The Convergence of Payments and Lending is Coming. Is Your Credit Union Ready?

June 23, 2022 Co-op Solutions

Payments Lending Convergence

Payments Lending Convergence

How do credit unions best compete with fintechs?

The key lies in becoming the digital hub for all the member’s financial needs. This is what leading fintechs are doing, and they are already enjoying transformative success.

The Co-op CU Growth Outlook study shows that rapidly growing and diversifying financial technology firms like PayPal, Chime, Robinhood and Mint are quickly becoming the major competitors to credit unions, surpassing regional and national banks as the biggest threat to cooperatives.

In 2022, these trends have not only continued but accelerated. Moreover, fintechs are doubling down on their takeover of the financial services market with an increased focus on placing payments at the center of all they do.

Fintechs are growing rapidly — faster than all other types of financial institutions — and are capturing primary financial relationship (PFR) status from credit unions. For example, between 2021 and 2022, PayPal experienced five times relative growth in PFR, Chime grew by a factor of 18, and both Robinhood and Mint quadrupled the number of respondents that identified them as their PFR.

But this evolution also highlights a future state ripe with opportunity—and one that credit unions are uniquely primed to serve. That future state will be transformed by the convergence of lending and payments.

The Evolution of Payments in Three Waves

According to Rob Mannamkery, Senior Manager, Financial Services Business & Digital Strategy Consulting at EY, who participated in a panel discussion at Co-op’s THINK22 conference in May, the modernization of financial services has evolved in a series of “waves” over the past couple of decades. The first wave was the move from analog to digital interactions, as exemplified by the growth of bill pay, P2P and digital wallets as a convenient alternative to cash and physical checks.

The second wave is what Mannamkery calls the evolution of payments from “discrete to embedded.” Whereas the first wave was “a transformation of form,” this current phase is “a transformation of substance.”

“As you digitize your products—through virtual cards, bill pay, all of the different products that you have today—and you start to now embed them into different experienced ecosystems, that’s where you start to make those significant strides,” Mannamkery says.

Examples of this move toward embedded services include the growth in popularity of digital wallets, as well as Buy Now Pay Later (BNPL), which took off during the pandemic. As the ability to pay for goods and services moves closer to the point of sale, it is becoming more deeply integrated into the sales process, serving consumers’ needs to gain immediate access to funding.

According to Mannamkery, the emerging third wave is where things really start to get interesting.

“There’s a convergence that’s happening among deposits, payments and lending. If you think about credit, it’s really just a time-bound function that manages liquidity between cash flow cycles. The more you compress that time-bound spread, the more these products start to converge.”

— Rob Mannamkery, Senior Manager, Financial Services Business & Digital Strategy Consulting at EY.

Implications for Credit Unions

This convergence between lending and payments will have significant implications for credit unions. As members demand access to funding to meet their cash flow needs in the moment—whether to purchase a new car, a home, a household appliance, groceries, or a vacation—the winners will be those institutions that provide the right product at the right place and at the right time.

Mannamkery sees this impacting how credit unions—and the entire financial services industry—operate in the future.

“The economics are going to change,” he says. “Whether it’s interest income or non-interest income, all of that will be impacted, and credit unions need to consider how they are measuring these impacts within the organization.”

Fortunately, credit unions have certain advantages over the competition in serving their members’ changing needs. Credit unions already enjoy strong trust and loyalty among their members and are considered the go-to source for their members’ life stage financing needs, especially when it comes to big-ticket purchases like new homes, renovations and autos.

But to make the most of this emerging opportunity, credit unions need to begin investing now in modernizing their infrastructure, with a focus on uncovering deep insights within their member behavioral data.

“The future of lending, payments and financial services fundamentally rests on insights and automated actions,” Mannamkery says, “and being able to remove the challenges for the member.”

Samantha Paxson, Chief Experience Officer for Co-op adds that credit unions also need to take a fresh look at their organizational structures, with emphasis on breaking down traditional silos.

“Credit unions have a separate lending department, a payments department, a marketing department and a retail department,” Paxson says. “These functions are converging, and credit unions need to streamline their structure in a way that serves the member best. It’s about turning those silos on their side and asking how we can design our processes between the payments and lending functions to best move the member across our organization and eliminate any points of friction.”

Josh Sledge, Senior Director of Incubation at the Filene Research Institute agrees.

“Maybe some of that payment information can help you to underwrite your member’s loan request, because you understand their cash flow better and you can open up credit access in a way that no one else can,” Sledge says. “Magic can happen when you break down those silos. But that means you’ve got to have the infrastructure and the analytics capability to be able to draw those connections and act on them.”

Eliminating Bottlenecks in the Process

Paxson sees the challenge as analogous to the country’s current supply chain woes, where transportation and warehouse resource limitations prevent the efficient movement of needed goods from producer to end consumer. Paxson cautions that credit unions can’t focus solely on digitizing the front end, in terms of member engagement, while ignoring back-end processes and infrastructure.

“If we are engaging our members digitally but our back-office processes are siloed, the technology is not integrated and the data is not integrated, then we are creating a bottleneck in terms of how we’re serving our members.”

The reality is that convergence in payments and lending is coming. For credit unions, the time to invest in digital infrastructure, processes, and data capabilities—both member-facing and in the back office—has arrived.

For a deeper dive into Co-op’s research on the importance of driving growth through payments and daily member interactions, view our latest white paper, “Co-op CU Growth Outlook: Bridging member needs and payments strategy to deepen trust.”

CU Growth Outlook

The original article The Convergence of Payments and Lending is Coming. Is Your Credit Union Ready? can be found on Insight Vault.

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