In addition to digital lending, another scalable technology has grown in popularity, especially in recent years. While credit unions both large and small were initially skeptical of automated decisioning, it is now being implemented at higher rates. The alternative to auto-decisioning, human review, was long-considered a more reliable form of decisioning by many credit unions. However, with increasing loan growth, credit unions have grown more comfortable with the idea of automation. The U.S lending portfolio has increased by 61.8% over the past five years, and last year, credit unions saw loan growth of 9.7%. Consumer loans are the fastest growing category, increasing 20.2% over the past year and 93.7% over the past five years. Due to this rapid growth in the consumer loan space, credit unions have been forced to reassess the efficiency of their lending process and many have taken the leap to adopt automated decisioning. For credit unions who are still on the fence, here are three factors to consider.
Credit Union Asset Size
Many small credit unions question whether automated decisioning is a viable option for their operations. While there are small CUs who have implemented it, a majority of them choose to continue with human review. 77.1% of credit unions below $100 million in assets have yet to adopt automated decisioning, while on the flip side, 95.7% of credit unions over $1 billion in assets have embraced it. When considering automated decisioning, asset size is certainly a factor. Many small CUs find they are able to maintain high levels of efficiency with manual decisioning and enjoy the level of control they have over the process. The choice to implement automated decisioning hinges on a variety of factors such as staffing, cost, and control but in the end, credit unions big and small make their choice based upon what process they feel works best for staff and members.
Effect on Consumer Loan Asset Quality
Credit unions are often concerned that automated decisioning will negatively affect their asset quality, but studies have shown that there are two sides to that story. The median consumer loan delinquency rate for automated decisioning is 0.77%, and while this is actually 12 basis points higher than those who do not use it, a closer look at the data shows that the automation provides a better overall outcome. The middle 50% of CUs who use auto-decisioning have more concentrated levels of delinquency at lower values. Similarly, the median net charge-off is 16 basis points higher than those who use a manual decisioning processes. But yet again the middle 50% of net charge-offs is more concentrated than those who do not use auto-decisioning. Therefore, credit unions might experience higher delinquency and charge-off rates with the automated option, but they will be concentrated at lower levels when compared with conventional decisioning strategies.
Credit Union Auto-Decisioning Adoption
Automated decisioning is on the rise, but it is not yet the dominant decisioning method. 69.7% of loan applications were reviewed manually, while just 30.3% are reviewed via auto-decisioning. The breakdown for approval and denial rates within each type of decisioning are as follows: 23% auto-approved, 7.3% auto-denied, 43% manually approved, and 26.7% manually denied. When looking at automated decisioning alone, the overall approval rate is 76%, and 24% are denied. One can conclude that auto-decisioning has slightly higher rates of approval.
Auto decisioning is not for every credit union. Large credit unions find that it is a necessary process to maintain the level of efficiency required to meet members expectations in decisioning wait times. While many factors contribute to a credit union’s preference, one thing is clear: Auto-decisioning can be a viable solution for credit unions of all sizes. Ultimately, the choice comes down to the credit unions structure and values. Some CUs might never feel comfortable with letting go of the control they have with manual reviews, and if they have the resources to maintain that process then a switch to auto-decisioning is not necessary. However, with the continued consumer loan demand, many credit unions might need to embrace the practice in order to scale with the growth.