Tech Time: How Credit Unions Can Leverage AI to Compete in an Uncertain Economy

Financial institutions face a number of challenges that can hinder the efficiency and profitability of their lending operations, and credit unions are not exempt from these hurdles.

With high interest rates and decreased loan values, lenders find themselves navigating a landscape in which the value of collateral and coverage ratios have diminished. As a result, it’s becoming increasingly difficult for credit unions to maintain their lending capacity. However, by expanding their pool of borrowers with the help of artificial intelligence-driven lending tools, leaders in the industry can combat market problems and continue providing timely financial services to their members.

Legacy Technology and Processes Stand in the Way of New Lending Opportunities

Credit unions can alleviate market challenges by broadening their base of potential borrowers, in turn diversifying their funding opportunities and maintaining a steady flow of lending activities.

But there’s a major obstacle standing in the way: technology. Many financial institutions rely on legacy methods of assessing credit risk that can be manual, subjective and time-consuming, making it extremely difficult to attract a more diverse range of creditworthy borrowers.

As a result of using such outdated technology, institutions tend to either overestimate or underestimate a borrower’s ability to repay a loan, leading to higher default rates or missed lending opportunities. For example, a borrower may have a below-average credit score, but they hold a steady job and consistently pay bills on time. Traditional scoring methods don’t account for more nuanced attributes of this individual’s risk profile, causing the institution to overlook a viable loan candidate.

Moreover, identifying and funding nontraditional borrowers entails time-consuming processes for institutions that rely on manual processes and legacy technology. For instance, individuals with excellent credit scores will be accepted almost immediately for a loan or line of credit. But for individuals with less traditional credit histories, underwriters have to parse through pages of disparate documents to verify and cross-check applicant data. Human checks can also introduce bias and errors to the application verification process. This can lead to inconsistencies, such as discrepancies in whether an applicant’s Zelle payments count as income.

Despite these challenges, credit union leaders now have the opportunity to leverage modern lending technology that alleviates bottlenecks, minimizes errors, and increases efficiency so they can bolster their lending activity amid difficult market conditions.

AI-Powered Lending Tools: Driving Efficiencies and Expanding Access to Credit

Given credit unions’ laser focus on providing consumer-friendly loan products and personalized service, it’s understandable why many have yet to turn their attention to updating legacy technologies and processes. It also makes sense that institutions may hesitate to prioritize technology investments in an unstable economy.

However, it’s crucial to consider the benefits a modern loan origination system can provide your operations. A modern LOS with AI integrations allows teams to connect AI-powered lending tools that deliver automation capabilities throughout the loan decisioning process. These AI capabilities were previously only available to large financial institutions with extensive resources. With the help of technological advancements in the credit union service organization space, they’re now accessible to credit unions of all sizes in a cost-effective and efficient manner.

These tools can help you achieve your anticipated ROI while navigating industry challenges in three ways:

1. Expanding access to credit: AI tools leverage machine learning models to assess data points that aren’t included in legacy scoring models. This benefits borrowers who wouldn’t have been instantly approved for loans in the past. In some instances, algorithms powering these tools analyze thousands of data points beyond those captured in traditional credit reports, which provides more consistent and accurate insights regarding applicants’ creditworthiness. This capability empowers you to fund reliable borrowers who may have been previously overlooked due to their nontraditional credit profiles—like a recent college graduate with only a year of credit history.
2. Considering risk and compliance: Modern AI tools are designed to account for regulatory compliance and risk management. Lending tools that use AI for credit risk assessments and loan decisioning weigh borrower profiles more objectively, reducing human biases and errors. This type of oversight is critical in light of the CFPB's recent statement regarding AI and potential bias, and it helps avoid overestimating or underestimating a potential borrower’s risk. In fact, Zest AI, a leading AI-powered lending solution provider, reports that its credit union partners approve 25% more borrowers without expanding risk tolerance.
3. Streamlining the lending process: Advanced machine learning algorithms power functions like document classification, allowing you to automate tedious lending processes like verifying auto loan and consumer credit applications. This makes it easier to process and approve more complex cases while maintaining efficient lending processes and reducing operational costs.

Don’t Wait to Embrace Digital Transformation

It might be tempting to postpone technology and process improvements as you navigate an uncertain economy. However, relegating these upgrades to the backburner will only prolong industry challenges and hinder your credit union’s ability to adapt and thrive.

Cutting-edge AI-powered lending tools are more accessible than ever, thanks to the rise of the modern LOS with integration capabilities. Embrace digital transformation now so your institution is equipped to navigate current challenges and upcoming market shifts while protecting your reputation as a community-first institution designed to serve members.

Brian Hamilton is president of Origence Lending Services for CUES Supplier member Origence, Irvine, California.