How Credit Unions Can Attract New Members, Deepen Existing Member Relationships and Create “Stickier” Deposits Through SMB Lending
By Will Tumulty, CEO, Rapid Finance
In today's competitive banking landscape, credit unions are constantly seeking strategies to attract new members and expand their deposit base with stable funding. One area of opportunity lies within small business lending.
There are currently more than 33 million small businesses in the United States and of these, more than 85 percent are owned by Boomers and Gen-Xers, who also comprise the majority of most credit unions’ membership bases. It stands to reason that a meaningful percentage of each credit union’s members are also small business owners, whether that’s a one-person consulting company, a side hustle to earn a second income stream or an established storefront business within the community.
In most cases, members would prefer to have their personal and business banking relationships consolidated within the same institution, as many small businesses are funded through the personal accounts of their owners. Too often, however, this is not an option.
The end result is that small business owners look to community banks, large banks and/or specialized fintechs and lenders to help meet their small business capital needs. This becomes problematic for credit unions as these competitive providers then cross-sell those same members and work to convert them into their customers, threatening longstanding member relationships and the stickiness of their deposits.
An Existing Alignment With Credit Unions’ Vision
99 percent of the businesses in the U.S. qualify as small businesses and cumulatively, they employ more than 61 million Americans. As such, small businesses exist as the financial lifeblood of most communities in which credit unions operate – communities that credit unions exist to serve.
As an asset class, small business loans tend to be more stable and well-performing than other types of loans, and deposits held within business accounts have proven to be much “stickier” than consumer account deposits.
By putting a strategic focus on small business lending, credit unions can simultaneously grow deposits while expanding and deepening existing member relationships – something that has a direct, positive impact on member retention. When credit unions nurture a robust small business lending program, they not only empower local entrepreneurs, but also unlock opportunities for themselves to positively impact their communities in a more significant way.
Meeting the SMB Need: Some Considerations for CUs
Credit unions traditionally rely on individual member deposits, which in the current economy, can be volatile and susceptible to economic fluctuations. Generating deposits from small businesses offers several crucial advantages to address this instability:
● Stability: Small businesses tend to maintain consistent banking relationships, providing a more reliable source of funds compared to individual accounts, which can be more susceptible to economic downturns.
● Increased Loan Potential: Because small business deposits are generally larger than consumer deposits, a strong deposit base from small businesses positions credit unions to provide more loans of all types, further strengthening the credit union’s own financial health. Studies show that credit unions with robust small business lending programs experience higher loan growth compared to those without.
● Member Retention and Growth: By catering to small businesses, credit unions can attract new members, fostering a more diverse and resilient membership base. For existing members, the provision of small business lending supports member retention by adding loan products and services to existing members’ account mix.
The challenge for credit unions is that many have not traditionally operated in the small business lending space and there are some important factors to consider before executing a strategy.
From a loan decisioning standpoint, there are additional data points and verifications (including KYC/KYB, cash flow and debt-to-income ratio analysis for the business, among others) that are required in risk responsible small business financing – and it needs to happen very quickly. In most cases, when small business owners seek capital, it is because they have an immediate need.
Fintechs and banks have recognized the importance of fast decisioning and access to capital and are leveraging innovative technology to automate much of the process. Credit unions will need to do the same in order to compete, either by partnering with a LaaS fintech or by integrating a business lending solution into their existing tech stack.
For credit unions that recognize and move to capitalize on the opportunity that exists within their own membership base, small business lending presents a viable strategy to grow deposits in a challenging banking environment. Better still, it presents an opportunity for credit unions to make a more meaningful impact in the lives of their members and the communities that they serve.
Will Tumulty serves as CEO of Rapid Finance, a financial technology company and the one of the largest providers of working capital to small businesses in the United States.
Read the full transcript of the video below:
Disclosure: Transcript is automatically generated
Sarah Cooke 00:00
Welcome everybody. We're here live at the Americas Credit Unions GAC 2024. Been a great show, a lot of energy here. I'm here with Will from Rapid Finance. Welcome.
Will Tumulty 00:37
Thanks. It's good to be here. Yeah.
Sarah Cooke 00:39
Why don't I let you introduce yourself and your, a little bit about what your company does?
Will Tumulty 00:42
Sure. I'm Will Tumulty. I'm the CEO at Rapid Finance. We provide capital to small businesses across the country, we also offer software service platforms to other enterprises that want to be able to bring capital solutions to their small business customers. Yeah.
