7 Trends Credit Unions Must Jump On or Lose Essential Opportunities

The near future holds out both challenges to overcome and advantages to quickly build on for these financial institutions. It's critical that they tackle both disadvantages and advantages quickly.

Current industry trends may seem unfavorable but actually the opportunities for the credit union movement couldn’t be better. Let’s examine what these trends are and why there is cause to be so positive about the future of credit unions.

There are seven trends credit union executives must examine and act on. I’ll share three trends, and key takeaways, in the “bad news” category first and then four more, in the “good news” category.

Three ‘Bad New’ Trends that Must be Overcome for Credit Union Success

We all know that 2020 was a difficult year for all industries. Digital adoption by consumers was accelerated by shutdowns worldwide. Banks and credit unions had to rely on remote channels from drive-up only branches to video banking to ATMs. More than anything, they relied on digital banking. But this added pressure on ailing credit union digital infrastructure has spotlighted some of their competitive weaknesses.

1. Member Satisfaction Must Be Reinvigorated.

Every credit union executive we know says that credit unions compete with better customer service than banks. Yet, according to the annual survey by the American Consumer Satisfaction Index (ACSI), credit unions “fell 2.5% to a score of 77 on a 100-point scale” — trailing banks by a point.

This is the second year in a row that credit unions ranked behind banks on this survey.

Going back to 2008, credit unions had outscored banks by a significant margin, until 2018 when the two industries tied. The ACSI study showed lower scores for financial services in general that year, but the decrease by credit unions is the most dramatic. Further, the difference between credit union scores and those of small community banks — which by definition are the banks that look more like credit unions — is larger. Smaller regional and community banks scored the highest in the banking category at 81, four points ahead of credit unions.

The kicker for credit unions is that the biggest drop in score by benchmark was the “courtesy and helpfulness of tellers and other staff.” The problem: When you interview credit union executives, this is most cited as their leading competitive advantage.

Takeaway: Credit unions need to get clear on how they will transition a service culture from the branch/call center to digital.

2. Membership Growth is Flagging.

In 2020 credit union memberships rose 3.2%, which is the slowest pace since 2014, according to a CUNA Mutual trends report. Membership growth rate for credit unions have fallen for two years in a row, following a banner year in 2018.

Ron Shevlin at Cornerstone Advisors notes in a blog that credit unions and megabanks were the losers in 2020 in share of primary bank customers. In 2020, credit unions went from having been considered a primary bank for 15% of those surveyed to 14%. In the same time megabanks went from 39% to 32%. However, community banks increased from 12% to 14% while digital banks rose from 4% to 11%.

Takeaway: CUs have to get serious about digital-first acquisition strategies.

3. Digital Transformation Has Become a Necessity.

“Trend adoption — or technology adoption — in the ‘real world’ is a bit faster than with credit unions. If it were a city, Credit Unionville would be downright quaint and wholesome by comparison.”

— Kirk Drake, Ongoing Operations blog

To make his point, Drake includes a graphic showing credit unions lagging in technology areas such as AI, cloud, fintech, digital transformation and marketing automation as compared to other players in the financial services industry.

However, according to a PSCU and PYMNTS.Com study [PDF], “Credit unions took a more proactive approach to innovation in 2020 than they did in 2019, by their own estimation. 12% of CUs say they launched new products and services before their competitors in 2020, and 46% say they were quick to innovate new solutions after observing market trends. This is far more than the 8% of CUs that reported innovating before their competitors and the 30% that reported innovating quickly after having observed market trends in 2019.”

Unfortunately, the same report notes: “CUs appear to have a very different idea than do their members about what constitutes ‘innovative’ products and services. Many credit union members do not consider the technologies their CUs developed in 2020 to be innovative at all.” [Emphasis added]

Takeaway: The real judge for innovation is not internal. It is all about the perception of the next generation of membership — they’re your future.

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Four ‘Good News’ Trends that Credit Unions Can Build On

While competition is grows more complicated, credit unions have fundamental advantages that, coupled with investments in digital transformation, will result in positive changes for.

1. Member-Centricity Remains a Strong Hook.

The key to digital transformation throughout all industries isn’t technology. It’s about member-centricity, as I have mentioned in an earlier article. Putting the member at the very center of your strategy works.

“The fact that credit unions are member-owned provides them a natural mandate and rationale to establish the member as the true north-star.”

— Pari Bose, PenFed Credit Union

This point is also well made by Lisa Kuhn Phillips, VP at Allied Payment Network and former COO at 3Rivers Federal Credit Union. Talking about the opportunity for credit unions to win the customer experience, she says, “Their mission and purpose matters as they prioritize membership first.”

There is a stark difference between the member-centricity of credit unions versus the customer satisfaction ethos of most banks. Of course, there are exceptions in both camps. There are banks that have a laser-focus on customers and credit unions that lead with cost-reduction and revenue-optimization over member-centricity.

However, the cornerstone to every leading credit union is an obsession about serving members. The same cannot be said for many banks. Tom Novak, VP and Chief Digital Officer at Visions Federal Credit Union, believes that credit unions’ advantages are “based in the credit union industry mantra of, ‘people helping people’.” Novak adds that “credit unions that are mission-driven, open to taking calculated risks, and prioritize growth can unleash the power of digital transformation.”

