Looking back on my almost 30 years in international banking, I can safely say that two of the most annoying and often repeated comments I have learned to anticipate are, “but that’s the way we’ve always done it” and “members are not asking for that.”
In response to the latter, I find myself explaining that, “Experience shows, they are. They’re just not asking your credit union.” It’s usually that, or the question is not getting fed to the right person internally who can either warehouse the data in order to monitor demand or who can make a decision on whether to build or to buy.
In response to the former, I’ll ask, ‘But, is it working?”
We’ve seen a rationalization in the number of credit unions over the last 10 years from almost 7,000 down to 5,091 (as of Feb 2020), and we expect a further 2.7 percent reduction by the end of December. That being said, business growth in the sector has risen over 3 percent in the last five years largely due to increased memberships, interest rates and consumer borrowing. So, it seems that demand for services from member-owned institutions remains positive and strong even while bricks and mortar crumble.
This demand is driven not only by consumers, but also, in large part, by small businesses that are in search of what a CU can offer. But with credit unions having to use their own funds to finance operations and product development, there’s a long way to go yet before they are able to compete effectively with the average bank when it comes to international products and services.
So what happens when the small business member grows and requires more sophisticated services, like, for example, moving money internationally in order to pay for imported goods and services? Fortunately some credit unions are able to handle this process, but it’s usually through an affiliation with one of the larger competitor banks on the same street. Wells Fargo, JPMorgan, and Bank of America are three such examples and have a significant market share of the CU business in North America.
CUs are generally sent a fixed rate sheet by their affiliated bank each morning. In some cases it is possible to obtain a live rate through an online banking platform. In either case, however, the margins tend to be relatively wide and are driven by volume. What happens, then, when a credit union’s member doesn’t like the best rate a CU can provide? Chances are, they will relent and speak to, in most cases, a large bank that will gladly quote a rate – probably still not the most competitive rate, but one the member is happy to accept.
What comes with that rate, however, is the prerequisite that the member move all of their business banking across. This stands to reason given that the profitability on the payments alone is not enough to meet the larger bank’s minimum revenue hurdle.
In most cases, we know that the small business doesn’t actually want to have to transfer their banking needs away from the credit union. After all, they chose the CU because of the high level of member service and the ability to form business relationships in which they feel like a member and a partner rather than a small fish in a large pond with a 1-800-GO-AWAY member service number to call for assistance.
This is where a FinTech payment services provider (‘PSP’) might be able to help. By partnering with smaller financial institutions and offering a robust and compelling referral program, a PSP can support the need a credit union might have if their member is unable, or unwilling, to accept the wide FX margins forced upon the CU by the larger correspondent bank.
This will not only allow the credit union and their members to continue enjoying their well-founded and often long-term relationships while, at the same time, the CU continues to reap the benefit of the day-to-day banking revenue, but will also provide an additional fee income stream to the CU from referral fees. As we have seen, relying on deposit interest income alone has proven to be a rather foolhardy strategy, particularly during times of economic stress like post 9/11, the global crash in ’08, and again in COVID times.
Businesses banking with a credit union join for a variety of reasons, but as they grow and their needs change they may find it harder to justify sticking around. A credit union certainly doesn’t have to be all things to all people and considering outsourcing, or partnering, in order to continue to be able to provide members with the white-glove service they signed up for in the first place is a smart, future-proofing move. Members are asking. Isn’t it time to change?