Credit unions are taking advantage of data analytics to target members who could benefit from refinancing a loan.
Thanks to systems such as data warehousing, credit unions have the ability to host large amounts of data and can then mine this information to predict the lending behavior of their borrowers. Institutions have gotten better at this over the years and are now able to pitch refinancing loans to members with greater success.
Offering refinancing can help a credit union grow through new membership and increase engagement with existing members. Still there are risks to be considered, including ensuring proper cybersecurity and finding a system that is affordable and easy to use.
“One of the best things that I’m seeing is people being able to leverage the data that they already have,” said Brewster Knowlton, owner and principal consultant of the Knowlton Group, a data analytics firm.
The passage of the Fair Credit Reporting Act in 1970 unlocked credit reports, allowing credit unions and other financial institutions to look at a member’s entire loan portfolio. That includes loans the member has at other institutions, so long as that lender holds a financial contract with the borrower.
Credit unions can glean all sorts of information, including payments, certain interest rates and remaining balance amounts on loans the member has with another institution, Knowlton said.
In other words, credit unions and other financial institutions can model refinancing options from credit reports with the help of data analytics tools.
Third-party vendors have helped automate the refinancing process thanks to data analytics, which have driven down both the price of these systems and the time it takes for a credit union to analyze their own information. Data visualization tools are often utilized, such as Tableau, that connect to databases, process the information and generate infographics and other visuals to help financial institutions look at the information.
CAHP Credit Union in Sacramento, Calif., uses a loan recapture program – which allows it to identify borrowers who could refinance a loan – through the fintech Ser Tech for home equity lines of credit and loans for cars and recreational vehicles. About a third of the $158 million-asset institution’s loan production has come from the recapture program over the last two years, said Brad Houle, president and CEO of CAHP.
“We’re able to see the future trends of our borrowers,” Houle said. “Banks have been using this technology for years.”
“It’s been a huge success and the reason for that is when we’re targeting members, we can target certain groups based on their profile,” Houle added.
Still, there are downsides to using data analytics to find loan refinancing opportunities. For one, the technology can be costly depending on what system a credit union uses, though it has become less expensive over the years. With the advancement of technology and other data tools, costs for generating information on specific portfolio types can be $7,500, according to Houle. Monthly upkeep can cost about $600, Houle said.
“The good news for credit unions is that there’s a number of vendors who have come to the marketplace who are helping solve the data warehouse problem at a much lower price compared to before,” said Kirk Kordeleski, chief strategy officer at Best Innovation Group, a technology innovation and development company.
It can be difficult for credit unions with less than $100 million in market capitalization to find products to use.
“A smaller credit union could probably leverage some of those capabilities with the tools out there, but realistically a full-fledged data warehouse would be beyond the budgets for a lot of [credit unions],” Knowlton said.
But that’s not to say that these institutions won’t be able to leverage data warehouse capabilities. Data warehousing can be built over six to 18 months for a few hundred thousand dollars, which is “dramatically different compared to what had been built before,” Kordeleski said.
Additionally, relying on refinancing to spur lending can drive down net interest margins as credit unions offer lower rates to entice members to take this step. Cybersecurity and protecting data is also another concern.
Utilizing data analytics can be overwhelming for many, especially those unfamiliar with the technology. A 2018 study from Best Innovation Group and OnApproach found that
Still, for credit unions to stay competitive, they need to access to data and analytics, Kordeleski said.
“That data warehouse is necessary to pull together the disparate architecture that has evolved for credit unions from multiple system purchases,” he said.