Sarah Cooke 00:59
And that's, capital is key with small businesses. I know. So yeah. How are you finding credit unions interest in small business lending? You know, years ago, it was, you know, they were very shy about it, because of the risk involved, obviously, and other elements having that right expertise, but that certainly, that tide has changed. So talk a little bit about that the, the sentiment that analysts, I want to say consumer sentiment, credit union sentiment around business lending, yeah,
Will Tumulty 01:37
right, exactly. So you know, historically, credit unions have not been big providers of capital to small businesses, they've been very focused on their members. And there are some regulatory limitations that credit unions have. So understand where that is, I think, more recently, we're finding that there are some credit unions that are exploring this as an opportunity, which I think is really a great fit with the credit union mission of serving their communities. So if you think about it, you know, credit unions, really, the financial heart of their communities through their members, but a lot of their members are small business owners. And so being able to bring capital solutions to those small business owners, so that they can help grow their businesses within their communities seems like a perfect fit.
Sarah Cooke 02:23
right. And it's certainly an underserved community, which credit unions should be, should be doing. The end, you know, the small businesses are often the heart of the communities that the credit unions are serving too. So it fits the mission all the way around. I've always wondered, you know, what the holdup is, obviously, expertise is a big thing. We've seen a lot of credit unions buying banks often to buy that skill set, or the the knowledge and the technology. What are your thoughts on that? Is it a smart way to do it, or...?
Will Tumulty 02:59
I think, if you can buy a bank for the right price, it can be a good, a good return on that investment. Right. Um, but one of the things that we find is not all banks do a lot of small business lending. And if you think about your typical bank, in their commercial lending portfolio, in many cases, the smallest loan they'll make might be half a million or a million dollars, right, because they're looking to put big chunks of capital to work at a time. And their business processes and their systems infrastructure are really geared around that. So there's a lot of things that are very manual that are not terribly automated. And so, but most of the small businesses really, they they don't need, and they can't afford a half a million dollar loan, right might need a loan of 50, or $100,000, which makes a lot more sense for them. But the acquisition costs associated with the commercial infrastructure that a bank might have for lending is just too expensive, right. And so, you know, having been a small business owner ourselves for more than decade, we have built and used our own systems infrastructure, to do a lot of automation, a lot of credit-model-driven underwriting followed up with sort of manual reviews by our underwriting team where necessary, right. Importantly, to speed up the process, because as you know, as a small business owner, right, when you're looking at your cash flow, and some opportunity comes along, and you want to be able to jump on, it's like, okay, I don't have six weeks to go through a process, right? The bank or credit union. For this, it's like, I gotta commit to this by Thursday. It's Monday and so I gotta know whether this capital is coming through by Wednesday. So I can make a contractual commit right, with the counter party.
Sarah Cooke 04:42
right. And it's not only a great opportunity for that business. It's a great opportunity for the credit union or the lender as a lender, but yeah, because that is a loan you may not have realized otherwise until this person had the, that urgent need, but then you can't fulfill it usually because it takes too much time.
Will Tumulty 05:00
Exactly. And you know, it really can build a much stickier relationship with your customers. So it's like, okay, I'm a credit union, I have a credit union member who has been doing their personal banking with me for 10 or 15 years, they have a small business. Now I can do their business banking, I can bring them capital. The other nice thing about capital is, it would be tickled to say, Okay, if you're going to get a loan, you need to have your business bank account with me. Right. And that builds your deposit base, right? That is typically larger, right? Companies, small businesses have more money in their bank accounts than consumers do, typically. And those are relatively sticky deposits, right? So it can help that side of the balance sheet as well.
Sarah Cooke 05:45
Yeah, and right now, credit unions need the deposits.
Will Tumulty 05:51
That's right, everybody needs the deposits.
Sarah Cooke 05:53
So I mean, as far as business lending right now, is it a good environment, for credit unions to do, to be entering the business?
Will Tumulty 06:02
So, you know, it's such a broad market, that there's never a bad time to do lending to small business as long as you're smart about it. And as long as you enter a new market in a measured way, as any responsible financial institution would, right. So right, we've seen over, you know, we've seen many cycles over our time in business. And, you know, the, probably the worst time to get in would have been right before the pandemic, not expecting another one of those, no, but you know, delinquencies and write offs, they they ebb and flow largely with the broader US economy. The economy has been pretty strong. I know everybody's worried about is the recession coming later this year. But I think as long as you're focused on very solid, stable, small businesses that have a loyal clientele, they've been in business for a number of years. And you are prudent with your underwriting you can do just fine. Yeah.
