BOSTON -- For many credit unions, lower profit margins followed by identifying ways to attract new members top the list of the most pressing industry challenges, according to a new report from Aite Group, LLC.
Approximately 36% of credit unions surveyed said lower profit margins continue to be their top priority. Thirty-four percent said finding ways to attract new members was their biggest challenge.
"As the credit union industry is forced to evolve, many institutions find themselves in uncharted waters," said Christine Barry, research director with Aite Group and author of the report. "Survival in today's competitive marketplace requires flexibility, and, in the case of credit unions, it also sometimes means expanding well beyond their roots."
The report, The Evolution of the Credit Union Market: A Survey of Credit Unions, is based on the results of a survey of 101 credit unions, all with more than $100 million in assets and representing the size of the top 1,200 credit unions in the United States. Institutions of this size are often the most active users of technology within the credit union segment and offer the broadest product portfolios, according to the report. The report is part of a larger Aite study of 201 credit unions and the first of a series of reports on this market segment.
Margins have been squeezed for quite some time so the report's findings are not surprising, said Tun Wai, director of research and analysis and chief economist at NAFCU.
"We've been in this low interest rate environment. The squeeze is probably going to continue," Wai said. "Delinquencies may go up. Credit unions have to think about whether the members they're making loans to will be able to repay."
Offering "attractive rates" has been a key strategy and differentiator for credit unions for several years and "tax benefits enjoyed by [them] put them in a unique position to be able to offer [the rates]." Today, however, commoditization and increased competition is driving down rates, and both banks and credit unions are now suffering from lower profit margins, Barry noted in the report.
In addition to lower margins, credit unions also struggle to grow their member bases. Contrary to the past, most credit unions no longer have a single sponsor, such as a company, sending them new employee members each month, ensuring a regular flow of new members, the report said. As a result, credit unions continue to rely on "aggressive" rates on certificates of deposit and loans to attract interest.
"This tactic is not without risk, however," the report offered. "Offering aggressive rates is especially precarious, as credit unions run the risk of simply 'buying' their new members and jeopardizing their overall performance. Such a strategy is no longer sustainable."
Wai said membership growth concerns have become a mainstay in the industry.
"One thing [the credit union industry's economists] have been saying is not to look at the growth of membership but the quality of membership," Wai said. "You have to think about whether expanding is attracting the members you want to attract."
Still, credit unions are meeting their members' needs despite not "changing their lending standards tremendously" with the exception being risk-based pricing, Wai explained.
"In terms of liquidity, it doesn't look like [credit unions] are drying up," Wai said. "On the bank side, they're saying 'we're meeting the demand of new customers' but those new customers have to use other services."
To woo new members, credit unions are also merging or partnering with other credit unions, relying more heavily on technology and reinforcing its reputation for "superior levels of member service." Better employee training including empowering them to make decisions so they can better serve members has also helped.
"Because credit unions are owned by their members and not responsible for generating a profit for shareholders, they are able to focus more on member needs," the report said.
Although only 6% of survey participants ranked targeting a larger member base through less restrictive membership qualification as their most successful or second most successful strategy for winning new members, it has been a path several credit unions have decided to follow, Aite found. Charter conversions are also becoming more commonplace as a means to increase membership. Thirty-three percent of survey respondents said they work at credit unions planning a charter conversion (See related story, page 1).
In other areas of the report, Barry discovered that 70% of credit unions surveyed consider other credit unions to be their greatest competitors. Still, they continue to compete head-to-head with community and regional banks.
--msamaad@cutimes.com
