Why credit unions must innovate or risk fading away

Situation

With the effects of the coronavirus continuing to reverberate through the global economy, American credit unions face an existential crisis. To survive they must embrace a digital-first strategy that preserves the sense of trust and community that strengthens loyalty with existing members, while attracting new customers, who increasingly demand tools to manage their financial lives primarily, if not entirely, through online channels like mobile apps and websites. And credit unions must do so quickly.

These statistics and trends underscore the long-term challenges facing credit unions:

Credit unions are shrinking. As of Q2 2022, there were 4,853 federally insured credit unions, a 15 percent decrease from just five years ago when there were around 5,700. While most of this shrinkage is due to mergers, the trend has been exacerbated by credit unions’ failure to offer competitive products and services and poor succession planning. In contrast, during that same time period, only 12 new credit unions were formed.

Membership is aging. The average age of a credit union member in the U.S. is around 47, which skews older than most countries. To be successful in the long term, credit unions need to do more to attract and retain members from 18-41, a demographic that includes both Millennials and Gen Z, as many of these borrowers are in their peak borrowing years.

Credit unions are losing their primary FI status as younger customers age. A 2016 FICO study found that 20 percent of 18-24 year olds reported having a credit union as their primary financial institution, but this number halved to 10 percent for those in the 25-34 age bracket. Credit unions should make a concerted effort to address attrition for this demographic.

Loyalty to credit unions isn’t necessarily passed down from one generation to the next. A 2020 survey of credit union members over the age of 65 found that 60 percent had children who did not bank at their credit union even though over two thirds of parents exhibited strong feelings of loyalty toward their credit union.

Trust in credit unions is diminishing among younger generations. A recent intergenerational survey polled three generations—Gen Z, Millennials, and Baby Boomers—on their level of trust in different organizations (e.g., credit unions, banks, fintechs) to provide various types of financial services. When asked who they trusted most to securely manage their personal financial data, Baby Boomers were more likely to trust credit unions than national banks to protect their data. In contrast, Millennials were significantly more likely to trust national banks than credit unions and Gen Z were more than twice as likely to favor national banks over credit unions.

Proposed Solutions

Below are five strategies that credit unions should consider as they seek to transform into more innovative and agile organizations:

  1. Develop a comprehensive strategy for digital-first banking with a focus on attracting newer, younger members. Credit unions’ greatest assets are their members’ high levels of loyalty and trust, the latter of which members have cited as the most important factor in choosing a credit union. Credit unions need to think about these competitive advantages when designing a digital-first strategy. For example, in 2021 New York-based Summit FCU launched a virtual branch that allows members to video chat with a local “relationship specialist” similar to an interaction at a physical branch. To remain competitive, credit unions will need to embrace innovative technology with a personalized approach and offer products and services that many customers have come to expect, such as real-time payments, automated lending, wealth management tools, and other services (e.g., cryptocurrency offerings). If a credit union cannot offer wealth management tools and services when the largest transfer of wealth in American history is taking place between Baby Boomers and younger generations, what incentives do families have to stick with the same credit union across generations?
  2. Assess the efficacy of existing core systems and data management processes and what insights they generate. A recent PSCU and PYMNTS study found that “…63 percent of CUs lack the data analytics they need to provide the customized product offerings their members expect, and 51 percent say their core systems prevent them from implementing the innovations they want.” As a part of their broader business strategy, credit unions should identify the limitations associated with their current core systems and gap them against their short- and long-term strategic objectives. Given that replacing a core system is an arduous and costly process, credit unions may want to adopt interim solutions that allow next-generation technology, such as APIs, to work alongside their existing core with minimal disruption. Credit unions should also look for ways to derive the best insights from available data. Better data begets better business intelligence into what customers want and will allow credit union leaders to make targeted investments with the limited resources available at their disposal.
  3. Find opportunities to partner with fintechs. In many cases, it will be hard to compete directly with fintechs and neobanks on technology, so credit unions should embrace an “if you can’t beat ’em, join ’em” partnership philosophy. For example, Sharonview FCU recently partnered with the fintech Upstart to offer AI-powered personal loans, which the CU has credited with providing significant automation and efficiency gains. Partnerships between credit unions and fintechs are not only beneficial from a business perspective, but they also often make sense from a values perspective. Many fintechs have a strong sense of mission to help underserved and underbanked populations, a view that aligns closely with the ethos of credit unions.
  4. Lean in to the adoption of digital identity solutions. An important innovation in recent years has been the development of digital identity solutions—broadly defined as technology that can be used to assert and prove a person’s official identity. The problems with our current identity infrastructure were clearly demonstrated during the COVID-19 pandemic when millions of Americans went to apply for public benefits online and were often denied aid because they were unable to verify their identity. Meanwhile, criminals defrauded the U.S. government of billions of dollars, often using stolen identity data and synthetic identities. By embracing digital identity tech, credit unions can attract newer and especially younger members, improve the convenience of member onboarding and verification, and generate cost savings. In addition, credit unions can also promote greater financial inclusion for traditionally unbanked/underbanked individuals as well as the millions of Americans that lack a government-issued photo ID.
  5. Engage proactively with the National Credit Union Administration (NCUA) on technological innovation. Credit unions should engage with the NCUA to preview products and services that use newer technologies and seek regulatory clarification whenever needed. In recent years, the NCUA has taken a more forward-looking approach to technologies like blockchain, but it will be incumbent on credit unions to educate the NCUA about how newer technologies benefit consumers and also demonstrate a nuanced understanding of their associated risks.

To their credit, many credit unions are already embarking down a path of digital transformation by making substantial investments in customized product offerings, loyalty and rewards programs, and technology infrastructure, but others are wavering. The message to those on the fence is clear: innovate quickly or risk fading away.

Andreas Westgaard

Andreas Westgaard

Andreas Westgaard is a director at Klaros Group where he advises financial services and fintech clients on a variety of strategic, regulatory compliance, and risk management matters. Andreas previously worked ... Web: https://www.klaros.com Details

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