During a recent working session with a credit union executive team, I was struck by an observation made by the CEO. I brought up a quote from Francisco González, the Executive Chairman of BBVA, the Spanish banking giant, where he said “We are not a bank. We are a tech company.”

I was explaining how some organizations are focusing on data as a differentiation point. The CEO stopped and said, “It’s not about the data, it’s about the insights from the data.”

Clearly, that is a powerful differentiation. What struck me is that I have used that quote many times in front of bank executives but not one has made that point.

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2. Member Experience Can Blossom When Member Obsession is High.

Credit union member obsession comes through in many ways. Traditionally, the member obsession was focused on the branch experience. However, there’s a growing number of forward-thinking executives within the credit union industry who are steeped in design thinking and its application to all member experiences. Increasingly these thought leaders’ conversations have moved from digitizing physical processes to improving member journeys, increasing member engagement, and orchestrating omni-channel strategies.

“When we deploy digital banking experiences that are crafted from the consumers’ perspectives, there is proof that we will improve satisfaction, increase sales, expand the depth of relationships, increase retention, and positively impact our organizations,” says PenFed’s Bose.

“Empathy” has been a term most often used by Human Resources, but it is now bandied about by the credit union executive suite, along with “Net Promoter Score” and more traditional measures of member loyalty. In the meantime, humanizing digital experiences facilitated by data and machine learning has become the rallying point. My firm believes that serving credit union members can best be done through deeply understanding member behaviors and offering engaging experiences.

Supporting this point, Bose says that “a digitally-mature credit union’s path to winning is knowing their member ‘better’ and providing relevant and contextual guidance, education, and next steps through digital. Credit unions have demonstrated a long legacy of ‘knowing’ their members in the branches (personal service) — the challenge is how to extend that knowledge, advice and personal service in the digital arena.”

Credit unions’ approach towards member-centricity is also reflected in their product development and promotion.

Novak says that “as wholly-owned cooperatives and stewards of member assets, credit unions have delivered unique and sustainable value to consumers.” To illustrate his point, Visions’ Novak points to how his credit union offers free identity theft restoration and credit monitoring to members instead of charging a monthly fee for the service. The idea, he says, is to protect their member’s assets. Banks will tend to offer such services as a way to retain customers or reduce costs.

Takeaway: Member-centricity is the special sauce for credit unions. Lean into it through digital capabilities.

3. Strategic Planning Gains When the Horizon Lengthens.

Strategy and planning horizon is another factor that sets credit unions apart compared to most banks. Kuhn Phillips notes that credit unions have a longer-term financial perspective, while banks tend to focus on shorter term financial profits.” This allows credit unions to build out long-term digital transformation roadmaps versus the annual planning horizon that experience shows many banks have.

Credit union acquisitions of banks have added a new depth to their strategy. While this might have seemed sacrilegious once, “we are now seeing this occurrence with some regularity,” says Novak. He adds that credit unions “are well-positioned with strong balance sheets.”

Takeaway: Exploit strategic differences that allow your organization to have a longer planning horizon.

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4. Partnerships and Open Banking Hold Promise for Credit Unions.

When I began working with credit unions one of the revelations was the sense of community between them. It is not something I saw much on the banking side.

For example, I was dumbfounded when a digital banking executive at a credit union told me that he had just received the code for a system that had been developed by another credit union in a different part of the country. They were planning to use the very same code for a new system. I relayed that story to a credit union friend, and he was surprised that I was surprised.

“The difference is between who they serve — shareholders (members) or stockholders. The expectations are different between those who invest in a credit union collective and those who invest in a bank.”

—Lisa Kuhn Phillips, Allied Payment Network

She adds that “credit unions are a community.” This makes them very familiar with real partnerships, including credit union service organizations (CUSOs), that translate well to fintech partnerships and collectives.

When I have spoken about open banking with bank executives, the reaction is shaking heads. They conclude that such a model will never be seen in the U.S. By contrast, credit union audiences easily accept the role of marketplaces, banking-as-a-service, and other models that are likely the future of banking.

Novak notes that modular banking and tapping into a partner ecosystem are two methods of growth that credit unions have used for years. He sees credit unions “uniquely positioned to dedicate the appropriate research efforts to contract with key partners on their ascension up the food chain. Up and coming partner providers are more readily suited to working with credit unions to quickly roll out alpha and beta opportunities, that in turn, could improve the member experience and conversion through the sales funnel.”

Takeaway: Partnerships are key to extending the organizations’ capabilities, even in areas that are thought to be beyond reach.

Decide Where You’re Steering Before You Start

Andre Iervolino, CEO & Founder at Volino Consulting Group, book author, and former Chief Technology Officer at REV FCU warns that many credit unions don’t yet know how to define the necessary digital transformation they must undergo.

Iervolino says “credit unions must design digital transformation strategic plans that contain a very clear vision and mission statements, a strong primary strategic focus, and business integrated programs in order to operationalize the most important initiatives.” He adds that “within the next five-to-eight years relevant and successful financial institutions will have four areas of focus only: Executive Management (C-Level suite), Marketing and Sales, DevOps, and Strategic Partners.”

While we agree with Iervolino, our experience during the last few years working with forward-thinking CUs has reinforced our belief that there is a rising tide of credit union executives that do see the need for digital transformation and are pursuing it wholeheartedly. Ultimately, we believe a member-focus will win out. Only those organizations that understand it, whether they are banks or CUs, will persevere.

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