Same Size Slice
As the financial services pie has grown, CUs’ piece has not. Why? what can be done?
By many measures, U.S. credit unions have made big gains over the past decade. More than a third of all Americans are now members, and total assets held by federally insured credit unions have grown 81 percent since 2007 to $1.36 trillion. A longer look back in a recent study by the Federal Reserve Bank of Philadelphia shows that credit unions have grown faster than both large and small banks since 1984, as a percentage of total asset growth.
That’s the good news.
On the downside, according to the same study, credit unions’ total share of all assets and loans held by U.S. depository institutions remains a relatively meager 7.1 percent (based on 2015 data). As the economy has rebounded in recent years, the CU industry has grown—without making significant gains on the competition. Though CUs have burnished their reputation as the place to go for car loans, they continue to struggle to win their members’ mortgage, card and deposit business.
Any discussion about what’s holding CUs back and how they can gain ground must acknowledge that size matters and not all fields of membership are created equal. There is a growing gap between large and small organizations in increasing member ranks and wallet share. CUs with $500 million or more in assets, which account for 9 percent of all federally insured credit unions but hold 76 percent of total assets, made steady gains in membership, loan volume and total assets for the year ending Sept. 30, while smaller credit unions, on average, posted losses in those areas.
Their defined fields of membership and regional economies also afford some credit unions market advantages. While some small financial cooperatives are engaging successfully with their member base (read about some of them, for the most part, scale affords a significant edge in executing growth strategies.
That advantage is most obvious at the top of the financial services food chain, dominated by the largest U.S. banks. Chase by itself holds more domestic assets ($1.6 trillion) than all U.S. CUs combined. Such scale and name recognition give big banks an advantage that scathing headlines and loudly broadcast consumer complaints can’t dent, contends Mark Rosa, CEO of $900 million/62,000-member Jefferson Financial Federal Credit Union, Metairie, La.
“Even people who say they hate the big banks—that’s where they bank,” says Rosa, a CUES member.
At the same time, CUs that have expanded their fields of membership to welcome wider swaths of people through community charters and a commitment to serve underserved areas must still contend with persistent misconceptions.
“We’re putting up billboards for everyone to see, but people still assume membership is bound to employment with certain companies,” Rosa says. “If they know what credit unions are at all, they think about them the way they were in the 1980s. Credit unions face an ongoing challenge to convey our value proposition. We just keep plugging.”
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Jefferson Financial FCU’s tenacity has paid off in steady organic growth, which in combination with several mergers, made it the largest state-chartered credit union in Louisiana. And when the credit union ran up against the limitations of state regulations, which do not permit community charters to widen the scope of membership, it converted to a federal charter in late 2016.
With that conversion, Jefferson Financial FCU was able to add Orleans and St. Tammany parishes to its field of membership, widening its market in greater New Orleans. It also completed two mergers that added $160 million in assets to its books.
To further expand its ability to serve members, Jefferson Financial FCU worked with the CUSO CU Capital Market Solutions, Overland Park, Kan., to develop a $12 million secondary capital plan, prepare the National Credit Union Administration application and fund the capital, which came from credit union organizations. As one of the first CUs in the country to put a secondary capital plan in place, it plans to use the income from this infusion of capital to invest in technology, products, services and infrastructure to better serve members and fulfill the intent of its low-income designation.
“Members come in and put down $5 to join and then borrow $10,000 to buy a pickup truck to get to work. You don’t need many of those loans to get up to 100 percent loan-to-share,” Rosa notes. “We’re serving the people we set out to serve, but we need nonmember deposits and secondary capital to do that.”
Ongoing consolidation should help larger continuing credit unions expand their profile in the communities they serve, he suggests. With Jefferson Financial FCU’s 14 branches across Louisiana, “local advertising has a greater impact. People see multiple offices and more advertising, and they start to put it all together,” he says. “We’ll tell a local credit union that we’re spending a $1.5 million a year on advertising, and they can’t get close to that. That’s just a reality.”
