This blog is based on an expert discussion at our Summer 2022 Brainstorm Event. Register to attend our next one now!
Living in the age of convenience and instant gratification has financial implications and the landscape around lending is changing to reflect that. Over the last several years, we’ve seen massive growth in Buy Now, Pay Later (BNPL) services and installment lending.
This trend is infringing on loans typically reserved for credit unions, threatening to take an even larger bite out of the market share as third-party fintech BNPL players continue to grow.
The expert panel at the CU 2.0 Brainstorm Event discusses the potential benefits and drawbacks of venturing into installment lending and offering BNPL products to credit union members, as well as strategies for developing and rolling out these solutions.
Watch the video below to catch the whole thing, or read on for a short summary.
Sean Zimmerman, former Executive Consultant at CU 2.0 and facilitator for the event’s panel, acknowledges some of the key challenges facing credit unions in this area:
- BNPL is growing in popularity.
- Traditional financial institutions are losing relevance and engagement.
- Consumers are facing a fragmented experience.
Although these present leveragable opportunities for credit unions, institutions that are hesitant to break into this space could face losing their members to other services because they’re using the products offered by competitors.
Chad Heese, CLO at Rogue Credit Union says he, like many other credit unions, initially thought they had a competing product in credit cards before realizing that it’s not the same as a credit card–it’s a shorter-term payment plan without viability that attracts members to BNPL and gives it an advantage over traditional financing products.
CEO at Suffolk Credit Union, Michele Dean, also acknowledges the attraction to the fixed payment and affordability. She touches on the potential that credit unions have to increase utilization in debit cards by adding a BNPL feature, the implementation of which better serves existing members and holds implications for attracting new members as well.
Brian Scott, CGO at PSCU immediately recognizes the disruptive nature of the popularity of BNPL outside of the credit union industry, as well as the potential for loss of interchange income and loans to other parties that offer these services.
Bryce Deeney, CEO at equipifi rattles off a handful of astonishing statistics:
- Third party fintechs like Afterpay and Klarna are growing 300% YOY.
- 60% of American consumers have used a BNPL service in the last 12 months.
- 75% of those that used it desire a BNPL product from their primary financial institution.
- In 1 out of every 20 transactions, consumers are using a third party BNPL at checkout.
He advises credit unions to look at their member data and see how they are currently interacting with fintech offerings to determine member interest and get data to back up a solution.
Zimmerman points out that big providers like Apple and Paypal are getting in on the BNPL game as well, further increasing the competition and pressure for credit unions to quickly produce an attractive solution.
Scott contributes additional information relevant to the statistics given by Deeny: BNPL transactions are often high dollar (new tires, for example), and represent significant loan volume loss that would otherwise go to the credit union. Deeney drives home the point by stating that members that have used third party fintechs often use them more than once and also represent greater loss over time, as the entire shopping experience has been relocated to the third party.
Without an in-house installment lending solution, credit union members are vulnerable to poachers online as well as in-store.
Michelle Dean’s team at Suffolk Credit Union is working on finding a holistic solution to incorporate BNPL while addressing its major problems. The team at equipifi looked at their member transactions to find these solutions and divided them up into three transaction categories: small, medium, and large. Here’s what they found:
- 50% of their transactions fell in the small category ($80 to $200).
- 20% were large transactions ($500 to $3,000).
- Even though the large tickets only made up 20% of the type of transactions performed, they accounted for more than half of the balances.
A big reason for choosing a ‘purchase first, decide how to pay later’ model was based on the desire to emulate one of the benefits of credit cards, which helps prevent members from overextending themselves financially.
So far, Dean says, a digital branch manager and a lending team are all the staff they currently have involved in implementing a BNPL solution, but they anticipate having to address staffing needs as they move closer to launching a product this coming November.
Scott reiterates the earlier point that was made by Bryce Deeny: a majority of credit union members actually want BNPL or installment lending offerings from their primary financial institution. Because of this, he suggests, credit unions can easily compete with even the biggest names in third party fintechs–especially because of the credit unions’ established relationship with their members.
Credit unions already possess all the relevant information to make a quick credit lending decision, including personal details, spending history, and credit history. The name of the game is member retention. 68% of members already have an account with one of these third party fintechs, and once they venture out and start using the financial services these companies offer, it’s hard to reel them back in. Making your credit union the member’s first choice for BNPL is the key to retaining them.
Deeny believes there are two major advantages that credit unions have over other fintechs offering BNPL:
- An established relationship and member data
Credit unions have direct access to their member’s financial data, allowing them to view a more comprehensive assessment of the member’s history to make more sound credit risk decisions.
Third parties have to rely on external services (here he mentions Plaid as an example) to get a quick snapshot of a customer’s financial information to rapidly make a decision.
- Credit unions are already in members’ wallets
Members are likely already utilizing a debit card or are more willing to use a card once issued. Not only that, but they are already conducting a majority (if not all) of their banking on the credit union’s mobile app (think P2P, billpay, monitoring transactions and credit scores, etc.).
Incorporating BNPL solutions into preexisting mobile apps is one of the best ways to get a leg up on the competition, as they’re stuck fighting to get your members to download their apps and create an account in the first place.
BNPL, as Dean pointed out earlier, has huge potential for generating non-interest income, especially right now when credit unions need it most.
With NSF fees nearing extinction, the next best source of non-interest income is debit card usage because it generates significant interchange income. BNPL could be crucial in making debit card usage more attractive–not only to increase usage among current members but draw new members as well due to the sparse number of financial institutions offering BNPL with debit cards.
It also potentially holds the key to capturing the younger generation of members. It’s convenient and offers solutions to cash flow problems to help them do what they need to do.
Dean also agrees that it’s up to credit unions to do the right thing for their members by enacting parameters within BNPL products that protect members from overextending themselves and conservatively offering credit lines to those who can repay them, as well as offering financial literacy resources. She repeats herself to emphasize that if members can’t get BNPL products from their credit union, they can and will get it elsewhere that may not offer the same protections.
Deeny wraps up the conversation by advising credit unions to look at a member’s risk profile and set up a fixed fee when creating a product, as many consumers like BNPL because they know what the payment installments are before they even agree to the loan, less variables and what consumers might consider “hidden fees”.
Members can also know how much credit they can use and where before shopping, as tech at equipify integrates with banking core to get real-time analysis of consumer portfolio and risk analyzing data. At any given moment, the member is already pre-approved for a credit line before going shopping.
All panelists agree that ultimately, it’s up to individual credit unions whether they want to integrate BNPL into their product offerings or not, but their members are going to use it regardless of who is offering the service. Credit unions that get on board early with attractive solutions could stand to gain as much as they stand to lose in the way of generating non-interest income, providing more value to their members, and increasing growth amidst tough competition.