Over Two Decades of Risk-Based Pricing, Are Credit Unions and Their Members Seeing the Benefits?
Twenty years ago, I stepped into the credit union movement after spending most of the first decade of my financial services career working for banks and finance companies. It was at this time that many credit unions were transitioning from a single-price lending strategy, where every approved member paid the same interest rate on a loan, to offering variable pricing to members based on risk. The theory posited at the time was, “we can offer loans to more members if we can properly price the loans for the relative risk.” Higher risk borrowers would pay more in interest than low-risk borrowers, as the additional interest earned would cover the presumed increased losses due to default. Low-risk borrowers would benefit from more competitive pricing. Additionally, to overcome the sensitivity to treating members differently, many credit unions insisted in their lending policy that they were adopting a risk-based pricing, not a risk-based lending, strategy. What this meant was that no me