Top-of-mind awareness is a challenge that each CU must tackle, says Glenn Christensen, president of CEO Advisory Group, Kent, Wash. “Until we get that figured out, we’ll ... climb an uphill battle in terms of building market share.”
Over the years, CEO Advisory Group has conducted comparative research for CUs on awareness of financial institutions in specific markets. When asked about where they’d go for a checking account, car loan or mortgage, consumers typically don’t list a credit union in their top three or four options, Christensen notes.
On the other hand, once credit unions are on consumers’ radar, “people quickly understand their value proposition, and all the components that go into the selection process fall in credit unions’ favor, whether it be price, access to knowledgeable employees or understanding that employees are working in members’ interests to find the best solutions for them,” he adds.
Delivering value worked to the advantage of several credit unions that made Money magazine’s 2017 “Best Bank in Every State” list. CUES member Jeff Disterhoft, president/CEO of $4.6 billion/170,000-member University of Iowa Community Credit Union, sees his organization’s inclusion on that list as a reflection of its commitment to offer competitive pricing and consumer-friendly fees and account requirements. More important than that national notice has been its growing market share in core financial products—auto, mortgage and credit card lending and deposits—at about 20 percent annually.
“In the core four markets we serve, our automotive market share has grown from 12 percent to 18 percent over the past five years, and we’re frequently the largest automotive lender in the state of Iowa now,” Disterhoft says. At the same time, the North Liberty, Iowa, credit union has gone from being the third largest mortgage lender in its local market roughly 10 years ago to the largest purchase-money mortgage lender in the state. Its deposit growth makes University of Iowa CCU the state’s third largest depositor among both banks and credit unions.
He credits that to being “myopically focused” on providing members “the most cost-effective products available in the market. That all starts with our business model, which calls for relatively low operating costs allowing us to pass those savings on to our membership in the form of great rates on both loans and deposits.”
First Tech Federal Credit Union made Money’s 2017 list for both California and Oregon and was named its “Best Credit Union for Everyone” in 2016. It was also touted in a Forbes roundup of “best mobile banking apps of 2017” for the “overall most improved app” based on an annual study by MagnifyMoney. That kind of positive buzz adds to CEO Greg Mitchell’s confidence that the $11.3 billion CU, already the seventh largest U.S. CU by assets, will achieve its goal of doubling its current 500,000 members over the next five years.
Beyond favorable rates, including dividend reward checking with a current 1.58 annual percentage yield, the CU is committed to “sharing the love” with favorable pricing and top-rate digital services that meet the expectations of its membership, which includes employees of Amazon, Microsoft and Intel, says Mitchell.
Toward that end, First Tech FCU was the first CU to join the consortium behind the P2P mobile payment solution Zelle® , which includes Chase and Bank of America, as part of its commitment to develop “a winning brand that delivers great experiences.”
In addition, “we want the experience of walking into a First Tech branch to be uniquely different than walking into any other financial institution,” Mitchell says. “It’s unusual in the U.S. economy for individuals to walk out of a financial institution and say, “I feel that this organization is really advocating for me and my family.’ This approach has created significant improvements in our Net Promoter Scores. Our members are saying, ‘We like what you’re doing. Keep it up.’”
Focus on Products with Potential
The gains made by these credit unions illustrate a fundamental strategy: Rather than setting a goal to build overall market share, target specific product lines and the competitors in those sectors, recommends Steve Williams, principal with CUES Supplier member and strategic partner Cornerstone Advisors, Scottsdale, Ariz. He shares data from reliable sources in key product lines, as of Sept. 30:
- Credit unions held a 19 percent share in auto lending, according to AutoCount from Experian Automotive.
- Just over 9 percent of the U.S. domestic deposit market was held by credit unions, according to SNL Financial.
- The Mortgage Bankers Association reports that credit unions hold 8.1 percent of first mortgages.
- Credit cards may hold the greatest potential for growth, as credit unions account for 5.7 percent of revolving loan balances, according to the Federal Reserve.
