2018 has been a banner year for credit unions…but will a recession follow soon? Credit unions recorded a stellar performance in the first nine months of 2018, adding more than 4.2 million new members, the fastest pace in credit union history. Rising demand for loans driven by the low unemployment rate and strong economic growth underline this membership expansion.
Other factors indicate a strong performance. In September 2018, the credit union loan-to-savings ratio increased to 85.8%, surpassing the pre-crisis level of 83.4% in 2007, while liquidity represented by surplus of funds as a percent of assets fell to 23.7%, the lowest level since July 1980.
While the strong performance is encouraging, it also may signal some storm clouds on the horizon. A high loan-to-savings ratio typically occurs prior to a recession and can be a double-edged sword during a downturn. Financial institutions will lose the income generated from loans because consumers can’t afford or are unwilling to borrow as much during a recession. In addition, with an already high level of debt credit unions and banks have low liquidity meaning there are fewer funds to lend even to qualified consumers.
With the next recession looming on the horizon, credit unions’ competitive advantage becomes increasingly important. In the days of social media and smart phones, user experience and member satisfaction are very important factors. As non-profit cooperatives, credit unions traditionally pass on this advantage to members and, and when compared to banks offer higher rates on savings accounts and lower rates on loans and credit cards. In addition, credit unions charge lower fees and are unlikely to require a minimal balance. While credit unions should continue to leverage these competitive advantages, they should also focus on additional attributes to maintain their superior consumer satisfaction ratings.
Digitization is increasingly becoming a competitive differentiator
Members today expect ease of use and 24-7 service through digital banking from their financial institutions. Digitization has two benefits: improved convenience for the consumer as well as lower operating costs for organizations. Credit unions still have time to embrace comprehensive, connected banking suites for multiple account and loan types to digitize every step of the member journey. For example, few banks offer a fully automated platform or take advantage of digital opportunities for commercial and small business loans, but rather focus on mortgages and consumer loans according to the American Bankers Association. To capture more active mobile banking consumers early, credit unions should complete digital transformation to a comprehensive omnichannel platform in three main areas of the account acquisition and lending process:
- Information collection featuring common database, one-time data entry, and auto update
- Flow and access to information, including a capability to upload third party data and access it in one centralized interface.
Enhancing value of in-branch visits through advanced technologies and improvements to in-branch employees experience will be critical for credit unions. Despite growing importance of digital banking and declining number of transactions at the brick-and-mortar branches, consumers still crave personal interaction and prefer to open accounts at institutions with physical branches according to a study by TimeTrade, a provider of customer engagement services. Member-owned status coupled with community-oriented philosophy give an advantage to the credit unions compared to the banks. Credit unions would benefit from mobilizing their branch staff through additional training, access to omnichannel transactions, as well as transforming branches with technological advances to reduce wait periods, offer personalized services and provide integrated online-branch experience.
While it may be a bit daunting to consider a recession during such a strong period for credit unions, the reality its best to consider the future now so that your credit union can not only to survive, but thrive during an economic downturn. Fortunately, there are many opportunities for proactive credit unions willing to embrace digital transformation while strengthening in-branch experience by developing new solutions in-house, partnering with or acquiring another organization like a fintech, and investing in CUSOs. The key for credit unions is to stay true to the credit union ethos by focusing on the needs of your members and determining how to best serve them regardless of market dynamics.