Small Steps, Big Gains: Scaling Success with AI in Credit Unions in 2024

0:02 You're listening to Leaders in Lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here, decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Hello and welcome to Leaders in Lending. I'm your host, Drew Megory, and this week's episode is a special reairing of a conversation originally featured on America's Credit Unions podcast, The SeeU Lab, where Barry Roach and I dive into how credit unions can win. In twenty twenty four, we talk about how AI and fintech partnerships can help institutions tackle challenges such as liquidity constraints and keeping up with ongoing regulatory hurdles, to name a few. With that said, I hope you enjoy this week's show.

0:54 Hello, and thank you for joining us for another episode of the CEU Lab. I'm modeling Crownfeld with America's Credit Union and I'll be your moderator. Today. I'm sitting down with Barry Roach and Drew Magrie, senior account managers at Upstart, and we're going to discuss how credit unions can win in twenty twenty four. Barry Drew, it's great speaking with you, and thank you so much for joining us today. Thanks having to me, great to be here. Great. Well, let's start with just a little more information about your roles at Upstart. Thanks Malan. I'm Barry Roach. I'm a senior account manager here at Upstart. I've been with uptur for about eighteen months, but prior to my time with Upstart, I was CEO of two different credit unis in California for about ten years and have about twenty years total in the credit union industry. So very familiar with the challenges that we have in credit unis and happy to be here to talk about that a little bit today. True.

1:44 Yeah, thanks Barry. So I've been with Upstart, coming up on almost three years now, but prior to Upstart, I started my career in the financial service industry about fifteen sixteen years or so, where I actually started in the insurance business and then quickly transitioned into the regional banks where I worked in multiple areas that pertain to consumer lending in some form of a capacity. After about five or six years of doing that regional bank space thing, I wanted to get out and about and check out this credit union space that I heard so much about. And I was fortunate enough to lead the Ohio Teamsters credit Union for just shy of nine years as president and CEO before coming to Upstart to help build up the account management team's focus in partnering with credit unions.

2:27 Going back to your initial ask of what does the account management function entail here at Upstart is we do have a dedicated team made up of prior executives both in credit unions and in banks, and you can kind of think of as our function as like an ongoing post sales support as this is not, of course the setate and forget a business. And what we really strive to do is own the executive relationship with our partners and almost act as if we're an extension of their organization to give this more of a partnership feel rather than just another vendor type of feel. And where this helps is because of course, to what Barry and I have already talked about as we've sat in those chairs and we have done the work of the people that we work with on a day over day basis, and this helps because our team is able to provide positive insights to their programs to assist in meeting strategic goals and objectives as part of our partnership. But they can also leverage our partnership to augment other key initiatives within their organization that they may be trying to fulfill as part of their business plans throughout the current state and in future years ahead.

3:29 Great well as past credit union CEOs, you both have a very unique perspective on this, So could you speak about some of the challenges that credit unions are facing in today's environment? Sure, thank you, Madlin, So Drew and I speak to executives from across the country on a daily basis, and for the most part, there are less regional differences in terms of the challenges than there are sort of right across the country. Everyone has liquidity concerns, certainly maybe not as bad today as it was in early twenty twenty three. We're hearing less and less about concerns about liquidity and more about as the positive come back, as investments have run off and now looking for reinvestment opportunities, where's a good place to put that money you hold it or do you invest it in sort of higher yielding assets right now? And I mean we've seen in the learning space now yields as high as they've been in since before the Great Financial Crisis. So with that, that's great learn income coming in. Well, what about credit quality, because we have seen sort across the country certain degradation in credit really in all astic life and across the spectrum of risk, though not just subprime performing or underperforming as big maybe, but also for the prime space. We've seen through data from our partnership trained being, for example, a little bit of stress for all borrowards out there right now through anything you could add from what I've heard from some of my lending departments.

