Adapting to change: The new reality for credit union leaders

Today's credit union leaders are navigating a barrage of challenges that were unimaginable just a generation ago. The velocity and breadth of change confronting the U.S. financial services industry are nothing short of remarkable, creating an era that is as daunting as it is exciting. Here's why financial leaders find themselves at a true inflection point.

The 21st century has delivered a series of transformative economic events—from 9/11 and the Great Recession to the global pandemic—which have all left an indelible mark on financial institutions. For 17 of the past 24 years, federal interest rates sat below 2.5%, a scenario without parallel in American history.

The intention behind persistently low rates was clear: encourage consumer borrowing and spending. By any measure, this objective succeeded. U.S. consumer credit stands at a record $5 trillion, up from $2.7 trillion in 2008—an astonishing 185% increase. Yet, the effect on credit unions hasn't been as straightforward. As of the most recent data, credit union loan-to-share ratios are above 80%. Historically, these ratios would have been higher, especially given the surge in total consumer borrowing.

Where has all this lending gone? Increasingly, it's moved outside traditional depositories. Fintechs and neo banks now originate 28% of U.S. personal loans and a remarkable 69% of mortgages—and those numbers keep climbing.

Previously, a robust economy naturally translated to greater profitability for depositories. Today, the picture has changed, largely due to the disruptive impact of technology, which has introduced new pressures on margins from both ends. Digital tools have made it effortless for consumers to compare rates—and switch providers—placing downward pressure on loan yields and raising the cost of deposits.

This squeeze is evident in performance metrics. Since 1995, return on average assets (ROAA) and net interest margin (NIM) have both trended downward for credit unions and banks. Credit union ROAA dropped from 1.27 to 0.59, and NIM fell from 4.43 to 3.91. Banks saw a more modest ROAA reduction (1.21 to 1.16), but a pronounced NIM decline (4.55 to 3.57).

The fundamental driver? Technology has given consumers near-instant access to the most competitive rates, intensifying competition not just from traditional rivals but from a rapidly growing array of digital-first providers. Choice overload is now the norm—well before fintechs arrived, there was already an abundance of lenders; now, tech companies and major retailers, from Apple to Walmart, are offering financial products.

Our research and industry discussions suggest these dynamics are fueling significant consolidation. Leaders recognize both the risks and the opportunities and are seeking new ways to respond strategically.

For credit unions determined to maintain scale, generate growth, and remain competitive, a reimagined approach to strategy is critical. Those best positioned for success over the next 3-5 years will excel in three key areas—the "three-legged stool" of modern operational strategy:

SRM frequently advises institutions on structuring and executing fintech partnerships and M&A opportunities. When executed well, collaborating with fintechs not only brings in new loans and members but also boosts net income. Free from legacy core constraints, fintechs are nimble, using digital platforms and social channels to attract and retain members across a wide range of lending products.

Many fintechs have staff with deep depository backgrounds and a strong understanding of regulatory compliance, enabling them to forge legitimate, value-added partnerships with credit unions. These collaborations are already generating billions in new loans industry-wide, and many participating institutions are seeing above-average returns.

Institutions that embrace these realities and the three-legged stool approach are likely to see meaningful gains in both growth and income. By working with fintechs, traditional depositories can tap into cutting-edge marketing, technology, and sales strategies, translating to newfound agility and reach.

Fintechs excel at quickly serving well-defined market niches, driving targeted lending growth. Where there is alignment in customer needs, asset types, and risk tolerance, both partners stand to benefit. Still, successful partnerships demand careful oversight. Maintaining balanced asset concentrations and managing expectations around volume are essential for both sides.

Ultimately, open communication and mutual understanding are the foundations of fruitful collaboration, and the clearest path to thriving in this rapidly shifting new world.