Sarah Cooke 07:00
And, and often, and you were talking nationally, but there are pockets where things are going great. There are other pockets where it's not but but yeah, it really depends on that local community where the business is serving, or whatever the product is, or service is. And the demand obviously.
Will Tumulty 07:17
Exactly. And there are cyclical things in industries, right. So we saw more delinquencies and write offs over the past year in transportation, right. So freight, that whole industry was hit by some macroeconomic factors related to supply chains catching up and then being over overstuffed in the warehouses. And so you don't need those trucks moving goods around. So, you know, that is another thing based on our experience as a lender that we can help our credit union customers figure out, right, if particularly if you're new to small business lending, and like, which, what should I worry about here? Right. How do I underwrite? Particularly if it's a business, that's not heavy on assets? Right? Because the underwriting there can be different, we do most of our underwriting based on business cash flow, right? So we get the data that we need, or system can automatically pull most of that together, and then we can figure out okay, what is the stability? The cash flows? What's the level? Are they rising? Are they falling? And, you know, what kind of a loan could we do for our business?
Sarah Cooke 08:23
Right, and I love that you guys are talking like $50,000 loan, because those, those, you know, landscapers who need to buy a truck, or whatever it is, you know, a piece of equipment or, you know, a restaurant, whatever. Because those are the people that are you know, they're part of the community, and then as credit unions, they're supposed to be supporting the community. And so being able to give them, you know, that small dollar loan for a business anyway, small dollar loan is great. Because I guess the point was, it was too expensive to do it, and which is why, you know, they'd rather have one lender at a million dollar, one borrower at a million dollars versus 10, and 100,000. So
Will Tumulty 09:02
exactly, it's expensive. And it's difficult to deploy capital, right? If you have a several billion dollar balance sheet, deploying that capital, you know, 25 or $50,000 at a time, you got to do a lot of that. So you really need automations in the system infrastructure to do that efficiently. Right.
Sarah Cooke 09:19
Talk a little bit about the automations. What are the like time savings you're seeing within the credit union or lender, but also, for the businesses? Like how quickly are they able to get their applications turned around? That kind of stuff? Yeah,
Will Tumulty 09:34
so we, we use our own systems, right, so we eat our own dog food. I've been doing it for 10 years. And so that's really, we took, we took the stuff that we've developed internally, and we have commercialized various sub elements of that. Really focused on the front end acquisition and origination portion of the lending value chain. On our internal program, so we have small businesses coming to us for a loan or a line of credit. Once we get a completed application, probably 80% of the applications that we can approve, they are approved and funded within 24 hours. Right? So we can do it pretty quickly. The way we do that is we rely on our systems to do a bunch of automated data gathering for us. Okay, so we get the information about the business, right? So business name, address, EIN, right, identifying information about the business things about the business owners, right, because you got to know about the business owners as well. And then we take that information, we have one system, that is a data enhancement and aggregation platform, takes that, shotguns out information out to a couple dozen different data validation vendors or enhancement vendors, it brings all that back that usually takes less than a minute. And then we have rules that can look at all that enhanced information and say, okay, doesn't hang together, does it look real? Right? Are there any red flags, then on that particular system, we can compare all of that enhanced information to every other customer that we've ever seen? Right? Because we load that that information in there. And we say, Okay, on applications that we saw two years ago, are there any matches on those data elements, were they approved, were they declined, did we flag them for fraud, right? And so you can basically do a lot of upfront screening and enhancement, so that by the time you have people getting into the loop, you're not spending a bunch of time on things that are just not going to go anywhere. From there, it moves to our loan origination system. And in that loan origination system, that's where we apply sort of the the credit rules, the credit rules that will be based on business credit, business owner credit, cash flow of the business. And the machine will basically pull all that information in and give a preliminary assessment that is then passed on to an underwriter, who will then look over the file and say, Okay, maybe we need some more information to validate some things, maybe they want to check some documentation. There might be other documentation that's needed. But all that can happen in a couple of hours, and a message can go back to the applicant, really that same day and say, Hey, we've got a preliminary approval, here's the rest of the documentation we need, here are the terms and the dollar amounts and the things like that. So if you're interested, click here. And you can continue through the process. Nice,
