Top credit union trends and priorities shaping the financial landscape in 2024
Credit unions have traditionally offered more personalized and member-focused services than banks. However, the multiple disruptions that have taken place in the finance industry over the past few years, such as the rise of fintech startups and digital banks, have translated to a loss of market share. As a result, credit unions have seen a significant decrease in their share of PFI (Primary Financial Institution) relationships. These refer to a customer's primary relationship with a financial institution, such as a bank or credit union.
As of 2023, the landscape for major national banks, credit unions, and community banks has continued to evolve. The 2023 Annual Survey of Community Banks, conducted by the Conference of State Bank Supervisors (CSBS), highlights several key trends and challenges faced by these institutions. One of the primary concerns for community banks has been the issue of net interest margins, which continues to be the top external risk. This is coupled with heightened costs of funds and liquidity concerns, reflecting the impact of the macroeconomic environment on these institutions. Moreover, cybersecurity remains a top internal priority for community bankers, reflecting the increasing importance of digital security in the banking sector.
In contrast, the latest data on credit unions and banks as of the first quarter of 2023, provided by the National Credit Union Administration (NCUA), shows a detailed comparison of average savings, deposits, and loan rates between these two types of financial institutions. This data gives an insight into the competitive landscape and the financial performance of credit unions relative to banks.
It’s clear that credit unions need to undergo significant transformations in order to meet customer expectations and remain competitive. In this blog post, we'll explore the top credit union trends and priorities for 2023.
Credit unions are facing stiff competition from other financial institutions, including large banks, fintech startups, and online lenders. These competitors are gaining market share by offering more attractive rates, fees, and digital services, making it harder for credit unions to retain their members. According to the American Customer Satisfaction Index’s most recent finance study, as of 2023, credit unions have seen a decline in customer satisfaction, scoring 75 out of 100. This marks a drop by one point from the previous year, placing them behind banks for the fifth consecutive year. Banks maintained a consistent overall score of 78 on the ACSI's 100-point scale. This trend reflects a continuing shift in consumer satisfaction towards banks over credit unions in recent years.
- Fintech startups often have lower overhead costs and are more nimble than credit unions, allowing them to quickly adapt to changing market conditions and customer needs.
- Large banks, on the other hand, tend to have the resources required for digital transformation, allowing them to acquire or develop the technology needed to provide more attractive services and products.
- Online lenders are able to offer loans with fast approval times and competitive interest rates, attracting consumers who want to avoid the traditional loan application process. They can also offer a wider range of loan products, such as small business loans, personal loans, and student loans. This makes it difficult for credit unions to compete on product offerings, especially if they have limited resources. As a result, credit unions have experienced a decline in their share of the unsecured personal loan market - in 2013, credit unions held approximately 30% of this market. However, by 2019, their market share had decreased to around 20%. In contrast, fintech lenders saw their market share increase from 7% in 2013 to 39% in 2019. Online lenders also use sophisticated algorithms and data analytics to assess creditworthiness, which enables them to make fast lending decisions. This gives them another advantage over credit unions, which often rely on more traditional underwriting processes that tend to be more cumbersome.
Moreover, competitors are simplifying the process for credit union members and other consumers to switch providers by reducing the time required to open new deposit accounts or apply for loans. Chime, for instance, advertises on its website that opening an account is free and takes less than two minutes, while SoFi claims that individuals can find out if they pre-qualify for a personal loan in just two minutes.
The regulatory burden
Credit unions also face a complex regulatory environment. For example, the Bank Secrecy Act, requires the implementation of anti-money laundering programs, while the General Data Protection Regulation (GDPR) regulates the collection and use of personal data - both of which require significant costs and operational burdens in order to be compliant.
In addition, new regulations, such as the NCUA’s new risk-based capital rule and the CFPB’s proposed changes to the Qualified Mortgage (QM) Rule, could also have an impact on the ability of credit unions to serve their members.
The process of continuously screening, monitoring, recording, and reporting can be resource-intensive for financial institutions, even the largest ones. While big banks have the resources to allocate people and funds to this process, credit unions may struggle to do so and face more significant financial setbacks as a result. This can be especially difficult for smaller credit unions, which may have limited resources and struggle to keep pace with changing regulations.
Changing member demographics
As mentioned above, the challenge of changing member demographics is a significant concern for credit unions. A study by Chase Digital Banking found that 99% of Gen Z and 98% of millennials use a mobile banking app for a wide range of tasks, including viewing account balances, checking their credit score and depositing a check. Another study by The Ascent found that 48% of consumers aged 18-24 would switch financial institutions for better mobile banking options, compared to 33% of consumers aged 55 and older.
These younger generations have different preferences and expectations than previous generations, demanding convenient, personalized digital experiences and mobile banking options. In a nutshell, credit unions that fail to meet these expectations risk losing their business.
A macroeconomic environment
The macroeconomic environment is also impacting credit unions in several ways:
- Loan demand. When the economy is doing well, consumers are more likely to take out loans for big-ticket purchases like homes and cars. However, during an economic downturn, loan demand tends to decrease, since consumers are more hesitant to take on debt.
