It’s easy to build a business on certainty, but financial institutions are in the business of risk. You want to know your products will move, your staff will be happy, and you’ll turn a profit. However, community financial institutions are facing continuous challenges. We’ve seen years of strong loan growth, but according to Forbes, that trend will be shifting as auto loan growth slows and interest rates rise. The Washington Post also reported that home sales may slow this year. But community banks and credit unions are in the business of making loans, so how do we find new opportunities?
One sector to consider is lending to nonprime borrowers. We certainly do not want to revisit the financial crisis of 10 years ago, but we have more data and technology today to better understand and target these markets.
The credit bureaus are looking at new ways to calculate credit scores based on these new data. USA Today showed how the shift toward accuracy and better understanding affected overall credit scores late last year, and credit scoring will continue to evolve moving forward. Consider your own credit criteria – beyond credit score – when making decisions about consumers with credit scores a bit lower than your norm, such as payment records on non-reported payments like utilities and cell phones, credit counseling services, tighter loss mitigation practices and risk-based pricing. Perhaps they got laid off, which caused them to have some late payments, but they’re now back on their feet. The trajectory of the credit score can be more useful than the score itself. Help them out of a jam and get educated about sound credit usage and wealth building. You can earn a customer for life and a stream of referrals!
Check your deposit accounts. My last insight post was about using deposits to grow your business, and the nonprime (or emerging prime, as I heard last night – I like it!) can develop a wonderful opportunity to execute in a way that builds up the community. Mine your data. You can see how customers are using their money, and then you can make smarter decisions as to why your customer may have a nonprime credit rating. Based on this report from CNBC, younger customers likely have lower credit, so it can be a great source of less experienced customers whom you can develop.
Consumers are more than just a number. Use other data to balance the credit score. You can grow your nonprime portfolio to increase revenue, find new customers, and improve your relationship with a younger customer set. By offering products to these younger customers, you can create customers for life, helping them along their journey as emerging prime customers. These extended relationships generate real value over the life of your customer.