Sarah Cooke 12:29
very efficient and digital, all digital. Which you know, that transformation has been accelerated, if you will, by COVID, obviously. So, talk a little bit about that, how the technology push, because my understanding is credit unions are now like, Okay, we know we need to do it may, or even maybe a little more apt to adapt the technology even than others. And I think in part is because they're so member focused, membership is focused. Talk a little bit about the not only the evolution of the technology, but also like the evolution of the attitudes toward
Will Tumulty 13:08
the technology. Yeah. So, you know, we didn't start out as a technology company. We started out as a finance company, a lending company. But we did not find in the market, from the Big Core systems for writers, and others, the kinds of technology that we needed to quickly and efficiently and safely underwrite small businesses. And so you know, we've spent better than a decade building our own systems to do this, we really didn't have a huge intent to become a software company. But when the pandemic hit, we had an opportunity to support the SBA, one of their larger programs, we helped provide the technology for their economic injury disaster loan program. And that was a crazy time, in terms of like trying to get it done quickly. And like do all that front end origination and that kind of stuff. And it was rough, it was bumpy. But ultimately, it worked was a super big lifeline for lots and lots of small businesses across the country. In so coming out of that, we said, hey, you know, if we can help the SBA on a very, very compressed timeline, there are probably a lot of other financial institutions that have capital that they would like to help grow the small businesses economy, they just don't have the systems infrastructure, the process know how to do it, right. And so really, we've spent the last year, year and a half, building that infrastructure, at least for the front end portion of it. So that we can have products that are available to help those institutions that are looking to get into that market. Yeah.
Sarah Cooke 14:49
About how many institutions are in, what's the demand for small business lending, how many are already in it and then would like to make it more efficient?
Will Tumulty 14:58
So So across sort of all segments, right? Banks, credit unions, non bank lenders, right? There's hundreds and hundreds, credit unions are probably the most underrepresented. I think just given their history. For us in terms of our penetration into those markets, we're fairly new, we launched our first product maybe six or eight months ago. So we have a couple customers, we have many more that we're talking to. And what I think a lot of them are looking for is speed, efficiency, data reliability, and digital first, not only for their members, but also for their team members. So that, you know, the loan officer or the underwriter can be in a system, where they're not dealing with paper, they're not pulling up a bunch of Excel spreadsheets and trying to look at things. And it's all sort of presented in a unified format, where they can very quickly get to what they need to be able to make an effective decision. Right, instead of
Sarah Cooke 16:03
just pulling data, I forget what the stat is. But people spend something like 60% of their work time just searching for data. Oh, yeah, to do their jobs. It's nuts. So that sounds really efficient. So what, what would you advise a credit union, and that's looking to get into business lending or grow their business lending?
Will Tumulty 16:26
Will Tumulty 16:26
I would say, first, you've got to make a decision that you want to commit to it. Sure. And it's got to fit in with your overall strategy for growth and serving your members. And the second thing I would say is the big advantage there two big advantages in the lending value chain that credit unions would have. One is they already have customers. So if they can understand and their current member base, how many of those members are small business owners, right? It's like, okay, there is the immediate opportunity for you to serve your members better and to grow your balance sheet. The other thing is that they have deposits. And so that means that they have the balance sheet capacity, up to whatever their regulatory limitations are right? To grow that and then you can pretty quickly get to a back of the envelope sizing on whether this is a big enough opportunity for my credit union to really make sense. And, you know, am I going to serve a bunch of members, if I have a very small member base that are small business owners, there might be other priorities to serve your members better. If you have a reasonably sizable number of small business owners, it can make a lot more sense. Alrighty.
Sarah Cooke 17:37
Well, I always give my guests the final word. Any parting thoughts for our audience?
Will Tumulty 17:44
Well, so what I say is, I think going forward, I expect the credit unions will move more and more into serving small businesses. It totally makes sense from a Credit Union Mission standpoint, in terms of serving members in their communities. Right. 60% of the US economy is small businesses, and it's just too big for credit unions not to get involved in.
Sarah Cooke 18:05
Absolutely. Well, thank you for your time. Appreciate it.
Will Tumulty 18:08
Great. Thanks very much. It's great to be here.