Are credit unions relevant in today's social and crowded-sourced world?

Credit unions' competition is not just big U.S. banks. Recently in San Francisco, Bank of India billboards were seen marketing the convenience of deposits in overseas accounts. With technology evolving, our idea of member service will need to evolve to remain relevant in today's social, global and crowd-sourced world.

In support of the "Do Not Tax My Credit Union" movement, I emailed my U.S. senator bullet points of how credit unions play a vital role in the financial lives of 96 million members. I added how credit unions innovated the old banking industry. After submitting, I sat there contemplating the relevance of credit unions today with the emergence of so many innovative banking-related startups.

Are credit unions relevant today? Absolutely. Will credit unions remain relevant? That depends. Credit unions tout their great member service, higher savings rates, lower loan rates and fees but never their innovation and simplicity. We can discuss clever marketing to lure in deposits and loans but a discussion needs to happen about true product and service innovation.

Credit unions compete with large and small banks, retailers and financing companies. As a technology startup insider, I can tell you there are a growing number of Web and mobile startups innovating the banking experience. These startups share the founding principles of credit unions.

So what happened? We did nothing. The world changed and we stayed humble.

Mobile Smartphone Banks

Welcome a new group of smartphone banks competing alongside online banking veterans Ally Bank and Capital One 360. These smartphone banks built their infrastructure based on user experience and made it easier to join, deposit checks and access cash. They iterate quick to respond to shifting trends.

For example, Simple, a smartphone bank startup, has a quick and efficient one-page signup. While another uses computer cameras to snap a facial picture and capture driver's license data for identity verification.

How many credit unions still require ID photocopies and inked signed signature cards?

Smartphone Wallet and Payments

Profit-generating debit cards are going out of fashion and will eventually disappear. Financial institutions sensing revenue decreases responded by instituting annual and additional fees to compensate for lost revenue instead of innovating.

Smartphone wallets, like Google Wallet, will replace our need to carry multiple debit or credit cards. In fact, a future exists when digital wallets will connect directly with checking accounts bypassing your credit union card processing altogether.

Additionally, the need to log into online banking will decrease. People will be accustomed to paying utility bills and friends using establish online payment gateways like PayPal and mobile payment options like Square.

Crowd-Lending and Peer-to-Peer

Credit unions were pioneers of crowd-sourcing money to provide credit to individuals. Prosper and LendingClub, the original peer-to-peer lenders have seen the industry grow into the crowd.

Crowd-funding is a growing challenge for credit unions. It's a lending alternative for people to consolidate debt and take loans for home improvement and auto purchases.

Payday Loans

The payday loan industry is a multi-billion dollar business. The unbanked and low-income users of payday loan services are the very people that many credit unions aim to help. Tech startups have seen the potential to innovate the industry and profit as well.

LendUp and SpotLoan are two startups revolutionizing the payday loan industry. Their aim is in line with credit unions – to help break the cycle of paycheck-to-paycheck living.

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Financial Literacy, Tools and Advice

Members seek financial information and credit unions position themselves as financial literacy experts. The growth of content consumption supports people's natural inclination for knowledge. However, consumer content consumption has shifted towards blogs, tweets, pictures and videos.

The growth of online and mobile financial education startups supports this change in consumer behavior. People are socially interacting and use apps to learn about money. The threat to credit unions is the potential to be forgotten.

What Can Credit Unions Do?

Credit unions can turn into a place to just stash cash akin to the old mattress. But we need to engage with members and become competitive again through innovation.

It's not just adding on features like personal finance management, mobile apps or online deposits. Re-evaluate the strategy to incorporate simplicity, innovation and technology.

Get back to being simple. Complicated products, language and terms do not resonate with people. Are you still creating elaborate programs that aren't easy to follow? Can your member describe your product in 15 seconds?

Make your products easy and simple. Simple to join, understand and use.

Solve the original credit problem. Credit unions were founded to provide credit. Many credit unions have not evaluated their lending guidelines for decades. And most recently, some added more restrictions to approving loans.

I understand the importance of solid lending guidelines. The reality created is that these members are now turning to your new competitors.

Make service more than just name recognition and a smile. The welcome feeling members get walking into a branch should be the same warm-and-fuzzy feeling they receive interacting with your services. Incorporate the user experience in designing products and services with intuitive and fast user interfaces.

Engage with your members on social networks. Create educational content, share content and build a community. Your members do not want to know about the new checking account. But, they do want to know how to manage checking accounts and avoid fees.

Finally, it's OK to charge members for product usage. It's ok to charge them slightly higher if the product has value.

Credit unions often confuse the word "not-for-profit" with "we shouldn't be making money off members." That is incorrect.

Credit union leaders must accept that profits are good because they are re-invested into the membership allowing for better rates and lower fees. Or better yet, reinvested into innovation aimed at making members' lives easier and richer.

Jason Vitug is founder and CEO of Phroogal in San Francisco.

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