Among Young Adults, Credit Unions Lose Luster to Big Banks

Credit unions will continue to struggle with narrowing net interest margins this year, while the economy will have a rebound of historic proportions this year, according to an economist with Raddon, a research and advisory group for financial institution based near Chicago.

But the greatest threat to credit unions is the weakness of their bond with consumers younger than 42, said Bill Handel, chief economist and general manager of Raddon, a subsidiary of Fiserv.

“Generational relevancy is probably the existential issue that the credit union industry faces,” Handel said. “The fact is we have lost that relevancy to the younger demographic.”

Credit unions emerged in a better light than banks in the Great Recession. But in the COVID-19 pandemic, Raddon’s research is showing consumers view big banks as more responsive and responded more to the customer, to the pandemic than credit unions or community banks.

The view is pronounced for the nation’s 95 million millennials, ages 21 to 41, who now outnumber baby boomers by 50%. Gen Z, age 20 or younger, constitute another 86 million, or 26% of the U.S. population.

“We see it very clearly in the millennial, and we anticipate we’ll see it in the Gen Z group, and that does not bode well,” Handel said. “Our strength in this industry is the baby boomers, and it’s a generation that’s going away. We need to figure out how we build relevancy.”

Caroline Vahrenkamp, who leads the research team at Raddon, said its research shows that close to three-quarters of millennials claim one of the six largest banks as their primary financial institution, up from about 50% three years ago.

“They have an advantage in technology, and we expect that. They also have a perceived advantage in service: That’s a problem,” she said.

One ray of hope in Raddon’s latest research is that it suggests 41% of those millennials who go to the big banks are very open to having a new financial institution within the next year.

“They’re very open to changing,” Vahrenkamp said. “There is an opportunity for credit unions to regain that relevance, but they have to strike while the iron is hot.”

A critical path for re-connecting with young adults will be through first mortgages for homebuyers. But credit unions will have to overcome the big bank dazzle.

“These large banks recognize how important that first mortgage relationship can be,” Handel said.

The Mortgage Bankers Association forecast five million households will buy a home with a first mortgage this year, up from 4.9 million last year.

“That’s a great opportunity,” he said. “But how do we make sure we remain relevant and in the consideration? That’s going to be our key challenge.”