“Generally, credit unions are making progress in all those areas, but they should be talking about their auto loan market share, their mortgage market share, their credit card market share, and their checking and deposit market share individually, because the competitors and strategies are very different for each of these markets,” Williams says.
Of course, CUs could still grow their share of auto loans, but they are holding their own in that sector, he suggests. Each of the other product lines is dominated by a different lineup of big national companies—the top 10 credit card companies, the top 10 mortgage lenders and the top 10 banks for deposits and checking accounts.
“They’re trying to compete in these areas where there are big-scale players, and that can be intimidating,” Williams acknowledges. “How do credit unions keep up with Chase’s mobile app and Capital One’s credit card offerings and Quicken Loans’ mortgage technology all at the same time? They’re fighting for awareness and consideration as customers are making product decisions, so they need to shore up their product and marketing sophistication.”
Gaining market share in those key product lines requires that credit unions partner with strong technology vendors and maintain a talented internal IT staff to lead efforts “to mature up their product offerings and figure out new ways to market to and engage members via digital channels,” Williams adds.
Credit union service organizations continue to offer opportunities for CUs to grab more market share in crucial product lines. CUDL from CUES Supplier member CU Direct, Ontario, Calif., was instrumental in helping CUs start to compete on a national level for auto loans, and CUES Supplier members PSCU, St. Petersburg, Fla., and CO-OP Financial Services, Rancho Cucamonga, Calif., provide platforms to achieve scale in the payments arena, Williams notes. Other CUSOs may introduce the “next big thing” in mortgages or digital services.
Canadian CUs are working together to chip away at the “best-kept secret” problem. The Canadian Credit Union Association, Toronto, and its National Marketing and Advisory Committee commissioned the National Credit Union Awareness and Perceptions Study in 2016-17 with a focus on nonmembers ages 20 to 44. A central finding was that 39 percent of nonmembers across the country don’t know anything about CUs, with a higher rate in Ontario where financial services are dominated by five big banks, says CCUA President/CEO Martha Durdin.
To overcome that barrier and help Canadian CUs build on their current 9 percent market share, the study recommended developing and adhering to a simple, common definition for staff and members: “Credit unions are financial institutions, just like banks in most ways, and they are open to anyone.”
The Canadian CU scene shares some market challenges and opportunities with financial cooperatives in the U.S.; for example, the dominance of big banks is offset in some regions where CUs have established a greater foothold. Caisses populaires (people’s banks) command a large market presence in Quebec and Manitoba, and Vancouver, British Columbia, is a CU-friendly city. In some regions, credit unions do well in real estate lending; in some small markets, CUs have a significant business services presence, Durdin notes. The goal is to build on those foundations.
Canadian CUs have also seen their share of consolidation, with their ranks declining from 325 to 207 over the last three years. A difference from the U.S. market is that Canadian CUs have moved away from closed bonds; within their provinces, they can serve all consumers. There’s also a federal credit union model, but currently only one financial cooperative is open for business across the nation, though several others are considering that option, she says. (Read more on this in “The Launch Pad for Strategy” on p. 20.)
CCUA has shared its research findings and recommendations with member CUs and incorporated new messaging into its communications and marketing. This year the association is launching a major social media campaign, primarily via Twitter, Facebook and Instagram, to reinforce the benefits of CUs.
“First, we have to tell them what credit unions are, because they don’t know,” Durdin notes. “The example we use is milk: If you don’t know what milk is, there’s no point in trying to sell it.”
Social media offers the advantage of a cost-effective reach across a big country, with the ability to target audiences and take advantage of “evangelists”—existing individual and business members who love their CUs and are willing to pass the message on, says Suzanne Peters, CCUA’s AVP/communications and member relations.
from Analytics to Relevance
Not every CU is actively pursuing new member recruitment, notes Mark Weber, CEO of Weber Marketing Group, a CUES Supplier member in Seattle. Some focus instead on building wallet share, a potentially more profitable approach given the lower costs of marketing directly to existing members who know (or should know) their credit union’s value proposition.
Sooner or later, though, credit unions recognize that they must grow membership to shore up an aging member base and gain relevance and their share of existing and new markets. And that’s when the going gets tough for many organizations.
