Credit unions wrapped up 2021 in historic fashion, reaching a series of milestones that reflect their focus on serving members. Among the many notable metrics, the industry recorded a 5.4 million annual increase in membership, opened a record 4.5 million share draft accounts, originated a record $795 billion in loans to members, and crossed $2 trillion in assets.
As 2022 nears the halfway point, the balance sheet is well positioned to build on that momentum with ample liquidity, asset quality at historically strong levels, an industrywide net worth ratio exceeding 10%, and the highest industry ROA in nearly 20 years.
Given the challenges the pandemic has presented during the past two years, these results are particularly outstanding. Credit union staff and members had to quickly adopt new ways of doing business when the pandemic emerged. Today, the country has navigated through the delta and omicron surges, and mask mandates are being lifted in areas that once had some of the tightest restrictions. A more normal way of life seems to be returning; however, the pandemic has taught us to be prepared for changing conditions.
Jay Johnson, Chief Collaboration Officer/President of Callahan Financial Services
Despite a return to normality, the pandemic-prompted shift to remote has changed the thinking of credit union leaders as to how to operate going forward. Some teams are mixing in-office and remote work; others have transitioned entirely to a remote workforce, allowing them to attract talent beyond their geographic footprints. The challenge now lies in how to protect culture and develop employees in a remote environment.
Member expectations and behaviors have changed, too, especially in regard to digital channels. Credit unions are urgently investing in digital capabilities, in both back-office and member-facing processes, to provide fast, easy, frictionless access to accounts and resources. This requires significant investments in terms of dollars and personnel. Can credit unions keep up as fintechs and neobanks present new banking models and national banking competitors direct billions of dollars into their own technology development?
This piece originally appeared in Callahan’s latest issue of Credit Union Strategy & Performance. Read the full issue today.
Outside of credit unions, Russia’s invasion of Ukraine has pushed oil prices to new highs even as inflation continues to make headlines. The Federal Reserve announced the first interest rate increases since 2018 and signaled its expectation for more hikes by year-end. The Fed also is beginning to reduce its balance sheet after being a significant source of market liquidity over the past two years. Fortunately, unemployment is down to 3.6% and hiring is robust as companies, including credit unions, look to add skills to their organizations.
Maintaining Relevancy In A New Era
In addition to investing in digital capabilities and determining what work environments will look like moving forward, credit union leaders are appraising the uncertain economy, evolving consumer needs, and an intensifying competitive environment. Their overarching question: How will credit unions remain relevant to members and potential members?
To answer that, they are deeply considering several related questions.
Should We Evaluate Risk Differently?
Many credit union leaders sense their organizations need to take a different posture toward risk. Credit union balance sheets are strong, with room to say “yes” more often, including to members who other financial providers might not serve. It’s more important than ever to provide access to affordable financial services, and more credit unions are earning community development financial institution (CDFI) certification and using grants to fund programs that will reach into underserved communities.
Diversity, equity, and inclusion is a growing focus across corporate America, and credit unions are adding “access” to that discussion. Serving the underserved has been a longstanding focus of the industry, but the past two years have spotlighted the barriers — real and perceived — that many consumers see when considering financial services options.
It’s more important than ever to provide access to affordable financial services, and more credit unions are earning CDFI certification and using grants to fund programs that will reach into underserved communities.
USAlliance FCU in partnership with Digital FCU, Affinity Plus CU, and Service FCU launched Dora in September 2021 to reach consumers who might not consider a traditional financial institution. The credit union-owned neobank provides a bilingual application and access to affordable financial services. Should credit unions decide to serve these consumers based solely on their risk profile? Or, are there other strategic considerations for evaluating this opportunity?
The increasing number of fintech partnerships speaks to this re-evaluation of risk. Credit unions provided $250 million of capital to launch the Curql fund in 2021 to connect with fintechs and accelerate innovation in the industry. CUNA Mutual’s CMFG Ventures has a similar goal, and CUSOs such as PSCU and CO-OP Solutions also are building fintech partnerships. Additionally, many individual credit unions are developing relationships with early-stage firms. NCUA board member Rodney Hood wants to help credit unions keep pace by giving them more flexibility to invest in and work with fintechs. Similarly, vice chair Kyle Hauptman wants to ensure credit unions play a role in the evolution of blockchain and cryptocurrencies.
