September 26, 2011

What Not To Do

Banks and credit unions need not surrender part of the lending franchise. The good news is it is not that difficult or expensive to put branches into social media communities. But the branches need to do more than advertise. A social media site that only has advertising and doesn't have a place for people to apply for loans and make payments is like an empty branch with great signage. Many Gen Ys will think it an affront if financial institutions entice them with advertising but provide no way to transact. Why should they bother with cosmetic facades when the non-bank lenders are in their Facebook neighborhood, ready to make microloans to them and to transact their payments?

Lenders learn about applicants from social media communities. Try Googling yourself and see how services can instantly provide your demographic information - and more. Facebook feeds the information these services deliver about you. Think about that box on LinkedIn where people recommend each other to potential clients and employers. Kabbage uses the applicants' Facebook history, not their traditional credit history, as a key to understanding the credit risk.

For the borrower, the social media community influences the decision to take out a microloan. The bank that offers a good initial experience with a loan transacted via Facebook is going to benefit from the viral nature of social media. It'll happen when the person who received the loan on Facebook will post a status update or Tweet about it. This will result in delivering an endorsement to many others. Every day a bank isn't there, with tangible banking services, is a day that millions of people are not hearing about that institution's services.

Many of the community aspects of microlending are emerging in the new digital communities facilitated by social media. Non-bank companies that pioneered payments in social media communities are now there pioneering microlending. Banks and credit unions should not quit claim to any aspect of their lending business. Instead, financial institutions should learn about social media communities and then build virtual branches in these communities with functional and secure microlending products.

George Warfel is the consulting director of global payment solutions at Fiserv.