MADISON, Wis. (11/18/13)--With merchants and consumers mainly relying on credit cards with terms credit unions can easily beat, the market opportunity for indirect merchant lending is plentiful, according to a new white paper from the CUNA Lending Council.
Through indirect merchant lending, credit unions can provide members with loans when and where they need them, expand their lending portfolios and acquire new members, according to the white paper, "Indirect Loan Opportunities."
From an operations perspective, the components of merchant lending are familiar to credit unions. Back-end processing is the same as with unsecured personal loans. Members or potential members will still be price and payment sensitive to varying degrees. A different kind of risk does exist when acquiring loans from a merchant; credit unions replicate much of the risk protection practices from indirect auto lending, the paper said.
Merchant lending is unique in several ways:
The loans are often small. While big-ticket items aren't out of the norm, more partners deal in smaller dollar products. As a result, programs plan for a higher volume of smaller loans or for merchant lending to be a smaller part of their lending portfolio.
The merchants also tend to be smaller and potentially less stable. This increases the need for good due diligence, but don't overdo it, the paper advised. The risk is ultimately with the person making the payments.
The competition isn't another lender offering similar terms. It's usually some kind of credit card. This significantly reduces the competitive rate environment.
Credit unions have an opportunity to educate--and even "wow"--potential partners. Retail stores and service providers are often unaware of how much a credit union can help their business and their customers. They might not offer financing. They might dislike the financing they do offer and wish they had an alternative, the report said.
To download the whitepaper, use the link.