“The farther they get away from the core membership they’ve served for years and years, the harder it is to build awareness and grow market share,” Weber says. “What worked in the market they’ve been serving for 30, 40, 50 years doesn’t necessarily make them successful and relevant in a market where their brand is not known.”
To begin to address that challenge, Weber recommends CUs first identify their current “power users” and then extrapolate that model into the market of potential members: Who’s been joining over the last several years? Which member segments create the most loans, checking accounts, active credit cards and other payments? Which of those ideal segments will likely grow in the next five years? By answering such questions, CUs can identify the types of members who gravitate toward their services and build their growth strategies around those profiles.
The science of lifestyle segmentation—moving behind simple demographic classifications to more specific member attitudinal profiles—is getting “stronger, richer and deeper,” Weber says. Weber Marketing Group’s segmentation model classifies financial consumers into 58 distinct segments, including 11 for millennials alone based on marital and family status, buying power, plans for homeownership and levels of student loan debt, as examples.
“Once you’ve identified that strategy, you can begin to humanize it for all employees in the form of ‘persona mapping.’ You can build in behavioral data, product, payment and channel usage, where people live and shop, and a slew of information and big data insights about their values, media consumption and habits,” he explains.
Based on these profiles of ideal member segments, CUs can build a brand focused on their needs and preferences, find the best branch locations, and tailor their offerings.
“Instead of pushing generic products through a sales culture, credit unions can become completely personalized to each individual member at the right moment in the right channel,” Weber adds. “They want help that is specific to their needs, and you can be right in front of them with the right content and products at the right time, not a bunch of irrelevant product cross-selling.”
Seek Out Niches
Christensen recommends understanding what’s essential for a sub-segment of the market with specific needs for financial services that aren’t widely available. Begin by gearing efforts narrowly toward that market, which might be defined by demographic, business types or other commonalities (such as solar panel loans). Then, find novel ways to convey how the CU can meet those needs as a means to optimize the return on a small marketing budget.
“I don’t think credit unions can afford to be bland in terms of how they reach out to those different segments,” he adds. “Especially small and medium-sized credit unions can’t be all things to all people. Resources are limited, so they have to pick and choose the strategies they want to pursue.”
For CUs looking to tap a market with significant growth potential, Miriam De Dios Woodward suggests investigating ways to better serve Spanish speakers in your community. This group is among the fastest-growing and youngest in the country, says De Dios Woodward, CEO of Coopera Consulting.
“For every credit union looking for ways to lower the average age of membership, this is a very young market,” she notes. “And Hispanics are one of the most financially untapped groups in the United States.” (Read more in “Speaking Their Language” on p. 24.)
Build and Align to Your Brand
CUs can overcome a slew of obstacles to building market share by identifying what sets them apart from the competition and building their brand on those distinctions, Weber says.
“When credit unions define and focus on their brands and identify the relevance of their brands to a specific set of target audiences, everyone heads in lock-step toward that future,” he says. “Everyone can articulate what makes them different—beyond low prices and good service. And it can unleash innovation in service and technology.”
Developing a distinctive brand can also transform the corporate culture, from the frontline to the back office to the C-suite and boardroom with the right training and shared language, Weber notes.
“Don’t just think about millennials as prospects and members. Think about millennials on the job,” he advises. “They will make up 65 percent of the workforce within the next four years. What motivates and inspires millennials? Working at a place that knows what its brand is—and being able to look out to the future, knowing exactly who we are serving and what makes us unique can inspire and engage employees in a shared purpose.”
Disruption won’t come just within financial services, Weber cautions. CUs should be at the potential dwindling of their bread-and-butter auto loan business given disinterest among young consumers and the shift toward ride sharing and self-driving vehicles, he recommends.
“That may be jumping way ahead, but I think it’s reflective of realizing how fast technologies like artificial intelligence and consumers are changing and how significantly credit unions need to be rethinking what their focus should be to stay relevant,” he adds.
Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Eugene, Ore.