A volatile economy, potential recession, inflation and the fastest interest rate increase in modern history are top of mind issues for credit union leaders. Many are fighting to maintain their relevance while facing extraordinary pressure to compete with other types of financial institutions and digital financial services providers.
Changing demographics are forcing credit unions to find ways to connect with younger generations. The role of the branch is being re-envisioned to respond to evolving member needs. And credit unions are striving to make business models more relevant in changing times – from finding ways to compete despite lower noninterest income, such as the elimination of NSF fees, to managing liquidity in an unpredictable economic environment.
Here's a look at the latest trends we’re seeing among our credit union clients.
Staying relevant to younger members
The forthcoming transfer of generational wealth – when an estimated $30-$80 trillion will be transferred from boomers and seniors to younger generations – makes it urgent to attract younger consumers. Approximately three-quarters of credit union deposits are held by members who are of baby boomer age or older, according to a 2022 Raddon Performance Analytics program analysis. If younger generations continue to rely primarily on larger banks for financial services, it could create a long-term liquidity crisis for credit unions.
Meanwhile, larger banks have consolidated their hold on younger consumers with 80% of millennials and 90% of Gen Z naming a major bank as their primary financial institution, according to recent research from Raddon, a Fiserv company. These large organizations make the most of their nationwide presence and are able to benefit from effective branding, marketing and national advertising. Because of this, they are well positioned to absorb the vast majority of the wealth transfer in the form of deposits and investments.
If younger generations continue to rely primarily on larger banks for financial services, it could create a long-term liquidity crisis for credit unions.
Credit unions face an existential need to track movement on long-term deposits and develop strategies to attract and retain younger members. Now is the time for credit unions to differentiate themselves by ensuring they can deliver the right technology, create opportunities to connect and offer unique value to members.
And even if many credit unions are not at technology deficits compared to big banks, they are at a perceived deficit. Effectively communicating capabilities to key target audiences should be a priority.
Partnering with fintechs can help credit unions introduce new digital services to members, such as budgeting, credit score and educational tools. These partnerships can also help to engage the next generation of consumers. For example, credit unions can offer a co-branded fintech platform to kids and families, delivering a custom debit card, wealth management options and financial education tools by integrating with Fiserv partner Goalsetter.
Credit unions that can establish their commitment to financial wellness and financial health – and how members benefit – can build trust where they operate. For example, we work with one mid-sized credit union that takes every opportunity (outdoor signage, community events, local advertising) to publicize their give-back to members: “Members who refinanced with us saved $X million.” They’ve quantified the concept of “When we do well, you do well” and put it in terms of value to their members.
Intensifying focus on relevant branch strategy
Revisiting the role of the branch is not new for credit unions, but the scale and scope of the current transformation is new. Credit unions are moving away from the notion of branches being transaction hubs and transforming them into centers of sales, service and advice. This affects everything about the branch – from the people who staff it and the location to the technology that is offered.
Major banks have significantly reduced branch counts over the last five years (2016–2021) in an effort to gain efficiencies and focus more on virtual experiences. In contrast, credit unions have grown their overall branch count by 1% and the largest credit unions have increased branch count by 13% over the same time period, according to data from the FDIC and NCUA.
As credit unions look toward branch growth, they are figuring out the optimal locations, experiences, and talent and skills that will be needed to make each branch succeed.
We expect to see more mobile branches, especially in rural areas where it might be impractical to have a continual physical presence. Credit unions are also focusing on micro branches – typically smaller branches located in malls or supermarkets – with more limited staff and targeted services. In other cases, credit unions are looking to balance the presence of traditional teller-staffed branches with newer, more digitally focused experiences.
Credit unions are transforming branches into centers of sales, service and advice.
Branch strategy is key to building a younger membership base too. Approximately 66% of Gen Z and 44% of millennial consumers say the primary role of the branch is either for account opening or advice, according to Raddon research. This compares to just 27% of Gen X, 16% of baby boomers and 8% of traditionalists – all of whom are more likely to view the branch primarily as a center of transactions.
Interestingly, millennials are more interested in coming to the branch post-COVID than pre-COVID, mainly for high-touch advisory services – perhaps because of investment uncertainty, homeownership goals and financial planning needs.
Keeping business models relevant in a volatile economy
With a fiduciary duty to their members, credit unions need to avoid unnecessary risks by anticipating and responding to economic shifts and evolving their financial models. A few examples:
Fees: Many of the nation’s largest banks have reduced or eliminated NSF fees – historically a key revenue source for financial institutions of all kinds. Now credit unions face unprecedented competitive pressure to eliminate these fees.
Interest rate: The interest rate environment is wreaking havoc. Credit unions have historically benefited when interest rates rise because asset yields get repriced while rates for checking and savings deposits stay much lower. But maintaining low-cost core funding rates is becoming much more difficult in the face of competition from upstarts with high-yield accounts.
Liquidity: Some credit unions face liquidity concerns after investing excess cash from consumer deposits during the pandemic. Selling off in the current environment would generate losses, so they are faced with figuring out how to fund loans without selling off assets or raising the cost of funds.
These kinds of issues can pose a significant threat to the financial health of a credit union. Mitigating that risk often means returning to your core purpose and considering the extent to which each business move – issuing lower-rate loans or credit cards designed to attract new members as we head into a potentially riskier delinquency environment, for example – is in the best interest of the overall membership.
To avoid unnecessary risks, credit unions must anticipate and respond to economic shifts and evolve their financial models.
The road ahead for credit unions
To compete in today’s financial services landscape, credit unions need access to reliable, relevant technology that ensures efficient operations and delivers the experiences members want. This may have been cost-prohibitive a decade ago, but that’s no longer the case. Fiserv credit union clients of all sizes are now able to access economies of scale that enable them to succeed in their priority markets.
For more than a century, credit unions have put the interests of their members first, differentiating themselves on member service, cost and local presence. We expect that to continue into the next century and beyond. The only difference now is adjusting how, when and where services are delivered to remain relevant to current and future members.