The Path Forward: New Lending Opportunities are Necessary for Survival

Change, for better or worse, is always happening. I can’t help but think I am part of the last generation that will have grown up without a cell phone or the internet constantly at my fingertips, and how strange it will be for me to explain to my children that we managed to live happy lives without those amenities. But there is value and a need for these inventions, which is why we have all permanently embraced them and incorporated them into our lives.

This got me thinking about a business meeting I recently had, where CEO shared with us a story of change his father experienced. His father was a banker, and decades ago he thought the idea of drive-up service at a bank was ridiculous. He thought it was a waste to knockout a bank wall to put in a drive-up window, but realized afterwards how wrong he was. When the next innovation came, the ATM, his father was one of the first bankers to have one installed!

I think we tend to view our field of financial services as a mature industry, and I agree that it is, but mature industries are still strongly shaped by technological advancement. Arguably, mature industries have to adapt faster to technological advances because they face greater competition in their field. If you manage your institution in the manner of “I’m going to stick with what I have always done because it has always worked,” you are ironically facing an existential threat. The world of finance today is not like it was decades ago for several reasons.

One major change is the role of the community bank is in decline. Many banks have been swallowed up into larger enterprises that no longer will find it cost effective to handle small business lending. While I lived in Washington DC, I witnessed banks that would refuse to look at loan requests less than $1 million, $5 million, or even $10 million simply because it wasn’t worth their time! While some community banks will continue to provide services to smaller businesses, the number of these banks is shrinking every day.

I see this as a tremendous opportunity for the credit union industry to fill the community banking role that banks are leaving behind. Credit unions’ mission has always been rooted in empowering members, and business lending can be another way to directly support members and the community.

While many CUs have seen themselves traditionally as consumer lenders, this lending is becoming an increasingly low yield product that covers less and less overhead. The yields are low and demand is not experiencing strong growth. It is the CUs that embrace business lending that will continue to survive - both by garnering better yielding assets and by providing services that their members are demanding and fewer banks are providing.

Business lending is a big change, but it is a necessary change for credit unions. Small business is the engine that drives the US economy, and CUs can be there to feed that engine in place of consolidating banks that pass over small business needs. Best of all, business lending is one more service that several members need, which makes it a perfect fit for CUs trying to empower their members.