Is there a future for credit unions and building societies?
In my last column piece, I said that with the ever-increasing changes in technology, it’s difficult for any business to know what actual line of business they will be in in the future.
I highlighted that big banks can invest in the future by exploring the possibility of new tech now, but smaller banks will not have the budget to look so broadly. This for me begs the question, what does the future hold for smaller banks and especially not-for-profit financial co-operatives like credit unions in the US and building societies in the UK?
Credit unions were set up in the mid-1800s initially as a way to serve poorer and more rural communities that banks couldn’t reach. Building societies were similar but had a few differences, with the name first coming about sometime in the early 1900s. Both extended the reach of financial services (savings and borrowing) both physically through branches and by policy, with the aim to accept anyone as a customer.
For both, quite often they have scaled using the inverted business model of a co-operative. Banks had a centralised structure and grew with economies of scale. With co-operatives, all members shared decision-making responsibility and control – a decentralised model. There were also independent building societies/credit unions which often managed to capture a specific target market, like a farming community or local traders/artisans.
Fast forward to today and there are a number of challenges for both credit unions and building societies:
- As customers migrate towards digital payments and banking apps, having physical branches is costly and less of an advantage.
- The cost of operating on legacy systems and the cost of physical branches puts them at a disadvantage to digital-only platforms.
- Their ability to adopt/invest in the breadth of new technologies is limited by their size.
- The increasing cost/complexity of compliance/regulation is also putting a strain on finances, as well as the increasing threat and complexity of managing cybercrime and security.
That being said, while there are fewer credit unions in the USA today than 10 years ago (5,117 vs 7,200), their collective assets under management have grown from $900 billion to $2.2 trillion. In the UK, according to the FCA, the membership of building societies doubled between 2007 and 2017 and their collective assets managed grew by 250%. This kind of growth and loyalty is enviable for traditional banks. This for me highlights that for all the hype that fintechs and neobanks will address the gap in banking for the underserved/underbanked, it is still credit unions and building societies addressing this space best.
One of the big advantages they have is their membership model creates a higher level of loyalty among customers because they know the organisation serves to meet their needs and not those of shareholders as banks do. They can also increase trust by involving members in key decisions and meeting them locally. Focusing on specific communities also allows them to have a deeper understanding of their members’ needs and therefore design products and services specifically for them. Some like Ecology Building Society have focused on sustainability and therefore had success reaching climate-conscious customers.
Going forward, many are addressing the need for innovation through fintech partnerships, recognising that not all innovation needs to come from in-house. Many also now provide digital access for their members, and open banking further extends their capability to reach more digitally savvy customers. Increasingly, they are also adopting cloud technology to reduce their costs and improve operational efficiency, giving them the ability to launch products faster.
So, it seems there is a healthy future for credit unions and building societies that are taking a progressive approach to the changes in customer behaviour and technology. However, it would be foolish to be complacent. As of 2021, Chime in the USA had 12 million customers, making it larger than the biggest credit union in the USA, Naval Federal Credit Union, which had 11 million customers. Chime was started in 2013 with a simple mission to make banking simple, affordable and accessible. Going forward, as I highlighted last week, there are several technologies that could have massive transformative effects to banking products and services. Luckily, customer adoption tends to be much slower than innovation.
This week, I’m just saying that with the finite resources of a small bank, credit union or building society, the future could be daunting. However, the formula of focusing on the specific needs of a niche audience will always be a winning approach. The huge advantage the internet brings is that those niches have no physical limits and hence provide plenty of opportunity for growth or for reinvention.
About the author
Dharmesh Mistry has been in banking for more than 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.
Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.