- More technology and more sharing will give credit unions an edge.
- Banks are not the only competitors CUs face.
- Many small credit unions will not survive.
Just when you thought the bleeding had stopped–the corporate credit union blow ups are passed their worst stage; the global economy is on the mend; consumer optimism is ticking up–there is more gut-wrenching news in store for credit union executives.
The headline news is that there is no going back. Giant, encompassing mega-trends are remaking the credit union universe and before this is over, just about every credit union will feel the changes. Some will get bigger, some will close, but for all the news is the same: “Change is coming, like it or not,” said Fred Becker, CEO of NAFCU.
Exactly what are these mega trends? Experts are quick to highlight the issues, the perils and the opportunities. “The very existence of credit unions is now in question,” warned Louis Hernandez Jr., CEO of technology company Open Solutions and author of Too Small to Fail: How the Financial Industry Crisis Changed the World’s Perceptions. According to Hernandez, many credit unions continue to stumble in their efforts to remake their business model. The move into community-based credit unions is not as simple as some thought. Not all will survive.
The ones that grapple with the trends will be that much more likely to be among the survivors.
Mega-trend No. 1: more technology, more sharing. Hernandez is not all doom and gloom about the future of credit unions and, indeed, he cited a mega-trend that, he believes, could be exactly what credit unions needs to prosper: “more cooperation, particularly with technology.” Were credit unions to pool their technology initiatives, sharing tools and solutions, Hernandez said, they could cut those expenses by 30% to 40%.
Core to Hernandez’ argument is that technology will be central to the evolution of financial institutions and the associated costs can only be expected to rise. That will give big banks major advantages, arising from economies of scale, but credit unions, said Hernandez, can level this playing field by joining together, sharing expenses and solutions.
He also argued that the history of the credit union movement makes cooperation, even on fundamental issues such as back office technologies, easier to sell than it is in the for-profit banking sector. That is why he expects this cooperative spirit to increase as more credit unions see the advantages of pooling together for technology initiatives.
Mega-trend No. 2: Competition will come from all directions. A generation ago, a credit union executive could make a list of his or her prime competitors on a three by five card and have plenty of blank space. Going forward, however, competitors are multiplying, said Becker. He pointed to Wal-Mart, which continues to edge into offering more and more financial services, and also the rise of person-to-person financial transactions (via PayPal, for instance). Another reality is that, with the spread of the community charter for credit unions, more credit unions are competing against each other, like it or no. Competition, suggested Becker, just is going to be inescapable. And, for many credit union executives, accepting this represents an earthshaking paradigm shift.
Mega-trend No. 3: Small credit unions are going away. According to
“The top 200 credit unions have the same assets as the next 7,000. It’s inevitable that there will be consolidation,” said Tim Chen, CEO of NerdWallet.com, a site dedicated to consumer education around credit cards.
Spiraling technology costs and competition are root problems, but Kevin Handly, an attorney with Pierce Atwood in Boston, fingers yet another pressure point as the factor that will undo many credit unions. “Running a financial institution has become much more complex, the regulators are less tolerant,” explained Handly, who pinpoints this as a key reason some, generally smaller credit unions will choose to merge or close the doors. Compliance is expensive, said Handly, and, unlike the costs of, say, technology, this is not readily pooled. Thus Handly’s prediction that the coming years will see more small credit unions vanish.
Handly is however optimistic about the sector as a whole. “The future for right-sized credit unions is bright,” said Handly. What is right sized? Handly ducked the question. “You hear $250 million, but I wouldn’t say that.”
Mega-trend No. 4: The need to reach out–more often and smarter–to young consumers. Credit unions have not excelled at attracting this consumer base but they are of course the future. Jack Vonder Heide, president, Technology Briefing Centers Inc., suggested that credit unions will have to deploy the tools and devices preferred by this demographic. For instance, he said more credit unions will offer more and richer mobile banking tools because younger consumers want to do their financial transactions on a cell phone. Those consumers also very much want attractive rewards programs and, said Vonder Heide, credit unions that are not creating programs with that under 35 years of age demographic in mind may not have happy futures.
A last point made by Vonder Heide is what he called “the commoditization of money.” Their parents might have aggregated all their financial transactions at one institution. The younger demographic, said Voder Heide, are using online tools to comparison shop, often across institutions nationally, and they are opting for the best deals. What that means is that credit unions cannot fight just for this customer but for this customer’s every financial decision.
Mega-trend No. 5: Continuing nonmember ignorance about credit unions. “The average nonmember has no idea what credit unions stand for,” said Mark Sievewright, a senior vice president at technology developer Fiserv. That is not good news. “Credit unions are at an inflection point. They need to focus on growth,” said Sievewright.
To Sievewright, communicating the credit union advantage needs to be pursued by just about every credit union. Big banks are deluging America with billions of dollars in advertising and marketing. Contrary messages are easily lost, but, suggested Sievewright, if credit unions concentrate on getting their differences understood, they just may be able to make a dent in the pervasive ignorance that hinders growth. “Getting this message across is a great opportunity,” said Sievewright.
Check out the next page for the Top 5 Global Credit Union Mega-Trends
Sidebar: Top 5 Global Credit Union Mega-Trends
We are the only ones identifying mega-trends. Recently the World Council of Credit Unions G-10–the 10 biggest credit union systems including Canada, Australia, and the United States–met to identify what its members believed to be mega-trends. Here is their list.
1) A greater need for urbanization. In much of the world, especially outside the U.S., credit unions are a primarily rural institution. To stay competitive they need to step up their urban game.
2) An increasing microfinance malaise. Bad news for some can be good news for others. As enthusiasm for microlending wanes, credit unions can step up awareness of their ability to lend.
3) An uptick in transactional mobility. Mobile banking is gaining traction globally, often in rural areas, and credit unions have to continue to push this digital envelope.
4) A push for membership growth. Efforts to recruit members in key, younger demographics, the 20 to 24 and 30 to 34 age groups, continues to falter. The WOCCU G-10 urged redoubling efforts to win support in these age groups.
5) Fostering an emerging middle class. The middle class is the backbone of the credit union movement. Countries with a solid middle class are where credit unions will prosper.