4:58 Yeah, one thing to kind of touch off that whole credit risk and defaults rising, right, everybody knows that the personal savings rate continues to drop, defaults trying to rise across all asset classes. And we have this new thing as of December called CECIL and how to manage those methodologies at a really odd time, right, so being able to predict risk and look at what those ongoing trends are across all assets in comparison to what the defaults are doing I've heard a lot of chatter around the challenge of how to formulate an accurate cecil methodology, and as a result, informing those methodologies, it's taken a hit to some credit unions across the country from a net income perspective. So that's another one that I'll add around around credit risk for sure.

5:43 And of course there's always the competitive risk, right, so all credit nis are trying to remain viable for their membership and to attract new members as well, and so you have to have nowadays not just a great brand footprint and a great experience when members are walking into branches, but digital footprint is very important as well in that digital experience. So, especially through Upstart, a lot of what we do is to help introduce those brand new borders who are now becoming members of credit unis with a nice, elegant digital experience when it first applied for loans through the Upstart platform. So that's just one example of those competitive stresses. But also now AI AI has become this new buzzword and now you know, boards are saying, well, tell me about your AI strategy. It's like, well, what is AI? You know, we have a lot of crediting executives are struggling with perhaps understanding not only what AI is, but not necessarily understanding how AI can help their business and help move their crediting forward in terms of a much better value proposition for their membership. One thing up there does do around AI is that is key in how we perform our underwritings. So we've been using our digital intelligence machine learning for years now and with AI and with training data, the more data and the more time you have, the more accurate both predictions can be.

7:08 So both Drew and I have found I think that just providing that for our blending partners has been a great help for them in not just sort of knowing how ay I can help the business, but actually leveraging it and having a fancible impact on their business. Another thing I'll add to on a side of just AI and of course cost of funds and liquidity and all this fun stuff is the increasing regulatory environment is another challenge that I've heard too, and the cost associated with it too. Like you go through an NSU exam, seet PB exam, I don't know what the asset size of the listeners are. The multitude of different things that are needed to be done from a regulatory and compliance perspective have elevated in the past two three years to the point where you're having to add additional fte within your organization to adhere to those regulatory requirements. And that's been another real key challenge in the credit union space in the past few years.

8:04 Yeah, I think those are some challenges that we've been hearing kind of across the board. But let's take in a little bit more and address AI and how that can really help in the face of some of these challenges. Yeah, I'll start here, and I'll preface that the Upstart crew did have some boots on the ground last week at acus CEO's conference in Key West, and the general consensus, outside of some of the stuff that we've already outlined, is really two things. Is credit unions, even though they're very widely known across the country, they continue to struggle with providing what their identity is and getting the word out within their communities of what is the value that credit unions possess. And then the second, as a result of that conversation, the credit union consolidation could be coming.

8:48 We once had ten thousand credit unions in the country. Now down to five thousand. Don't quote me ONCT the exact number, but somewhere in that realm. And this is in large part due to the struggles to manage again those inatory requirements, the cost associated with that. You're competing with the Chase, the Wells, Spargos, the Bank of Americas, and as a result, some of that profitability is going away. So to your point about how AI can address some of these challenges already outlined, is I'm going to go through kind of like three key themes of things that we hear and things that we talk about here at Upstart, and one of those themes is going to be innovation innovation, and I'm going to start it around the thought of automation less human interaction. Consumers today do not want to talk to an individual and a branch as much as they would like to click some buttons on their phone, their tablet, their computer, what have you, and not have that human interaction and have that fully automated experience. To give you some numbers, for instance, just on the Upstart platform, of the borrowers that come through the top of our funnel and apply for a loan and get funded, ninety percent of those individuals are going through a fully automated experience and then fast forward from another thought process of innovation, it creates an elevated member experience. You want to serve your member base, you want to serve your net new members that you could be obtaining through partner channels or even within your own internal type of rails, of ways to promote products to your membership, and that elevated member experience giving them real time decisions whether they're good bad

10:18 from the comfort of their own home. It allows that member experience to be elevated for them to come back to you for additional needs that they may have. Going back to the theme of credit risk or economic uncertainty, things could of course change month over month based on what we're seeing in some of the data, but it's been proven that the use of AI for decisioning loans particularly that's our general scope of what we do here at upstart, is it is a better predictor of default. It's a better predictor of risk in comparison to using traditional underwriting methods that maybe wouldn't allow for an approval of a member on your internal policy and procedure. I'll give some some statistics here too is for Upstart particularly, our model is about three times better at separating risk between the highest and lowest Fyco bands, which again goes back to being able to say yes to more borrowers. And an example of that is someone that has a six forty FICO grade may qualify for some form of loan within your institution, but the actual probability of that individual of defaulting may only be let's say fifty basis points. So being able to price that accurately and predict that risk accurately allows you to play in that lower tier of Fyco borrowers within your organization. And then the last kind of key theme that I'll address is is competition and cost.

