Serving the underbanked and millennials – Can credit unions be the disruptors?
As credit union boards and executives refresh their strategic plans, some will take a similar approach to what bankers are doing. They will focus on growth and market share, driven by improvements to the member experience; investments in mobile technology; talent retention; brand marketing and risk management. And the holy grail will always be to do all of this while becoming very cool and popular with the membership of the future found in the millennial and Gen Z generations.
But to be clear, a high percentage of most credit unions’ target field of membership is underbanked, or put differently, they are financially struggling and underserved. And many, if not most, progressive credit unions will realize the need for proactive service strategies for this group as well.
The Filene Research Institute just published a thought-provoking, must-read paper titled, “The Credit Union of the 21st Century.” In this report, the Filene team compiled feedback from credit union leaders with academic research to reach the following conclusions that relate to credit union strategic planning:
- No matter the service niche chosen by individual credit unions, each should realize that the credit union of the future should be relationship-rooted, a platform-based concierge and a one-stop shop for financial services. They should also consider investments in “ambient” banking with a skillful mix of artificial intelligence–driven chatbots and human handoffs.
- Dramatic socioeconomic trends and new technological capabilities will change the way that credit unions must approach financial services, and change should happen quickly.
- Workforce transformations to more part-time and contract workers in a gig economy, growing income volatility and fragility, and increased automation have altered the financial needs of Americans.
- Millennials will have less need for traditional branches and much greater interest in a one-stop mobile financial institution. The role of payments is becoming the key entry point into financial relationships.
- Changes to credit union laws and regulations will be needed to help credit unions adapt to this new environment and to help them be the community-centric cooperative providers of affordable financial services in the future.
I find it interesting that there is a surprising amount of overlap when considering relevance to both millennials and the underbanked. There are 83 million millennials in the U.S., a quarter of the population, and an estimated 30 percent are underbanked, 21 percent have never written a check, 27 percent would consider a branchless, digital bank, and they account for over 40 percent of all retail sales today.
This “next generation” for credit union membership does not typically place the same value on home and car ownership and other big-ticket items as their parents and grandparents did. So, as futurists predict that autonomous cars and ride-sharing will become even more prevalent, credit unions’ bread and butter home and auto lending may become hyper-competitive and challenging in the future.
And millennials are glued to their smartphones, accounting for 41 percent of total time Americans spend there. So, although today many credit unions are very loaned out with an emphasis on mortgage, auto and credit card loans, in the future, opportunities for small-dollar, short-term loans should be considered.
The Filene study describes the precarious future of work in the U.S. by pointing out that 94 percent of net employment growth between 2005 and 2015 was in the form of freelance, contract, on-call or temp agency jobs. And 20 percent of all workers today are contractors, usually not receiving benefits from their employers. They predict that in the next 10 years, a majority of workers will fit these criteria.
And with respect to income volatility and difficulty saving, the Filene report revealed that Federal Reserve data showed that one-third of Americans reported some kind of monthly income variation in recent studies. Other financial wellness data reinforce the point that being “underserved” in financial services is more mainstream than ever. Fully 60 percent of U.S. households experienced a major financial shock last year, and 55 percent could not replace one month of income with liquid savings.
So, who is serving the needs and perceived needs of this burgeoning group of underbanked and underserved consumers, including the millennial population that has 30 percent underbanked in its ranks?
Traditional bank and credit union models seem to locate new branches in more upscale neighborhoods, looking for the moderate-to-higher income household that might be net savers and more likely to make big-ticket purchases financed by a credit union. The occupational-based offices, located close to the core FOM group, seem to be a model of the past, or one that is being replaced by community-based fields of membership and a more diversified membership comprised of both occupational groups and communities.
Nobody can argue with the economic rationale behind these credit union growth strategies. But not-for-profit, tax-exempt credit unions also have a social responsibility to serve the underserved in lower-income, urban and suburban neighborhoods. This can also be done through great one-stop mobile offerings that help members with their basic needs of paying someone, getting quick access to credit, and saving and protecting their usually small nest egg for the future.
