How Community Financial Institutions Can Leverage Niche Lending to Outmaneuver Competitors
For years, the number of community banks and credit unions has been decreasing as they face increasing competition from larger banks and non-bank lenders. However, there is a new threat that looms even larger – retail giants like Walmart and Amazon entering the financial services space. These companies possess a vast digital and physical reach, massive capital reserves, and the ability to seamlessly integrate digital financial services into their existing ecosystems. This new set of competitors can be more formidable than traditional competitors due to their near-limitless access to people, assets, and the volume of their interactions with the general public.
To stay in front of these market behemoths, community banks and credit unions must differentiate themselves through unique products and services. One of the most effective strategies for maintaining relevance is through niche lending, an area in which credit unions have found success and where new opportunities continue to emerge. Niche lending allows community banks and credit unions to offer highly specialized financial products tailored to specific market needs, creating a competitive edge that retail giants can’t easily replicate.
With the right banktech partners, institutions can elevate their niche lending capabilities to meet the demands of modern borrowers. Niche lending partnerships with banktech companies can provide numerous benefits:
● Broader audience reach: Banktech companies can help FIs reach a broader audience of borrowers. However, “broader” doesn’t necessarily mean geographically further – it can also mean identifying niche borrower groups already present in the community but previously overlooked by traditional lending programs.
● Improved efficiency: When niche markets are identified, banktech companies can help improve efficiency to ensure the market can be captured, serviced and maintained. Technology can automate manual processes, improve user experiences, and enable more efficient borrower onboarding. This allows the financial institution to focus on what they do best – offering personalized financial services – while the banktech partner manages the digital experience.
● Reduced risk: Niche lending partnerships can help credit unions to reduce their risk. Banktech partners provide credit unions with the technology, data insights, and expertise needed to assess the creditworthiness of borrowers and mitigate default risk.
Two prime examples of niche lending that are well-suited for community banks and credit unions are Patient Lending and Green Lending. While both are focused on commercial entities in the local community, each has unique features that allow community financial institutions to leverage their physical presence and digital lending platforms for a competitive advantage.
Patient Lending: Meeting Healthcare Financing Needs
Patient lending provides community financial institutions the opportunity to partner with healthcare providers to offer affordable financing solutions for patients. Key advantages include:
● Focus on underserved borrowers: This approach allows institutions to implement lending solutions for underserved borrowers who may have limited credit history or lower credit scores but need immediate access to financing for medical expenses. By partnering with local healthcare providers, the financial institution can offer an alternative loan with flexible terms to help patients pay and promote financial wellness.
● Strengthened relationships and trust: By providing patient lending options, credit unions and community banks can establish themselves as trusted financial partners within their communities, fostering long-term relationships with both healthcare providers and borrowers.
● Diversified loan portfolios: Patient loans are in a class by themselves. The commercial guarantee provides a backstop against borrower default while the patient selecting and making payments de-risks the loan from commercial default.
Green Lending: Empowering Sustainable Initiatives
Green lending is another niche lending opportunity that enables community financial institutions to support local businesses and individuals committed to environmental sustainability. Benefits include:
● Supporting sustainability: Community financial institutions can play a crucial role in financing environmentally friendly projects, such as renewable energy installations, energy-efficient building renovations, or sustainable agriculture practices. This can contribute to local environmental goals and enhance the bank's reputation as a responsible corporate citizen.
● Attracting environmentally conscious customers: As more businesses and consumers prioritize environmental responsibility, offering green lending options can help local banks and credit unions attract a new segment of environmentally-conscious commercial customers.
● Tapping into government incentives: Many governments offer incentives and programs to promote green lending, such as tax credits, grants, interest offsets, or loan guarantees. FIs can leverage these programs to mitigate risk and enhance the profitability of their green lending portfolios.
By embracing niche lending opportunities, like Patient Lending and Green Lending, credit unions can leverage their trust in the community to differentiate themselves from the massive organizations, strengthen their ties to the local community, and contribute to a more sustainable and inclusive financial system.
About Author:
Jeff Grobaski is the founder and CEO of Epic River, a lending-as-a-service platform provider that connects banks and credit unions with healthcare providers to streamline patient payments. Their unique offering allows providers to offload nonpayment risk by partnering with banks and credit unions to create low-interest patient loan agreements. As CEO, Grobaski draws on more than 20 years of experience in software development and product management.