11:39 I talked a little bit already about the competition in comparison to the larger banks, but you're also competing with that potential credit union consolidation revolution. You're competing with the ten billion plus credit unions or the top twenty five that are able to reach a broader range of members and build their businesses, and you're only able to adhere to your existing field of membership, which might be smaller in nature. So using AI under multiple platforms, not just in lending, can allow your organization to really be one with the times and better compete across the financial service ecosystem. Hey there, former host Jeff Kelner here to let you know about an exciting opportunity to strengthen your understanding of artificial intelligence and financial services. If you want to better understand the fundamentals of how AI models work and how they will impact the financial services industry, your in luck.

12:29 Upstart is launched an online course and certification designed to do just that. This course will give you the knowledge you need to lead the conversation about how your organization can best leverage and manage this revolutionary technology. If that sounds interesting, check out the course as it's currently free for a limited time. You can learn more at upstart dot com slash AI Certification. Again, that's upstart dot Com slash AI Certification. Thanks, and now back to the show. To add to what through was saying, we just entered a new feed thure within ubserve. We call it recognized Customer Personalization the fancy long term. Basically, all it means is it's a method for upsearch to identify borrowers on our platform who belong to our partner credit unions right at the beginning of the application, so we can drive those applications to our lending partners in a much more efficient and faster way. And it's increasing the cross sell now for those members and bring a better relationship for that crediting member. So that's a new feature that's coming in and this kind of illustrates a lot of the innovation that Upstart is doing. We're not just an AI lending company. We're constantly trying to find ways so we can better support our lending partners and new lending partners coming on board all the time.

13:49 Yeah, I mean, just that line about being able to say yes to more borrowers, I think that's crucial to the credit unions that you're working with. Being able to better serve their members is really critical. So well as you know the credit union space, it's really collaborative. Peers are learning directly from one another. Do you have some examples of partners that you're working with who are really successfully addressing these challenges. I can say that I've got a couple of newer lending partners who came to ups are not just looking for ways that they can improve their lending capability and certainly add some good quality high yielding loans in their books, but they're also looking for how can I expand my membership?

14:30 So field and membership is different amongst all credit ings, and some are more successful at leveraging. They're larger charters, they're larger field of membership than others. What ups are can do is actually almost on a turn can debate to provide new members for those creditings that are coming in markets that maybe they're not they're not a lot of active in so my old crediting and others I've spoken to, for the most part, those marketing activities are centered around their market where there's a brand footprint. However, they may have other need the other states of other areas of the country where they have the ability to onboard new members but just haven't really realized an effective marketing spend in those markets. And I'll start confind borrowers in those markets, deliver them to these creditings as new members, and now it gives you an app back to be able to get that second and third product service from that brand new member and really establishing strength in that relationship from there.

15:26 Yeah, I'll give a more seasoned example without naming names, but we have a partner about two and a half billion or so in assets that's been leveraging our platform for about two years now. Of course, their CFO has that l word of liquidity being top of mind and almost all of twenty twenty three, but coming into twenty twenty four, without giving exact dollar amounts, they increased their monthly capital with us to of course drive the higher yields right with it being a performing asset within expectations, they were able to utilize the higher yielding asset to augment their high cost of funds to retain their share accounts and their certificates, a deposit that we're starting to run off in the first quarter of this year. So they're with leveraging our program with increased capital in the twenty twenty four This also allows to Bury's point of how our program works, allows them to originate more net new members in growing their member base, and then they're doing a very very good job on the back end of providing cross sell opportunities. And some metrics here again is they're seeing roughly a twelve to fifteen orsh or so percent conversion rate on secondary products outside of just the unsecured personnel that they're obtaining from upstart and of course the opening of the share account, and they've been seeing success on that across multiple different assets, not just credit cards and autos, but they've seen some helock, they've seen some deposit growth in cross sell too, So they're doing very successful and of course increased capital, using that yield to offset their cost of funds and then getting that net new member and expanding that net new member

