Credit Unions: Good, Better & Best

The past year gave us all a lot to think about. Navigating the pandemic was a career-defining event for many. For the most part, credit unions large and small were able to adapt quickly and make changes to meet the immediate needs of their members, improve remote access, care for their teams, and grow and generate a reasonable (albeit lower) ROAA. It’s also been a time of deep reflection for those who’ve been unable to quickly adapt as they’ve watched loan balances and yields fall while soaring deposits challenged net worth ratios.

Where do we go from here?

As we look ahead – hopeful for better months and years to come – our focus must reach well beyond opening our lobbies back up to generating higher asset yields and improving mobile systems. Looking to the future, we have to ask ourselves where we’re headed, how we want to be remembered, and how big of and what kind of impact we want to make. These are the strategic questions on the minds of leaders today.

Good: ‘To be desired or approved of’

When it comes to pricing (rates and fees), credit unions are considered good when compared to the broader financial services market. But it’s a very competitive market, and, on any given day, if a person takes a moment to search, there’s usually another competitor with better pricing or terms. Overall, member service quality is considered good, but the service quality gap between banks and credit unions has narrowed and is basically even. More of us need to let that sink in a little bit.

Providing “best in class” financial commodities will continue to become more difficult. Credit unions can and must be consistently on their games to remain good for pricing, service delivery and product quality.

Price competitiveness alone is challenged by large-scale banks that can buy market share at a moment’s notice. When it comes to technology, there’s a lot credit unions can and must do, but I don’t see financial technology as a future strategic advantage. Of course, there are outliers, but it doesn’t hold out for the credit union space as a whole.

When it comes to financial commodities, will a good classification be good enough tomorrow? I believe it will take more for credit unions to remain (or become) best-of-class.

Better: ‘More suitably, appropriately or usefully’

Beyond the run-of-the-mill financial products, services and pricing commodities credit unions offer, credit unions have two strategic advantages that make them better than the competition.

Strategic advantage #1: The not-for-profit cooperative model helps credit unions return more revenue to members. However, when it comes to profitability, this is no guarantee that a credit union can compete against more efficient for-profit organizations. It’s just one tool. The not-for-profit structure may be more compelling for younger and more mission-focused consumers. However, for this to be clearly better, credit unions need to do a better job communicating the benefits of their unique structures.

Strategic advantage #2: Credit union roots are in financial inclusion. For more than 100 years, credit unions have helped millions of individuals and families exit poverty and create some degree of wealth. When banks left low-income or minority communities, credit unions took their place. Here, credit unions diverged from most mainstream financial institutions by offering underserved consumers (and small businesses) flexible and affordable products and services. They took the time to listen to each member’s unique story and found an individualized way to help. The outcomes and impacts continue to be remarkable. This is much more than “good” rates and low fees. This is a better way of banking for lower-income, minority and other underserved groups. Approximately half of all credit unions are Low-Income Designated – which means more than half of their credit union memberships live in low-to-moderate income census tracks.

I’m not willing to bet on a long-term tax exemption for our cooperative model. Don’t get me wrong, our cooperative not-for-profit structure is worthy of the exemption and we should fight for it. I’m just not willing to bet on it. However, I am willing to bet long-term that a focus on financial inclusion will remain a better way for credit unions to differentiate and to be clearly different and better. Why? First, income and wealth polarization continue at an alarming rate. Lower-income, working-class people will need advice and affordable and flexible access to credit. Here, credit unions have a huge price and advocacy advantage over predatory lenders, and I’m assuming a majority of for-profit banks will not enter the “inclusion” space. Second, rapidly shifting consumer demographics are majority minority. Credit unions that intentionally and purposefully service minority markets will have a long-term advantage.

Best: ‘Of a more excellent or effective type or quality’

I believe that credit unions with high community investment and engagement are the best. By community investment, I don’t mean purchasing the naming rights of stadiums. While cool, it’s just a marketing investment. I mean investments that are specifically targeted to the major needs and challenges of the community. Today, most of the communities served by credit unions (more than 50% in lower-income census tracks) have big challenges that threaten the quality of life for the people living there. In many communities across the country, the best credit unions (large and small) have stepped up to the plate and found ways to invest and engage with other community partners. Step by step, their actions are making a difference.

Credit unions started as a unique breed of financial institution. Some of that uniqueness has disappeared over time due to shifting values, priorities and competition. However, the need for a not-for-profit financial cooperative that provides products and services of good value and better focus on serving the underserved and marginalized communities, with flexible and affordable access and best practice approaches to community investment, will be needed for many years to come. This is where I’d place my bet.

Why It Matters

Credit unions’ collective long-term sustainability will depend on how well they compete with other financial institutions to win the hearts and minds of the consumers (or businesses) they desire to serve. Credit unions must shoot for better than good. Good rates, services and technology is the starting point, and while these offerings do deliver value, that value is similar to what is available elsewhere in the market. Credit unions that shoot for and attain better and best results will stand out.

Scott Butterfield is Principal of Your Credit Union Partner based in Sumner, Wash.