The payday lending and check cashing industry has really only been around in the U.S. since 1993, and it has grown to over 15,000 stores, 83,000 employees and over 12 million customers, mostly low-income and financially challenged borrowers. It is a profitable business with over $11 billion in revenue and $1.4 billion in profit in 2018. The largest providers are national companies like Advance America and Check N’ Go, and they are both fast and mobile in their offerings.
These providers are most-often focused on an excellent consumer experience in their urban and rural stores as well as their websites and mobile apps. While their reputation is poor due to the high fees charged for payday loans, regulations require transparent disclosure and place limits on egregious practices related to rollover loans and collection activities.
Most of the big payday loan providers message trust, speed, clear rates and fees and customer satisfaction. They tout customer testimonials, cross-sell reloadable VISA debit cards as an alternative to checking accounts, offer faster access to paychecks, provide bill pay and money transfer options, and offer financial education. These are many of the same brand promises offered by the new neo-banks and challenger banks that are mostly funded by venture capital and large money-center banks.
Many credit unions across the country offer payday alternative loans. For federal credit unions, they model the NCUA-approved and CFPB-exempted PALs program where members can borrow up to $1,000 for a $20 fee and 28 percent interest for terms of one to six months for three such loans in a six-month period. The APR on these loans is less than 76 percent, well below the APR rates of payday lenders.
For state-chartered credit unions like One Detroit in Michigan, their members can use their MyPay loan product for a $70 annual fee, along with an 18 percent annual rate, and members are allowed to make multiple draws throughout the year. Seventeen percent of this urban credit union’s members use its MyPay loan product, and members pay roughly one quarter the cost charged by Detroit-area payday lenders.
As the millennial generation shows less and less interest in home, auto and other big-ticket purchases, and as their credit scores and employment status make it more difficult to be served by traditional loan products, their needs for quick access to money may well be served by credit unions’ payday alternative loans like that offered by One Detroit Credit Union.
And then consider the huge influx of neo-banks like Chime, MoneyLion, Varo, and Greendot and proprietary beta banks like Marcus by Goldman Sachs, Greenhouse by Wells Fargo and Finn by Chase. Jim Marous, co-publisher of the Financial Brand predicts that by the end of this year, over half of the top 10 U.S. banks will have fully digital mobile banks that provide customers with the one-stop financial services hub that Filene suggests credit unions will need to offer. Most of these providers emphasize alternatives to traditional checking accounts via a multi-feature reloadable debit card with instant alert cashback features, ATM access, bill pay features, lower fees and access to loan products in many cases.
Interestingly, these banks realize that the separate mobile product is about creating a different mobile experience that blends financial education, low-fee services and remote tools for payments, borrowing and investing. Many of them will use the Greendot model of messaging that there are no pesky overdraft fees and provide the ability to get payroll deposit up to two days early and deposit cash at corner pharmacies, while also managing spending using a personal financial management platform.
The takeaway for credit unions is that, as next-generation banking places more emphasis on speed of payments, quick and easy access to small loans, and creative ways to low-cost, trusted saving and investing, millennials and other tech-savvy consumers will demand a different type of banking. And a majority of these new members will be lower-income, underserved consumers looking for trusted, affordable financial services.
The simple, consumer-friendly payday lending stores offer convenient storefronts in low-income neighborhoods that are less attractive to banks and credit unions, while also offering a strong web-based or mobile app for quick, convenient loans online. As payday lenders expand out into the world of the mobile neo-banks, perhaps credit unions should consider how they become more relevant in both areas of short-term small-balance lending as well as neo-bank services offered through the mobile channel.
No provider should be better suited to doing this than credit unions. However, the key planning question will be whether that is where the 21st century credit union wants to go. It won’t be as profitable as serving middle- to upper-class financial services needs. But serving these needs will be more satisfying and more in keeping with the true mission of credit unions. I believe that most successful credit unions will work to proactively serve all income demographics but with strong conscious emphasis on the growing needs of the underbanked and underserved, especially millennials.
CU Solutions Group has created a new FinTech company called LifeStep Solutions, LLC, and we plan to explore turn-key mobile solutions for credit unions of all sizes. These will help credit unions meet the service needs of millennials and the underbanked. Features will include mobile payments, short-term small balance loans and resources for financial wellness. We believe that credit unions will want to collaborate and invest together in these solutions, and we look forward to sharing that journey with our credit union partners and investors.
