5 - Credit Unions Using Credit Scoring 100% 90% 80% 69% 67% 76% 78% 87% 86% 90% 70% 60% 50% 40% 30% 20% 10% 45% 59% 61% 0% 1996 1998 1999 2000 2001 2002 2003 2004 2005 2007 Credit Unions with $50 Million or More in Assets Source: 2007 Lending Strategy Research scoring as a part of an automated decisioning process that includes other criteria, and 55% use it as just another indicator in a manual loan underwriting process. Automated/Instant Approvals or Decisioning To give borrowers that quick loan decision that they are looking for, an increasing number of credit unions are turning to instant approvals facilitated by automated loan decisioning. Of those credit unions using credit scoring, 53% (76% of credit unions $250 M plus) use decision engines with set criteria to provide instant, automated approvals on consumer applications (up from 46% in 2005). Of those not using automated decisions, 34% say they are very likely to provide them within the next year. Instant approvals are most popular in the Internet channel, where members have grown to expect answers at the click of a mouse. But credit unions providing automated decisions use them in other channels as well: 75% Internet. 71% face-to-face. 63% call center. 53% indirect. Although automated decisioning is growing rapidly, credit unions are being cautious in applying it to all loans. A majority of credit unions (55%) are using it to approve specific loan segments such as high credit scores. Other credit unions (31%) say that the automated decision serves as input to a process that is still primarily manual. Only 14% are using automated decisioning as the sole criteria to approve or deny all loans. 14

Figure 6 Credit Unions Using Risk-Based Pricing 100% 90% 80% 70% 60% 56% 53% 59% 67% 76% 80% 85% 50% 39% 43% 40% 30% 26% 20% 10% 0% 1996 1998 1999 2000 2001 2002 2003 2004 2005 2007 Credit Unions with $50 Million or More in Assets Source: 2007 Lending Strategy Research Risk-Based Pricing Credit union members want products and services customized to meet their needs. Risk-based pricing is a means of providing customized service because it provides tiered rates based on a member s credit worthiness. A majority of credit unions have adopted this concept of rewarding members with good credit histories with lower rates. Eighty-five percent of credit unions with $50 million or more in assets do risk-based pricing for consumer loans. For the credit unions with $250 million or more, this percentage is 87%. Outsourcing As credit unions seek to operate more efficiently, they are looking at outsourcing those functions that can be managed more efficiently by an external vendor. The survey asked about outsourcing on a number of operational functions. Responses did not change substantially from 2005. Servicing and collections is an area that continues to see little outsourcing: Only 10% of credit unions (10% of credit unions $250 M plus) outsource any of the servicing of consumer loans. 4% say that they are likely or very likely to outsource in the next year. 26% reported outsourcing at least some part of their collections, excluding repossession or disposals. 4% of credit unions not currently outsourcing rate their interest as high (a 6 or 7 on a 7 point scale) in outsourcing some part of collections. Small Business Lending Products As the lending environment has become increasingly competitive, credit unions have expanded beyond traditional consumer loans and looked for creative ways to grow their loan portfolio. They continue to 15

serve more member needs by developing the market for products related to small business. In the 2007 survey, 50% of credit unions with $50 million or more in assets said that they are doing some form of business lending (up from 43% in 2005). Credit unions with $250 million or more in assets are more likely to offer business lending products than are those with fewer assets. Following is a list of business lending products currently offered by survey respondents: 39% residential real estate loans (40% of credit unions $250 M plus). 30% non-real estate small business loans (39% of credit unions $250 M plus). 24% commercial real estate (37% of credit unions $250 M plus). 25% business credit cards (39% of credit unions $250 M plus). 10% financing for retail inventory (18% of credit unions $250 M plus). 4% financing for dealer floor planning (3% of credit unions $250 M plus). technology is illustrated in the adoption of risk-based lending and automated decisioning. Larger credit unions, however, are more likely to implement new technology. Twenty-two percent of those credit unions that did not market small business loans say they are very likely to do so within the next year. Lending Process and Product Future Over time, the rate of innovation in products and process will increase. Process features are core to the lending function. Channel development and technology will continue to shape this process. Credit unions do relatively little outsourcing and do not have immediate plans to do more. However, past research shows that in areas that are developing, such as indirect lending and small business, credit unions do outsource some aspects of the function. Outsourcing and partnerships may become more important as the Internet and multi-channel development take hold. Products must be designed to fit this new lending environment. Regardless of asset size, credit unions want to increase efficiency, and many look to technology for process efficiency improvements. Increased use of 16