16:57 experience and being able to deliver multiple product across the product offerings. Right. So, you know, as Drew says, we are an extension of the leadership team. We're not just dealing with the lending folks in credit unions or finance folks. We're also dealing with the marketing people and think about the opportunities to provide for marketing. You can ab test all kinds of different ways while onboarding these new members. You can see what works and what doesn't. You can throw out what doesn't even try and do more of what is working and sort of layer on other marketing treatments and elements from there. There's lots of different ways of measuring this. We sit with marketing people all the time and sort of brainstorm ways that they can improve cross sell or reach out to these brand new members that they're that they're getting from Upstart.

17:42 Yeah, and on that, like I would I would even add outside of just Upstart or lending in general, is if you're looking to utilize AI in any realm of your business, like, find that partner that is able to adhere to your goals and objectives across all different functions within your organization and is an extension of your organization to provide those insights and be the industry leader in letting you know what's going on within their company so you can better speak to your partnership when you're sitting in front of regulators and so on and so forth. Yeah. So I mean Upstart is partnering with more than one hundred credit unions and banks. Now, so what are some of the key tips that you have for success when you're partnering with financial institutions.

18:24 I can say that my former credit uni was also an out there partner, so I had seen it from the implementation side, from the crediting perspective, and now coming into off starting and delivering it. This gives me a holistic view of how effectively implement a program like this. But I think the biggest learning that I've had is that we try and encourage our lending partners to start small and really let's get the pipe built. Let's run a little bit of water through the pipe. Let's make sure that from a reporting standpoint, everything is working efficiently on the back end, how that new membership is on board on your for the accounting is looked after, the compliance and regulatory aspects are looked after from the risk folks within the credit union. And let's get a few loans under your books and let's see how they perform early and really understand how that flow of information is coming through and how we can be efficient on the back end so that it doesn't become a burden on the operations folks when you're bringing in all these brand new members. But from there, once you realize that working pretty well, it's working efficiently, let's scale it. The nice thing with our program is there's a lot of configurability options available for the crediting so they can expand their credit box, that can shrink it as their business needs changed.

19:39 You can raise or lower the volume as needed for your program. Your net return is something that you are providing to us as opposed to outstart saying that we will provide that return. You're seeing what your net return options are necessary for your business, and then we help to deliver a portfolio that will meet those that is subjective. Well, that was kind of my biggest learning, I think, from both sides of the desk. With the accent relationship. Yeah, I can't say that I was partnered with Upstart at my prior credit union. But one thing I will add is, even from the early onset of the discussion with partnering, it's important to get executive buy in, not just the lending folks. It's imperative to get board buy in.

20:22 And then once you do go forward with some form of AI driven partnership, bring all the teams into it as well, look at credit risk committee, bring in the legal compliance, so on and so forth. And even though they're not touching it every single day in some capacity, at least they have a general sense of what is being done. So when you get to that portion of what Barry was talking about of scaling, everybody within your organization is comfortable with the partnership, is comfortable with the potential to scale, and then being able to monitor on the back end as things have increased. Yeah, including the board, right, Drew. I mean we've actually spoken to board members in the past, We've had credit unis and by this in board meetings so that we can help to explain the merit of the program, the bafans of the program, and some of the risks of the program. I mean, I think we need to be fully frank parented to all elements of the program that hopefully will become successful for the crediting and if there are success measures that may not be met, how it is that up there can help to get the program back on track because we may enter into a partnership with a certain expectation and if the explication is met.

