February 22, 2018
Kris Carrera, Business Line Executive, Credit
Once regarded as the preserve of lower-paid families who would otherwise struggle to obtain a mortgage or bank account, the credit union market is booming. Despite extensive consolidation over the decades – from 24,000 credit unions in 1969 to 5,700 credit unions as we start 2018 – credit union membership has increased by 218% in the last 30 years; assets, meanwhile, have grown by 1,512% and lending has increased by 1,252%. The result is that more than one in three American adults are now members of a credit union.
Historically, credit unions were affiliated with a specific cause and only open to customers within a specific industry, and customers would pay a token fee to become a member to benefit from the financial services they offered. That’s rapidly changing, however, as credit unions work to actively expand their footprint and grow their business – even those once tightly coupled to a specific region or industry. Many established credit unions are also undergoing wholesale brand renewals to remove any remnants of historical affiliations. For instance, the San Antonio Federal Credit Union has become Credit Human, while the Albuquerque Public Schools Federal Credit Union (APSFCU) has become Nusenda credit union. Such moves are a testament to their ambition to become a strong and viable alternative provider of financial services.
The growth in business is now being driven by the fact that credit unions are expanding their services into more conventional banking products. Today, there is little difference between credit unions and other financial institutions in terms of products and services, with checking accounts, credit cards, and loyalty schemes that work alongside traditional products like auto and mortgage lending.
Like other financial institutions, credit unions are highly regulated, their capital requirements are stringent and they are closely monitored by regulators. The differentiating factor comes in the service levels. Whether providing service to individuals or businesses, credit unions operate on the principle of “profit for service,” not “service for profit.” Credit unions return any profit directly to members in the form of shares, rebates, lower lending rates, and higher deposit rates.
The modern credit union now provides products and services similar to those of national banks and local community banks. To compete in such a market, credit unions are under pressure to find new members while keeping current membership engaged. Fortunately, increased use of data analytics and a more diverse product portfolio have better-positioned credit unions to cross-sell more conventional debit and credit products to customers who may only want an advantageous loan, while also deepening the relationship with their established membership base.
The primary differentiator for credit unions has always been personal service and that connection is not lost on millennials. A demographic that is highly demanding of personalized service, community activities and vocally averse to the faceless reputation of larger banking conglomerates, millennials are a target for credit unions. Many are ramping up efforts to offer these demanding younger customers a local solution for reasonable fees with a strong emphasis on loyalty schemes – the goal to ensure top-of-wallet status for their credit/debit cards. The concept of “a local bank for local people” is not lost on millennials and, assuming the product and service offerings are comparable, many actively prefer the more community-oriented services offered by cooperative-driven credit unions.
The last few years have seen credit union membership grow at a much faster rate than other financial institutions. The millennial factor is certainly a major driver as 25% of all credit union members are millennials, compared with 20% a few years ago – numbers much stronger than other financial institutions.
Once deemed to be technological laggards, credit unions also have been heavily investing their profits into more digital services to back up their broader product offerings. Credit unions have also been emboldened by a more open financial market. While they are still deemed a special case, the rules in the United States have changed and the previous lending ceilings that restricted business potential has been relaxed.
The Mercator Advisory Group projects that bank cards issued by credit unions will grow to $60 billion in 2018, which is a 54% growth over the 2012 rate. In fact, average transactions have increased, indicating that credit union cards are increasingly moving to top of wallet status. Interestingly, we are now seeing credit unions entering the list of the top 50 issuers of credit cards. This significant opportunity looks set to continue to be exploited into the mid-term.
While the world is increasingly globalized, there remains a strong driver for financial institutions to be more local and embrace communities. Large banks are going to great lengths to justify their community credentials, but they are always at a credibility disadvantage compared to community banks and credit unions. With their emphasis on people, community and personalized services – all offered at very attractive rates – credit unions will be an increasing threat to traditional banks going forward.
While credit unions do not have the numbers of large national banks, they are increasingly a clear and present threat to business.
Business Line Executive, Credit
With over 25 years of international payments experience, Kris was responsible for the launch of the first successful cobranded card program. A leader in risk-based pricing and target marketing using predictive data analytics, she specializes in merchant services, credit cards and home equity. Kris has received Best Travel Card, Best Cobranded Card and Best Private-Label Program awards.