For these efforts to be effective, credit union management teams and boards must be prepared for the inevitable ups and downs. Not every new venture will deliver on expectations. In those cases, the question shouldn’t be “why did this fail?” but rather “what did we learn?” Risk is fundamental to financial services. Credit unions have exceled at managing risk throughout their history; bringing a new lens to defining and pursing risk will be an important piece of maintaining relevancy in the future.
How Will Our Business Model Evolve?
Even as interest rates hit historic lows, regulators, legislators, and consumers paid greater attention to fees for late payments, checking overdrafts, and other financial services. Interest rates are now moving up, but the focus on fees is not declining. In June 2021, digital financial services company Ally Bank announced it would stop charging overdraft fees. A handful of credit unions, including University of Wisconsin and Alliant, announced similar moves shortly thereafter.
Since then, a handful of credit unions have announced they have reduced or eliminated fees entirely. In December, Capital One became the first large bank to eliminate overdraft and non-sufficient fund fees, and Bank of America might have tipped the scale further toward making it a market norm when it announced it was cutting its overdraft fees from $35 to $10 beginning in February 2022.
The pressure on revenue streams is leading credit unions to think differently about their business models. Some are looking to expand their products and services via small business lending opportunities or launching services such as cannabis banking; others are attaining scale and capabilities via merger or by forming partnerships with companies like Upstart and Happy Money, which are sourcing loans for a growing number of credit unions. Many are exploring new CUSO opportunities and partnering with credit unions and non-credit unions alike to bring new capabilities to members.
In many cases, the resources of an individual credit union, or even the credit union’s balance sheet, might not be the way stakeholders measure success. Leaders are considering whatever steps the credit union can take to retain relevancy in a changing consumer market.
What Is Our Value Proposition?
Each of these issues relate to how credit unions define and communicate their value proposition in a new era of competition and consumer expectations. In many ways, the past two years have highlighted the importance of credit unions to the members and communities they serve. Credit unions were truly “financial first responders” during the pandemic, lending at a record pace for each of the past two years and providing deposit options that attracted member savings at a rate never seen previously.
Despite these successes, the credit union national market share in mortgage and auto lending — the industry’s two biggest products — has declined since 2019, despite record loan originations. Instead of traditional providers, consumers are turning to neobanks such as Chime or buy now pay later offerings from companies like Affirm.
So, how can credit unions differentiate themselves in a hyper-charged competitive environment? A growing number of them are refocusing purpose. That effort begins by working to truly understand the needs of members and communities and asking questions such as: Why are we an indispensable resource for members? What are we providing that members cannot find anywhere else? What is their mandate for us?
Clarifying a credit union’s purpose empowers staff members to focus their efforts and deliver on that purpose. Research from the Harvard Business Review indicates employees are more motivated and enthusiastic when working for an organization that has a clearly defined and communicated purpose. When the purpose is clear, the organization can filter decisions through it. For example, some credit unions allow their employees to make on-the-spot loans or grants up to $250 or $500 when they see a member situation that calls for such action. Why? Because these credit unions have made it clear their purpose is to be there for their members.
How can credit unions differentiate themselves in a hyper-charged competitive environment? A growing number of them are refocusing purpose . That effort begins by working to truly understand the needs of members and communities and asking questions such as: Why are we an indispensable resource for members?
Empowered employees result in engaged members that see the purpose in action when interacting with their credit union. They understand the credit union is there for them; thus, they bring more of their financial relationship to their credit union. As relationships grow, profitability grows. As profitability grows, the credit union can dedicate more resources to delivering value to stakeholders — employees, members, and the community — in the form of better benefits for employees, a higher level of service delivery for members, greater involvement with community partners, and more.
In short, purpose broadens and deepens the impact the credit union is making.
The More Things Change…
Changes during the past two years in consumer behavior, traditional and emerging competitors, and the economy mean the financial services landscape is more challenging than ever. Despite these challenges, credit unions have opportunities to play important roles in the lives of their members and communities. Developing affordable housing options, growing a workforce with the necessary skills to succeed in today’s labor market, supporting small business growth, and helping consumers achieve financial well-being all are areas of need in every community.
For credit unions to remain relevant, they need only to look back at the formula that has worked for more than a century — understand the needs of the members and communities they serve, and invest in solutions to help them meet those needs.
The formula is simple, but it is not easy to achieve. New products, services, and technologies will continue to emerge. Returning to the key question of “Will this help our members achieve their goals?” is essential. It is a formula that drives success for leading credit unions across the country today, and it will continue to do so in the future.
This article originally appeared in the fourth quarter issue of Callahan’s Credit Union Strategy & Performance. Click here to download an issue of the industry's only strategy-oriented publication.