BOWLING GREEN, Ky.–There have already been two big “inflection points” affecting credit unions so far this century, and a third, even bigger such inflection point is now underway, according to one person, who has also offered some strategies for responding.
Joe Karlin, who now leads Karlin Consulting and who said he has worked at every level of credit unions during his career, discussed recent changes to payments, consumer habits and lending, the outlook for consumer purchasing habits, trends and lending, and proactive preparation, in remarks to the Kentucky Credit Union League’s Executive Forum.
Every 10 years since 2000 there has been an inflection point for consumers, according to Karlin, who said the first of which was the mass adoption of mobile phones in the early 2000s and the introduction of the iPhone and the touch-screen in 2007. Today, there are about 170-million mobile banking users in the U.S., with 80% saying it’s their preferred mode for financial transactions.
“We couldn’t see this inflection point just 20 years ago,” said Karlin.
Then, in the mid-2010s, along came the second inflection point, 4G technology, which allowed for pinpoint location identification. That helped create user-validated ecosystems the paved the way for Uber and Lyft, as well as services provided by Amazon, food delivery businesses and more.
Today’s Inflection Point
What is changing today?
According to Karlin, today’s “huge inflection point will make the other inflection points seem like bumps in the road." Those inflection points are AI and 5G.
“Those two married together are really going to make some big differences,” he said, suggesting one such manifestation will be a move away from devices toward biometric identification solutions that requires only a screen and camera for ID and payment.
“Digital assistants will become our e-fiduciaries,” said Karlin, and will be the basis for payments, transactions and decisions for consumers. “That puts us as credit unions at risk of not being able to push our products to our members.”
As for AI, Karlin believes no one has any idea of just how “impactful” the technology is going to be.
“I guarantee you banks and fintechs are dialing up the AI knob right now,” he said. “That’s going to be very difficult on a credit union-by-credit union basis. We need to (respond) together in order to stay in front of the fintechs and banks.”
Consumer Habits, Preferences & Fears
Karlin said the coronavirus pandemic has also changed forever how people entertain themselves, how they shop and more.
Meanwhile, auto lending has been affected by the fact better-built cars are lasting longer, which has led to longer-term loans (as have prices and rates), with many rolling over negative equity into new vehicles, creating only more negative equity.
Karlin cited one prediction that the country is on the cusp of the fastest, deepest consequential disruption in transportation as more people opt to use shared vehicles rather than owning a car. He urged credit unions to consider new ways to respond to that growing reality.
In terms of mortgages, Karlin said, there has been a huge swing toward home purchases by investors, reducing the environment for individuals shopping for homes. Meanwhile, one-third of homeowners have a mortgage rate significantly below today’s rates, making them reluctant to sell their homes, which only further prevents other buys from entering the market.
Karlin said he believes there are opportunities in affordable/entry level home loans for credit unions.
Proactive Preparation
Looking for opportunities going forward, Karlin recommended a number of strategies, including:
- Credit unions look beyond A&B paper. “If you’re priced correctly you can go deeper in credit and increase unsecured lending. Your C paper should be priced the same as you’re A paper. I call it a ‘net contribution analysis,’ which is about going through each product except mortgages and looking at products by credit tier to see what is being netted. There is often a bell curve, with A and B members getting lower rates due to the competition. This is a great time to make sure to do your revalidation to make sure you are charging correctly.”
- Go to a lendtech. Partnering with lendtech firms offers opportunities for higher rate auto loans and loans for persons buying out their leases, said Karlin. He explained the third party will use the CU’s underwriting criteria, help bring in new members, and bring in higher yielding loans. “A lot of these borrowers aren’t worried about rate, they are worried about payment,” said Karlin.
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