What do you know that Amazon doesn’t know about your members? And what are you doing about it?

Craig Peterson - VP Sales

When most of us were gearing up last fall for turkey, football, and political arguments with Uncle David, Amazon announced they were going to start selling cars. And why not? They drop off boxes weekly at most of our doors for everything from TVs to toothpaste, but with an average order value of around $50 they’ve been missing out on one of the biggest ticket purchases most of us ever make: our cars.

The average American will spend about 1,000 times more on a car than that average Amazon order. Granted, that’s a lot less frequent than those UPS deliveries (unless you’re Jay Leno or Jerry Seinfeld) but there are multiple profit pools skitching after your bumper: the sale itself, the extra warranties, the service, and of course what we all love to talk about – the financing.

It’s not a stretch to believe Amazon has auto lending in its crosshairs as some are prognosticating. There’s good reason to expect they’re looking to take a bite out of this nearly $200 billion market, and who knows more about the 230 million Americans that Amazon counts among its customers than Amazon? After all, they know what we eat, what we watch, and even some of what our doctors know.

You do. That’s right – in the business of lending, no one knows more about what’s important for a credit union’s members than the credit union itself. Every member’s new (or used) car loan is yours to lose, and I’m here to not only tell you why but also how we can all win and keep Amazon on members’ front porches not in their garages.

 

The case for open banking data

Experian, Equifax, and TransUnion have had a good run. I should know, I spent much of my career working for one of them. For decades, they had the only data worth buying on whether applicants were more or less likely to repay loans. If you think about it, though, traditional credit reports and scores are like driving by looking in the rearview mirror.

I paid my mortgage, car loans, and credit cards all on time last month. And pretty much every month since Carter was in office. Does that mean I’ll pay on time next month if at all? Many of you know that I’m an upstanding law-abiding citizen, but if I lose my job or a tornado takes off my roof then my Mountain America Rewards Card might take a backseat to immediate responsibilities.

If any of those curveballs happen, the mainstream bureaus would be clueless for a couple months until I missed a payment and then that missed payment gets furnished to the bureaus. But if I’m getting paid every two weeks and that paycheck doesn’t show up in my share draft account, anyone who has permissioned access to my account via open banking will know of my deteriorating finances in real-time. And if I’m making regular loan payments but that changes, you guessed it – open banking data reveals that missed payment almost immediately.

On the flipside, legacy bureau data is silent on what’s arguably the more important side of my personal P&L and balance sheet: income and assets. With most Americans gainfully employed and a hot jobs market, the critical question before delinquencies ever get reported to the bureaus is who’s living within their means and who’s living paycheck to paycheck. That’s why everyone from the bureaus to the CFPB are talking about the potential for cashflow underwriting based on open banking data.

The hard part with open banking data is translating raw data into automated, actionable insights in the same way that the old school bureaus produce thousands of attributes from the tradeline data they’re furnished. Almost anyone can stare at a stack of share draft account statements for a sense of whether a member is saving and spending responsibly or living paycheck to paycheck. It’s harder to distill these behaviors into attributes, even harder to understand the implications of any number of attributes and risk models for a loan portfolio.

This all is why I joined EDGE. There are a dozen or more companies who create analytics on top of open banking data, but there’s only one whose analytics have been built through experience with a profitable, growing loan portfolio. In fact, EDGE’s attributes and risk scores have been battle-tested on millions of consumer credit applications and billions of bank transactions . And you’ll see the real value in something “built by lenders for lenders” if you try asking another open banking player which of their attributes are more performant and how to implement them in your decisioning.

 

Advantage: Credit unions

Let’s turn to Amazon and why the battle for consumer lending is yours to lose. Depending on who you ask, there are anywhere from three to five “Cs” of credit. Taking each in turn, let’s examine whether a credit union or Amazon has the advantage from your respective starting positions:

Advantage
Rationale
Collateral
Probably a coin flip unless you or Amazon have  powers beyond CARFAX to  see under each car’s hood and simultaneously estimate its value in a recovery  scenario.
Character
Also called Creditworthiness – and almost a push  since Amazon can order a bureau report just as easily as you (and probably  cheaper). But here’s where your first superpower kicks in: you’ve been with  your members through their ups and downs, when you’ve stood by them there’s a  good chance they’ll stand by you ahead of the world’s second or third  richest man, so your relationships have real value as long as you both  continue to invest in member care through personal connections.
Capacity
Ability to pay is easy for the ~50%  of your members with direct deposit. You see how much they bring in, you  see how much goes out, and you’re left with either enough to make payments on  a new loan or not enough. You just need the in-house analytics or a partner  like EDGE to generate attributes from your data. For members with their  direct deposit elsewhere, you still have an opportunity to connect to their  external accounts (of course, Amazon can also request those connections).
Capital
Depending on the extent of your relationship with a  member, you may also have insights into balances that span their liquid and  longer-term assets. At a minimum, you can always ask and (based on EDGE’s  experience) generally expect a robust response where members seeking credit  will be willing to connect you to their external accounts.

