Credit Unions Are Knocking on Death's Door
I've been in the credit union industry for my entire career. In fact, I've been writing about credit unions even before I had a career, as my first credit union gig was a college internship.
I'd like to retire in this industry, too. However, as I think about the future, I’m not confident that will happen.
Many of the favorable business and economic conditions that allowed credit unions to grow are gone, and I don’t think they’re coming back.
Forget regulatory burden and the low rate environment. Never mind that employee loyalty is on the ropes and benefits are scaling back.
Two bigger problems stand out to me as credit union killers, and it doesn’t seem like many in the industry are prepared to do anything about them.
The first is the continued breakdown of the banking barrier to entry. Long gone are the days when credit unions only had to compete against big banks and community banks. Many readers realize this, but plenty more don’t.
Who needs a checking account when you can use a pre-paid debit card instead? I can’t remember the last time I wrote a check. I don’t think members will ever understand Reg D. And I think the backlash among consumers and regulators against overdraft and NSF fees will continue to increase.
Pre-paid debit cards can carry high fees, but at least those fees are known costs. Overdrafts are usually unexpected, and they come at the worst possible time. Pre-paid debit cards are increasingly tapped into direct deposit and promote access to fee-free ATMs. Why should consumers even bother with a checking account?
Check cashers and payday lenders aren’t going away either, even though they are under CFPB scrutiny. Here's why: Between 2001 and 2012, the ranks of the self-employed grew 14%, and are expected to further rise as technology and the increasing cost of benefits makes 1099 employees more appealing to a business’ bottom line.
When self-employed people get paid, banks and credit unions treat their checks like all others, putting them on hold and increasing the likelihood of overdrafts. Check cashing fees are often cheaper than NSFs. Products and services for small businesses often don’t fit their needs.
Consumers are also starting to wise up about past due loan balances and the practice of settling those debts first before granting access to payroll or investment funds. I predict consumers and those who manage baby boomer estates will increasingly separate their lending and transactional accounts to keep food on the table when money gets tight.
This leads me to the other big worry: The economy. The baby boomers, with their borrowing habits and good paychecks, were low-hanging fruit … and they’re not coming back.
We've seen report after report state that Gen Y doesn’t want to own cars. And yet, credit unions continue to woo Gen Y while at the same time marching forward with the same old bread-and-butter auto loan mentality. One-third of Gen Y still lives at home, and the prospects of them ever leaving aren’t good. And yet, credit unions continue to market home loans to this group.
What credit unions need to stay relevant are new products and services that meet today's economic and competitive realities, and business development plans that recognize the traditional workplace will continue to shrink.
If your credit union doesn’t have plans to launch mobile banking or a prepaid debit product this year, your leadership should step aside and let someone else take a crack at preserving the institution. Same goes for those that depend upon NSF fee income to keep the lights on, as well as those that don’t understand how social media differs from direct mail advertising. And if your business model depends upon the economy turning around and loan demand returning to pre-recession numbers, forget it. You’re toast. And these new must-haves will be behind the curve soon, if they aren’t already.
Regulators also have to get in the game if they want to save banks and credit unions, and in turn, themselves. Many of the hurdles consumers dislike at traditional financial institutions are regulatory in nature. The NCUA and FDIC aren’t exactly forward thinking when it comes to approving new products and services. Granted, there is always risk involved in new ways of doing things, and financial regulators are tasked with minimizing risk.
But the risk of extinction is also real, and should be given equal consideration.