21:29 I mean, this is where really where Drew and I were making our money, because we are the ones who are coming in to help with our crediting partners and explain what's happening with the program and to make sure that we have the tools available in order to make it as successful as possible for them. Yeah. I would add to like when you fast forward and you're partnered with any type of partnership vendor, like make sure you stay updated on what's going on too. From an education perspective. This wave of AI has evolved over the past six months more than it has in the past two years. Businesses, as does the credit union listeners here like you have to pivot your organization to meet specific goals and objectives. Your partners are going to do the same thing. So as much as you know about your partners when leveraging AI, the better suited you will be when there are pivots within the organization to make more accurate decisions of how you want to leverage your partner in future years.

22:25 Yeah, you couldn't be more right about that. The advances that we're going to see in the next couple of years were moving so much faster than we were even ten, fifteen, fifty years ago. Yeah, before we end today, any final words of advice to our audience, just to really summarize that how to win in twenty twenty four concept. So I'll say with AI. Upstart has an animule meeting where we bring our any partners together and we network and we talk about advances in the industry and in AI and so on. And we have a speaker come in to our conference last year and you spoke about AIS, not necessarily how you're using AI, it's really making sure that you're being ahead of this because your competitor may already be down the road in using the AI and you don't necessarily know. So it's almost like for those of you who are around in the nineties and the Internet came on and a lot of people really struggled, Well, the Internet, this is great, but how are we going to use this? What's the business used for this? And I think we've all learned that now that in the twenty twenty is that that connectedness and the on demand and the ability to transact business and to connect with others is if we.

23:32 Didn't have it, we couldn't do the things we're doing right now. And I think AI is going to have that much an effect, possibly even more, because it's going to make those day to day pats so much more efficient and those decisions that have to be made and in upstart S case, we're talking about under a decision. It will be using more and more data and get into a more granular site way of decision making and you don't have to jump in with both feet on this. I mean, I think this is where Upstart, having been in this business for over a decade, and having a lot of training data and a lot of experience with. This is a good introduction for AI into creditings who may not even know where to start. This is not chat GPP, not where you ask a question and we will give an answer to this impactful business use case where we are you liedes and machine learning and artificial intelligence to provide better decision making for you. And as Upstart goes out and talks to prospective credit unions about this, I think that's been very appealing for them, even more so now because AI has become such a prevalent topic, not just in business but in society.

24:38 Now, that's good. I'll expand a little bit off of that and kind of close out here with the reoccurring theme of our conversation today has been partnering with the right partner that can help your organization stay ahead of the curve and actually lead the conversation within your credit union when it comes to the impact of AI. So I'm going to make a quick plug here to the listeners. Upstart has released an AI certification and financial services program back on May first. This is a first of its kind AI certification program for executives in the financial service industry, and you can think of this course as an online master style class being led by upstarts, executives and experts within each field. The program is currently opened and relevant to anyone within the industry looking to get smarter and more informed on AI and how, where and why it applied to the credit union industry. For now, we are providing this for free. I've had the privilege of taking the course. It's an exceptional opportunity to learn about AI from a broader sense on how it's leveraged in lending to further advanced ones knowledge for personal development and professional growth.

25:40 If you're interested, we'd love for you to register at upstart dot com forward Slash AI hyphen Certification. Yeah. I think that's a really useful course for folks to look into. We'll make sure to put a link to that in our show notes as well. Well, Barry Drew, we covered a lot today. I just want to thank you both so much for joining us to share your insights. Thank you, it's been a pleasure. Thank you. Malin appreciates the time. Yeah, and thank you to everyone for listening. And if you're interested in learning more, you can check out resources at www dot NAFQ dot org forward slash Upstart have a great day everyone. Upstart partners with banks and credit unions to grow households and expand consumer lending through its leading AI lending platform. Upstart powered banks and credit unions leverage AI to offer higher approval rates and experience lower loss rates while simultaneously delivering the exceptional digital first lending experience that consumers demand.

26:30 Whether you're looking to grow and enhance your existing personal and auto lending programs or you're just getting started, Upstart can help. Upstart offers an end to end solution that can help you find more credit worthy borrowers within your risk profile with all digital underwriting, verification, loan closing, and servicing. It's all possible with Upstart in your corner. Learn more about finding new borrowers, enhancing your credit decisioning process, and growing your business by visiting upstart dot com slash lenders. That's upstart dot com slash slenders