Credit Union Transformation in the Digital New Normal

Digital transformation has changed the business world as we know it. From face-to-face interactions and the diminishing use of cash to blockchain and cryptocurrency use, the financial industry has been rocked on its axis. 

Regardless of whether it's a start-up based on digital technologies, or an incumbent organisation with a legacy system core, the financial services, and banking industry has probably experienced the greatest changes globally. 

But although some areas of banking have embraced the new normal, there are other parts of the financial sector that have struggled with the transformation. Credit unions and building societies, for example, are a breed apart from the usual incumbent. 

Pandemic disruptions for credit unions

So, what changes have occurred in the credit union space over the past 24 months? Peter Longo, Senior Director, Product Management Digital at Finastra believes branch networks have undergone massive changes, mainly because they have transformed from transaction centres into advisory centres.

He points out that the credit union industry has also become much more aggressive in terms of supporting small businesses over the past couple of years – mainly due to changes brought about by the pandemic. 

Credit unions, Longo says, have been reallocating and staffing up in commercial and small business sectors, as well as cross-training employees and advisors to do more, as member needs change.  

“Credit unions have typically thrived in lending, credit cards, and card spending. This has been disrupted due to the pandemic. Embedded finance competitors have come to the fore alongside community banks, that have historically refrained from going after microloans or smaller unsecured loans, but now look to explore this.”

But it is also more complicated than that, as Longo says embedded finance is cutting through into the credit union market, resulting in them needing to find ways to evolve their growth strategies and find new sources of income.

A shift in focus

The pandemic has impacted credit unions in terms of their operational services. Longo points out that as a result of members reducing their spending due to the pandemic, there has been an influx of deposits at credit unions. Under pre-pandemic circumstances, community banks and larger banks were typically deposit-heavy. But credit unions now find themselves experiencing deposit growth – at a much larger scale than they would have, had the pandemic not hit.

“The impact of COVID-19 in terms of quarantines and a lack of travel has meant that interest income and fee earnings expected from cards or loans have not materialised,” he says.

“Credit unions are based around the needs of their members, providing a somewhat ‘white-glove’ service. The pandemic has made it hard to interact with the community, and credit unions now need to find new ways to translate brick-and-mortar services to online channels. Unions have conventionally generated custom through word of mouth and have grown organically. However, with larger banks spending excessively on marketing, credit unions may now need to do more to attract members.”

Keeping up with the fintechs

Like all pre-pandemic organisations that have relied on legacy system technologies, the sudden growth of the fintech industry has also had an effect on the way credit unions operate and manage their services.

James Hickman is the COO at Ecospend, a leading open banking provider in the UK. He says new open banking technology is playing an important role in driving the sector forwards.

New open banking solutions, he points out, deliver a smoother and easier customer experience by cutting out the need for manually entering any personal or card data to complete a payment, as well as delivering the solution at a fraction of the cost of cards. “For a credit union, this allows for a more inclusive online product that allows for greater reinvestment into its product offering,” Hickman states. 

He continues, “There are other material benefits for credit unions using Open Banking payments. A key example lies within loan repayments, where customers that pay through the account to account payment method will see their loan repayments arrive into the payee’s account instantly. With more traditional card repayments funds can take several days to clear which can cost the consumer more in interest fees.”

A challenge too far for credit unions? 

But how has the fintech boom affected credit unions in a broader sense? Is the competition now too heavily pitched against them? Hickman thinks not, and says the benefits balance out the challenges.   

“A flexible, platform-based approach can allow credit unions to benefit from the fintech boom, by incorporating new apps to aid in creating new channels of income. In the past, digital banking apps were traditionally used for people to deposit cheques. Now we have systems like BNPL which have challenged credit unions, with their ease and adaptability. However, working with fintechs, credit unions can not only survive but also thrive.”

Hickman says fintech apps can also support customer service, giving credit unions the ability to enable mundane transactions, whilst bringing traditional ‘white-glove’ services to the forefront digitally.

Ultimately, although changes and competition are uncomfortable, they also force innovation - and that’s a positive outcome because it means credit unions have to address their shortcomings and provide better services to stay relevant.

“The fintech space is moving at a blistering pace, providing benefits larger banks simply do not offer. Traditionally, larger banks have not offered the flexibility to get to market with new solutions quickly enough. In contrast, fintechs enable speed to market and can help credit unions maintain market share with adaptable practices.”

He points out credit unions have had an easier time accepting adaptation than incumbent banks because they have a more agile approach to change. He concludes, “Credit unions have no interest in protecting old legacy systems or incumbent technologies that protect their profit margins. The result means they are able to look to introduce new innovative technologies that bring a wealth of new offerings and services for credit union customers.”

Hickman adds, “They are able to introduce technologies that challenge the incumbent methods that traditional banks and banking services have more pressure to maintain.”

Future-proofing credit unions for the next decade

Ultimately, credit unions have no choice but to catch up and digitise, otherwise, they will become outmoded and outdated by shiny and fast-moving fintech. But progress is always positive - and Longo believes the predicted changes will be beneficial for both unions and customers alike. He also believes these changes will come in two main areas.  

“The first change I see is an increased focus on small businesses. During the COVID-19 pandemic, community banks and credit unions provided critical financial assistance to small businesses through the Paycheck Protection Program (PPP).”

He points out that as a global operator, Finastra has helped process more than 86,000 PPP loans to date, supporting community financial institutions in their quest to provide funding for local businesses and preserve jobs as many people live paycheck to paycheck. 

“I see this focus continuing into the next decade as the value that small businesses provide is increasingly recognised,” Longo says. 

“The second change I see is that there will be diversification in services offered. Rather than going through traditional auto lending, we can now do digital retail lending.”

He adds, “Whether that be microloans or BNPL services, or even payroll streamlining. All these services will overtake existing financial mechanisms to form a new financial environment.”