Chaos Theory and Credit Union Lending

Edward Lorenz, the MIT mathematician, pioneered what is known today as the "Butterfly Effect". His contribution to chaos theory advanced meteorology and the science of weather prediction. The butterfly effect can be simplified by saying: A butterfly flapping its wings in South America can affect the weather in Texas. The theory explains how tiny changes in a complex system can equal results that are virtually impossible to predict. What might seem like a very small and insignificant change in one location could result in large differences in another. For credit union executives, the changes in the way people are banking are forcing them to think outside the box as they provide products and services to meet new demands. Lending is one area where the butterfly effect may apply, where a little innovative thinking may offer big returns. This is assuming that the right credit union data processing technology is in place to support the new programs, of course. Here are a few examples of how creative lending solutions are taking shape in credit unions across the country... most are not new:

Skip-a-Pay: Even the most reliable, low-risk member has the need for extra cash at certain times. Skip-a-pay programs allow you to provide some flexibility to your members during times when they need it, and can be easily requested and administered through your online banking platform.

Teaser Rates: By offering a low introductory rate on adjustable rate loans, you stand to bring in more borrowers. The use of teaser rates tends to grow dramatically during times when long-term interest rates have moved toward historical lows. Sound familiar? This idea is based on the hope to make more money on the adjustable rate loan when interest rates rise. For members, this can be an appealing way to assist with paying off debt or making a purchase they anticipate to pay off early.  There is of course increased risk for both the lender and the borrower on these loans, but both also stand to gain.

Interest Rate Reductions: Based upon certain criteria, some credit unions provide an interest rate reduction as a member benefit program. In the past, such reductions required closing and re-opening a loan under different terms. The right credit union core technology will allow for these modifications to be administered automatically.

Mobile Lending: What about using your mobile app as an easy way for members to apply for loans? With the tap of a finger, your members can have the convenience of applying for a loan no matter where they are. For the millennials who prefer to do everything on their mobile phone, this is one creative lending approach that stands to succeed.

Quick Loans Programs (add a Savings Component): MariSol Magic in Arizona structured a quick loan to compete with PayDay lenders.  “A wide range of our members were going to payday lenders,” Robin Romano, CEO of MariSol FCU said. “They liked the no questions asked aspect of the loans and their speed. So we set the program up to be funded quickly with a direct deposit account and having had a job for six months. In addition, the loans are paid back in three months, not one pay period, and carry a savings component. Members will take out the loan for $500, but repay $570 with the $70 going into a savings account which usually sees them continue in their savings habits."

As consumer habits change, your loan products will need to change too in order to capture your members' attention.  Lending should be seamless and fast from within your data processing system and it doesn't have to include multiple third-parties to make it happen.  You never know where a small change to your lending program will lead, it could possibly bring big results...