The following post is part of a series of blogs written by MeridianLink Partners who will be attending the MeridianLink LIVE! User Forum in May 2023. To learn more about the event, visit https://www.meridianlink.com/userforum.
Everybody Wins When You Can Fund More Loans
By: Aaron Long, Head of Sales at Zest AI
Loans aren’t a “first come, first serve” service in the world of banking.
We know the process that happens when a hopeful borrower applies for a loan: The simplified components of loan approvals, or denied credit applications, are a credit history check using the industry credit score and your financial institution’s risk tolerance for new loans.
But the need for capital doesn’t disappear with the denial of a loan. In fact, the need for a loan through a regulated institution increases after a loan denial because applicants will then turn to predatory lenders. According to CFPB data, up to 12 million Americans take out a payday loan each year.
The Credit Union Difference
“People helping people.” That’s a creed one would hear reverberating down the hallowed halls of credit union history. Credit unions came into being because the industry knew there was a better way to lend—to look at a borrower as a person, not an application to approve or deny.
Today, most credit unions rely on the national industry scoring system to make loan decisions—resulting in a “pass/fail” setup for borrower applications. That system is broken, using unclear formulas for decisions, few data points relevant to our modern realities, and unfair comparisons between individuals. For example, the financial habits of those living in Los Angeles are nothing like the habits of those living in a rural town in West Texas.
Right now, the credit union difference is simply the people employed by a credit union and their commitment to their community. That’s a big deal, but there’s a way to ensure that credit unions are making smarter, more inclusive, and all-around better lending decisions for their members.
When Tech and Community Focus Collide
In the past, if a credit union wanted to generate more loans, they would run a marketing campaign. Assuming an effective outcome, this inevitably increased the number of loan applications received. What it likely didn’t change, however, is the ratio of closed loans to loan applications. In other words, no matter the campaign’s effectiveness, the credit union was still saying yes or no to the same members due to the outdated credit risk underwriting models used.
It’s as easy to spot very high-risk applications as it is to spot low-risk ones. But what about those members whose credit reports put them in that gray area? Some members have certainly encountered a ‘no’ on a loan application and gone on to establish spotless repayment records. How do credit unions find these members and ensure they get the loan they need?
In a recent survey Zest AI ran at the CUNA Governmental Affairs Conference, 85 percent of credit union leaders agreed that they would take on more risk if it meant they could better serve their community during a recession. We at Zest AI like to bet that mindset doesn’t just disappear when the economic outlook is bright, especially when tools like AI-automated credit underwriting technology can help a credit union more accurately predict default risk and make safer, more efficient lending decisions.
Reframing AI Technology Misconceptions
If you’re asking, “How can AI help credit unions?,” maybe you’re hindered by some common misconceptions. Here’s the truth about AI:
1. AI Is Now Affordable.
A few years ago, AI was inaccessible to small lenders. AI required expensive technology and a team of data scientists to run it. With the cloud, AI can be easily integrated into your current technology at a fraction of what it previously cost. In today’s tech-driven world, using AI to bump loan approvals and increase automation and efficiency is priceless.
2. AI Breaks Down Barriers To Serving Members Better.
When AI is built purposefully around inclusion and member delight, you can serve more of your members better—and with that extra credit union touch—because your loan officers have the time to meet and offer financial advice to those who enter your facilities.
3. AI Allows Lenders To Focus on Members’ Experiences.
AI can enhance the lending experience from both sides of the desk. Automation reduces costs and decreases friction so loan officers can connect with members and members get a quick, fair credit decision.
Still think AI-automated underwriting isn’t for your credit union? Think again. From modern-day lending to flourishing in the future, AI is needed more than ever.
