November 17, 2021

Sustainable Growth for Credit Unions (Hint: It’s Not Through Mergers and Acquisitions)

Written by Joe Fuqua

A recent Credit Union Times article noted that while credit unions continue to perform strongly with long-time customers (those over 65 years of age), the industry is struggling to retain and add younger customers.  The same article notes that the average age of a credit union customer is 47 years old and that only 10% of people aged 20 – 34 currently utilize credit unions for their financial services needs.

So, why are younger depositors leaving credit unions for other institutions and services?  A CU Insight article suggests that a combination of cash incentives, reward programs, and gamified customer experiences are driving younger customers to these providers in large numbers.

This implies a trend that will have devastating impacts to the industry if not addressed.

For the last several years, the industry has managed the problem of growth through mergers and acquisitions (similar to the activity seen in the banking industry in the late ’90s and early 2000s).  Asset consolidation has led to a few very large credit unions holding a majority of the industries assets, and according to the American Banker, a group representing 12% of credit unions now hold 81% of all managed assets.

While this has solved the problem of scale for some credit unions, it does not help smaller independent credit unions, nor does it provide a path to long-term, organic growth for larger ones.

So, what’s the solution?

Should credit unions pursue similar strategies to traditional banks to attract customers?  This can be tricky, as many credit union customers were attracted because they wanted a very different experience from traditional banking; also, offering considerable up-front financial incentives to attract new customers can be problematic, as the incentives have traditionally been focused on lower overall costs and higher returns on deposits.

How about pursuing more unorthodox methods a la companies like SoFi that provide softer incentives through gamifying customer experience?  This might be a reasonable approach to attract very young customers who respond better to these types of incentives.  This, combined with robust social media strategies can begin to claw back a portion of the Gen Z and Millennial populations that have begun to abandon their parents’ choice of the financial institution; this might shore up customer numbers, but will not likely have a major impact on assets held.

To be successful in the long term, credit unions must continue to focus on differentiation with traditional banking.  Superior customer service has been a cornerstone to the value proposition of credit unions, and the industry must continue to look for ways to promote this fact – along with the generally higher return on deposit and investment products.  This can be a challenge given smaller advertising and marketing budgets, but as noted above, properly leveraging lower-cost channels provided by social media can provide significant brand lift with a reasonable investment.

In addition, many credit unions have been expanding their reach into the small business segment within their markets, offering loans, payments processing, and other related services and this class of service could be a significant source of long-term growth if the industry can overcome significant headwinds from both traditional banks and FinTechs (see this article from American Banker).  Once again, credit unions bring a unique value proposition compared to these other providers, but it is critical that those advantages are made crystal clear through effective marketing, advertising, and social media campaigns.

In short, credit unions offer some incredibly compelling advantages over traditional banking, as well as stability and reliability compared to FinTechs moving into the consumer and small business banking arena.  Recent trends in loss of customers is concerning, but with continued focus on maintaining best-in-class customer service and continuing to offer products aligned with the needs of local markets, along with aggressive attention to marketing and branding through more modern channels will both help stave the loss of customers from newer, younger bankers and demonstrate a focus on continued uncompromising service to its members.

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