By Ray Birch
LOMBARD, Ill.—Credit unions need to do three things: incorporate technology into their value proposition, get better at formulating deposit strategies and “reclaim” their position as “the” trusted financial institution—and understand one other thing—they really don’t trail the big banks in technology offerings like they believe they do, according to one person.
Each of those should be top of mind for credit unions this year as they wade into a period in which there is a great deal of change and consumer unrest, says Bill Handel, SVP of research at Raddon.
While a growing concern for credit unions is the perceived “technology gap” between credit unions and banks, Handel said the actual tech gap is not all that wide. But the chasm in terms of consumer perceptions, and the reason is the big banks’ marketing, he said.
The Drumbeat
“Something you can’t take your eye off is how do you build relevance, and continue to build relevance, with the younger generation,” said Handel. “The big banks just have this continuing drumbeat…They have really figured out how to be effective with the younger sectors. We have to figure the same thing out.”
Handel asserted a key reason big banks are doing well is they are emphasizing how digitally savvy and easy they are to work in the majority of their messaging to consumers. And while banks are investing a lot of money into digital service delivery, credit unions have also beefed up their capabilities, he said.
“Credit unions are just not telling consumers about it like the banks are,” said Handel. “Credit unions don’t have the huge technology deficit some people are saying they do--they have a huge perceived technology deficit. And that is because those big banks have very effectively talked about technology as part of their value proposition, and credit unions really have not.”
CUs Should Take a Page
Handel said the marketing message from banks doesn’t focus on technology for technology’s sake. Instead, they emphasize how technology makes customers’ lives easier.
“Credit unions could take a page from the banks’ playbook and focus on their value proposition in this way,” he said. “This would not be as an industry, but on an institution. Focus on how as an institution we can make members’ lives easier and better.”
Bill Handel
Banks Borrow From CUs
After all, reminded Handel, banks have not been reluctant to borrow from the credit union playbook, Handel said.
“This notion of financial wellness, I think, is something that really everybody else in financial services is trying to steal from credit unions,” contended Handel. “As we know, this is something that credit unions have always been about—helping individuals have the best life possible. This is something our industry needs to reclaim—reclaim the position as a trusted financial institution that is looking out for the account holder.”
Balance Sheet Pressures
Turning to the balance sheet, Handel said rising rates and growing margin pressure are the issues the industry will wrestle with this year, as well as the ability to formulate a sound deposit strategy.
“We’ve got a rising cost of funds and it's putting a lot of pressure on margins,” noted Handel, who acknowledged the additional pressure being felt from the liquidity crunch. “We're seeing more competition from non-traditional institutions, like Discover, for example, which is being very competitive on the deposit side. We haven't had any real deposit competition for 15 years and people in significant positions in the credit union industry have no idea how to create an effective deposit strategy. That's one thing that's going to be a major challenge for credit unions—managing deposits effectively.”
Earnings Pressures
Handel also pointed to pressure on the earnings side.
“You have the continued decline in NSF/OD fee income, and it's partially driven by regulation. But it is actually being driven more by competition. I've never seen so much competition on ODP fees. So, it's an unusual time. I think that puts continued downward pressure on revenue. I think (falling overdraft revenue) has not been as significant a factor to credit unions like it has been for banks. Maybe it has been for some credit unions,” said Handel, who added whether a CU depends heavily on overdraft income or not, the strong overdraft competition will place more pressure on earnings.
The Bottom Line
Handel emphasized, too, that additional earnings pressure comes at a time when technology costs are rising rapidly and the need to build branches to have a local presence continues to be a priority for a lot of larger credit unions.
“The banking industry is shedding branches while credit unions still want that physical presence in the marketplace,” observed Handel. “The bottom line, I think this year you’re going to see a lot of pressure and focus on the earnings model for the industry, and it's something you really need to pay attention to.”