See that? I didn’t even have to ask my lawyer about using Amazon’s logo, but that’s because the odds are truly in credit unions’ favor. The relationships and resulting data you’ve already got on your members has all the insights you need to automate, approve more, and improve offers.

However, there are two important caveats to any proprietary data before it can be a competitive advantage: First, you actually need to utilize that data. Second, you need to do so in real-time. Much like humans supposedly only use about one-third of our brains, most credit unions only know what they know about members in the abstract – the open banking insights inherent in your own data are largely untapped and only accessed through extensive manual review.

The time is now to unlock the latent power in your own data and take the hill! Amazon and a plethora of fintechs aren’t content to chip away at new markets when the largest profit pool is Main Street, USA – and your members. The competition also probably has access to your data through the open banking ecosystem, so there’s a good chance that if you don’t connect the dots for better member care then someone else will.

 

It doesn’t stop with your data – or with your members

As I mentioned earlier, if you’re like most credit unions, half your members have direct deposit with you – which means the other half have their primary account elsewhere. Connecting to those accounts through open banking can be a seamless experience with the right data provider.

The beauty of open banking is, to state the obvious, its openness. With appropriate security checks and consumer permissions, you can see the balances and transactions from any financial account in the U.S. just like you’ve already got on your core for members’ share draft, savings, and investment accounts.

Not only can you fill in important gaps for less active members, you can also introduce open banking connectivity into every indirect application. So for members and non-members alike you’re able to see a complete financial picture and not limit your decisioning inputs to a legacy bureau score before manual review.

Actionable insights from open banking data about applicants’ income and credit risk can put you on equal or better footing versus other lenders – and ensure you’re not a lender of last resort when less active members can’t get credit from their primary banking relationship or online.

 

Bringing it home

To underscore the opportunity for you to do much, much more with your own data and incorporate a complete financial picture for all applicants into your underwriting, let’s look at a couple examples and consider both the happy and unhappy paths:

1) Jane Doe earns a good living and her stable paychecks are automatically deposited her share draft account with you, which she uses almost daily for debit card purchases and bill payments. She’s had several loans with you over the past decade, all eventually repaid after the occasional late payment. Her credit score in the mid-600s reflects this history as well as balances on a couple “off us” credit cards. Jane is now applying for a new loan that will ultimately meet your underwriting criteria for the C risk band.

  • Happy path: You automatically detect Jane’s income, evaluate that relative to her obligations, assess her past “on us” asset and liability activity against your relationship scorecard in real-time, and offer her terms consistent with your Brisk band on the strength of – all within a few seconds of her completed application.
  • Unhappy path: Jane is conditionally approved for terms consistent with your C risk band before her application goes to underwriting. After a couple days and cursory review of Jane’s application, the underwriter sends her a boilerplate letter with stipulations for income, employment, and several other items. In the meantime, Jane’s internet search for “personal loan” turned up a number of digital lenders offering more competitive rates. She was approved in several minutes and funds from the new loan were deposited in hers hare draft account before your initial underwriting review, so she ignores the stipulations and after several weeks the application is coded as withdrawn. 

 2) Joe Public isn’t a member when he walks into a local dealers hip, agrees to terms on a car that’s new to him, and sits down with the finance manager who proposes applying for a loan with you because of competitive rates and dealer incentives. Joe is a self-employed tradesman with a healthy six figure income and a near-prime credit score that would eventually pass your underwriting without issue.

  • Happy path: Through your LOS, Joe receives a text messages that opens the mobile app for the large national bank where he banks. Joe is authenticated with the credentials saved on his phone and consents to share his account information with you. Invisible to Joe and the dealer, you’re factoring the additional income and risk insights gleaned from this account that show consistent, substantial cash deposits and healthy balance behavior worth bumping him up a risk band like Jane’s happy path. So in minutes Joe walks out of the finance office, keys in hand. In a few days, your welcome packet – complete with deposit slips and blank checks – will reach his mailbox. Now it’s up to you to deliver such compelling member care that Joe tries out more of your services (stay tuned for how open banking can help there, too).
  • Unhappy path: There are no quick checks available in your LOS to verify anything on Joe’s application beyond his identity and credit score, even pricey income reports like Work Number aren’t helpful for someone like him whose back office travels in his truck. The interest rate you can offer for someone who could just as easily be a return to the NINJA loan days isn’t particularly compelling, so it’s just as likely that the dealer steers Joe to another lender to salvage the sale as it is that Joe walks out. Either way, it’s unlikely Joe will ever darken the doorway of one of your branches.

‍Join me on the happy path! Hereat EDGE, we’re making important strides to bring open banking insights to credit unions as the only platform building direct core integrations alongside established external account access for nearly every account in the U.S. With your data our platform and your data, it’s possible to outpace an impersonal, transactional behemoth like Amazon and bring every applicant along the happy path by quickly and seamlessly presenting the best possible offers based on better data and insights.