- Delinquency rates. When the economy is doing well, delinquency rates tend to be lower as consumers are more likely to be able to make their loan payments. However, during an economic downturn, delinquency rates may increase as consumers struggle to make their payments. In the first quarter of 2023, the median total delinquency rate was 38 basis points, up from 32 basis points in the first quarter of 2022. This trend continued into the third quarter of 2023, where the median total delinquency rate further rose to 52 basis points, compared to 40 basis points in the third quarter of 2022. These figures indicate a gradual increase in the number of borrowers who are behind on their loan payments. The rise in delinquency rates can be attributed to various economic factors and highlights the challenges faced by credit union members in fulfilling their loan obligations. It's important for credit unions to monitor these trends for effective risk management and financial stability.For more detailed information, you can refer to the National Credit Union Administration's reports for the First Quarter 2023 and Third Quarter 2023.
- Interest rates. When the economy is strong, interest rates tend to be higher as the demand for credit increases. However, during an economic downturn, interest rates may decrease as the demand for credit decreases.
- Fluctuations in the economy. Credit unions invest their members' deposits in various securities, such as stocks, bonds, and other financial instruments. Economic downturns could lead to a decline in the value of these securities, which could impact credit unions' investment portfolios. Additionally, economic downturns could impact credit unions' liquidity positions as members may withdraw their deposits due to financial uncertainty.
What improvements should credit unions prioritize?
It’s become increasingly clear that to remain relevant to their members in such a dynamic, fast-changing marketplace, credit unions need to stay up-to-date with the evolving financial landscape. To do so effectively and within your the limits of their resources, it’s crucial to prioritize necessary improvements.
Additionally, credit unions should prioritize enhancing their lending processes, such as quicker loan approvals and more flexible loan products.
The first critical area of focus for credit unions is digital transformation. By investing in advanced technology, credit unions can provide their members with a more convenient and streamlined banking experience.
Key investment areas include:
- Mobile banking. Credit unions are responding to this trend by offering mobile banking apps that allow members to manage their finances on-the-go, including checking account balances, transferring funds, and depositing checks remotely.
- Enhanced online banking features. Online banking allows members to access their accounts and perform transactions from anywhere with an internet connection. Credit unions are investing in features like account aggregation, which allows members to view all their accounts in one place, and financial management tools, which help members track their spending and savings.
- Improved website user experience. A well-designed and user-friendly website can help credit unions attract new members and retain existing ones. Credit unions are investing in website redesigns that prioritize ease of use and accessibility. This includes features like clear navigation, intuitive design, and responsive layouts that adapt to different devices.
- Digital data intake. Digitizing data collection and entry helps credit unions to streamline the entire process, practically eliminating the need for manual input and data verification, while reducing the risk of errors and duplications. Credit unions are investing in several technologies, such as no-code platform to digitize their data intake. This allows them to streamline account opening and loan applications, personalize services, prevent fraud, access predictive analytics, and improve both the member experience and employee experience.
To achieve these goals, credit unions are partnering with technology providers and fintech startups to leverage their expertise and resources.
Member engagement is a critical priority for credit unions as they seek to build stronger relationships with their members and differentiate themselves from other financial institutions.
Key investment areas include:
- Personalized services. Credit unions can leverage data analytics and other technology to get a deep understanding of their members' needs and preferences, which allows them to offer tailored financial products and services. This can include online onboarding that’s personalized to the members’ needs, customized loan and deposit products, and personalized financial planning services.
- Financial education programs. Many credit unions offer financial education programs, such as workshops, seminars, and online resources, to help their members better understand personal finance and money management.
- Fostering a sense of community among members. By providing opportunities for members to connect with each other, credit unions can build a sense of loyalty and belonging among their members. This could include social events, volunteer opportunities, and other community-building initiatives. By fostering this sense of community, credit unions can position themselves as more than just financial institutions and become trusted partners in their members' lives.
Data analytics helps credit unions to tailor their services and offerings to meet members' specific needs and preferences, while also identifying areas for improvement in their services and operations, and informing strategic decisions.
Data analytics offers credit unions a number of benefits, including:
- A better understanding of member needs. By analyzing data on member transactions and other interactions with the credit union, credit unions can gain insights into their members' behavior, preferences, and needs, while also identifying common pain points and areas for improvement.
- More informed business decisions. By analyzing data on market trends, member behavior, and other factors, credit unions can make more data-based decisions on product offerings, pricing, and other strategic initiatives. This can help credit unions remain competitive and respond quickly to changes in the market.
- Improved risk management capabilities. By analyzing data on member transactions and other interactions, credit unions can identify potential fraud or other risks, which can help them take proactive measures to mitigate those risks.
Credit unions are investing in integrations to connect both internal and external systems and platforms, such as tech vendors, payment processors, and other third-party providers.
Integration offers credit unions a number of benefits, including:
- Remove siloes and improve collaboration across the organization. Integration allows credit unions to break down barriers between departments, facilitating more seamless communication and collaboration. This can help credit unions work more efficiently and effectively, improving the overall member experience.
- Real-time data sharing. Integration gives credit unions access to up-to-date information on member behavior, market trends, and other key factors. This information can inform strategic decisions and help credit unions respond quickly to changes in the market or member needs.
- Reduce costs and improve operational efficiency. Integration helps to eliminate duplicate data entry and other manual processes, reducing the risk of errors and improving the speed of processing.
- More innovative products and services to their members. Integration allows credit unions to offer new and innovative products and services that they may not be able to develop in-house. This can help credit unions remain competitive and attract new members.
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