Section Three: Marketing and Advocacy Issues This section tracks trends in a variety of marketingrelated functions, including cross-selling, employee incentives, and marketing databases. Generally, any change has not resulted in a sustainable trend in the use of these techniques and tools. Cross-Sell Effectiveness Credit unions continue to work to improve their cross-selling effectiveness. Over time, the perceived effectiveness fluctuates. In 2007, 48% of credit unions with $50 million or more in assets say that they are successfully cross-selling lending products and services through multiple channels (41% in 2005). As a measure of success of these efforts, lenders were asked about the number of financial products that a member has with the credit union. On average, a member at a surveyed credit union has 2.96 products. Cross-selling success is highly dependent on the sales culture at the credit union. Credit unions with fewer assets are less likely to see themselves as having a sales culture. Overall, 50% of surveyed credit unions (43% of credit unions $250 M plus) say that their frontline staffs are still better described as order takers than advisors or counselors. Previous research (in-depth interviews) with lenders indicates that training on the use of the credit report is an important component in assessing member needs. Sixty-four percent of credit unions (74% of credit unions $250 M plus) report that frontline staff has been trained to use credit report information to cross-sell products and services. In 2005, the percentage trained to use the credit report was 56%. Cross-sell Tracking and Incentives Compared to 2005, the use of tracking systems has grown, and the use of incentives continues to increase steadily over time (See Figure 7, Page 18.): 66% of credit unions (76% of credit unions $250 M plus) track the cross-selling efforts of their staff (in 2005, this percentage was 58%). 65% of credit unions surveyed provide monetary incentives for staff to encourage cross-selling of other products and services (64% of credit unions $250 M plus). Of those using monetary incentives, 43% use individual incentives, 8% use group incentives, and 50% use both. A higher percentage of the credit unions $250 M plus in assets (66%) use a combination (group and individual). Marketing Tools The Lending Strategies and Trends research also tracks the use of Marketing Customer Information Files (MCIFs), which collect and organize product and demographic information about each member household. Sixty percent of credit unions surveyed with $50 million or more in assets have a MCIF either inhouse or outsourced. This percentage increases with asset size. Eighty-nine percent of the credit unions with $250 million or more in assets have a MCIF. In 2005, 51% of credit unions $50 M plus had a MCIF, with 73% of the credit unions $250 M plus indicating that they had a MCIF. Credit unions use their MCIFs for demographic analysis of membership (90%) and to target direct mail campaigns (90%). Smaller percentages of credit unions also use MCIFs for assessing the profitability of market segments (72%) and assisting in developing budget and financial plans (51%). In 2005, the percentages assessing profitability and using the MCIF to assist in developing budget and financial plans were 63% and 42%, respectively. 17

Figure 7 - Credit Unions Offering Monetary Incentives. 100% 90% 80% 70% 60% 50% 40% 40% 46% 50% 52% 58% 52% 57% 58% 63% 61% 65% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 Credit Unions with $50 Million or More in Assets Marketing Future Although percentages on certain measures show change, the change may not be sustainable. Percentages can fluctuate over time, providing no real trend. Forrester Research indicates that credit unions are stronger than banks in customer advocacy. Sixty-six percent of members say that their credit union does what is best for them, not just its own bottom line. According to Forrester Research, advocacy carries the highest association and predictive power for cross-sell potential, and credit unions should take advantage of this strong member preference. Source: 2007 Lending Strategy Research This research has focused on specific marketing tactics in developing a marketing program. However, in order to make successful use of these tools (such as a MCIF and cross-sell training), it is important to have goals that incorporate the borrower perspective into the market and product development process. Unless the marketing program is robust enough to include market knowledge on actual needs and usage, then it will not be able to reach its full potential. As the consumer becomes increasingly important to collaboration, the competitive advantage based on their involvement will begin to emerge. This member integration is one of a credit union s greatest assets. 18

Section Four: Future Opportunities CUNA Mutual s Lending Strategies and Trends research has tracked credit union lending practices since 1996. This trend analysis provides snapshots of where the credit union lending business has been; but more importantly, it can provide insight into where it may be going. Over time, credit union use of remote channels has grown significantly. There have been changes in technology and the importance of marketing and cross-selling efforts. These trends are shaped by borrower needs, so it is important to understand that the member helps drive the trend. However, unless the member s needs are specifically addressed, adoption will be slowed. For example, a borrower may want to use the Internet, but if the site is not easy to navigate, that borrower may be forced into a branch. Therefore, adoption is based on the availability of a service that specifically addresses that borrower need. Analysis of trends research can help credit union leaders to actively shape the future rather than passively react to it. Trends don t provide answers, but they do identify issues that, if addressed, may result in opportunities to grow. To effectively use trend data, we must determine how the trend impacts the business and the value provided to members. Based on the trends information, there are a number of areas that provide opportunity for credit unions. These include further cross-channel integration, development of the member relationship, competitive analysis/tracking, streamlined process, and growth in partnerships related to product innovation. Cross-channel integration: Internet potential has not yet been realized. Generation X and Y are more technologically savvy than baby boomers. As significant numbers in Gen Y reach adulthood and move into the labor force (and prime lending years), a shift in channel preferences will result. integration is important to delivery. In use of the Internet, its relation to other channels must be considered. Member relationship: It is important to understand the needs of member segments and how they can be effectively differentiated in terms of products and services. Product and service development need to be customer driven. By better understanding the entire customer experience surrounding the purchase and service related to the product, credit unions can look for opportunities to grow. Member involvement in the new product development process will be instrumental in delivering additional insight. Competitive analysis/tracking: Financial products and services can be seen as commodities. In that type of market, competition becomes a greater concern. It is important to monitor what other credit unions are doing, as well as other traditional and non-traditional providers. Given the competitive environment, marketing positioning and segmentation may play a bigger role in being able to differentiate. Past research has shown that the non-traditional providers may offer the greatest challenges. Credit union trends allow for comparison with peers, to understand better their fit in the marketplace. However, these trends provide only a part of a bigger picture. By monitoring trends across related industries new opportunities can be identified and assessed. Streamlined process: Generally, consumers want a simple, streamlined, no-hassle process, and they don t want to duplicate their effort. Members want technology but usually are most interested when it addresses a problem. Technology for the sake of technology is not always welcomed. It is important to assess the benefit before adopting technology. The benefits provide the opportunities. Successful use of the Internet depends on building it around borrower preferences. Cross-channel 19

Partnering expertise and product innovation: Outsourced relationships need to be effectively managed to be able to provide the level of service that members want. Traditional management styles do not always translate to an outsourced environment. Therefore, it is important to be able to plan for the development of these relationships so that opportunities are not missed. The concern about control is a valid one; however, these relationships may provide for growth that cannot be accomplished by internal operation. Product innovation may depend on developing external relationships to remain competitive. Industry and consumer trends are intertwined. Trends are only important if they can provide a distinct advantage. The trend needs to be core to the business. In selecting a trend (industry or consumer) as a basis for innovation, the member value needs to be clearly understood. Once the trends are selected, then collaboration with the external environment to include consumers, competitors, and partners will expedite the process in providing creative input. The trends that these opportunities are built on include Internet/multi-channel use, social networking, and the changing competitive environment to include globalization, the use of technology impacting efficiency and access, and finally, the importance of external relationships in product development. 20