Despite any lingering recession-era skepticism of big banks and their motivations, we are now seeing a significant shift in their favor – even among customers who were affected by the last downturn. The ten largest U.S. retail banks now manage 48% of total consumer deposits, up from 39% in 2009. This uptick is largely a result of their investments in digital technology. The demand for digital offerings is decidedly strong among Millennials and Gen Z’ers. 50% of consumers in these demographics stated that they would switch to another financial institution if it offered a mobile app superior to the app provided by their current bank. It is likely that the importance of digital capabilities will only accelerate as the “Amazonification” of banks continues and the app-loving younger demographics gain more spending power. With this in mind, banks have ramped up their effort and investment in innovation.
A point of differentiation among banks is how they achieve their desired digital future-state. Increasingly, large banks with deep pockets are investing in internal talent to develop proprietary solutions inhouse. JP Morgan Chase recently reported that the bank has an $11 billion annual technology budget. Other banks have relied on M&A to establish digital dominance, purchasing fintechs to improve their offerings and talent base, as well as to squash potential competition. Since launching digital consumer bank Marcus in 2016, Goldman Sachs has been on an acquisition spree to fuel growth. This strategy has proven to be successful, as Marcus brought in over 1.5 million customers and $26 billion in deposits in a two-year span.
To put the spending of JPMorgan Chase, Goldman Sachs, and the like in perspective, Forbes estimates that federally-insured credit unions in the U.S. spent about $6 billion on IT in 2018… combined. So how will credit unions compete against big banks to attract digital-minded millennials? There are three notable trends that may implicitly answer this question.
Consolidation. Credit unions are consolidating to capture the advantages of greater scale. Since 2007, the total number of U.S. credit unions has declined by 34%. At the same time, the number of credit union members and total assets have grown 35% and 99%, respectively. Combining forces enables credit unions to operate with a greater deposit base, expand their service offerings, and reduce operating costs through synergies, thus lessening the gap between credit unions and larger consumer/retail banks. Credit unions have also broached the community banking market for M&A opportunities. In 2018, there were nine instances of credit unions acquiring banks, a historical record. This year is on pace to raise the bar, having already yielded eight of such transactions through June according to S&P Global, with more likely to close for the remainder of the year.
Pooling Resources. Credit unions have begun to cooperatively pool competitive resources through Credit Union Service Organizations (“CUSOs”). For example, a group of credit unions and other partners jointly formed Constellation, an innovation lab CUSO specifically created to serve as a digital platform that supports technology-driven innovation and mobile banking solutions among credit unions. Since Constellation’s inception in 2017, the organization has helped to roll out an ATM finder, card-in-file subscription management, and thought leadership to help credit unions provide a more seamless member experience. Similarly, Payrailz, a digital payments company, just announced the launch of CUSO CU Payz that will help credit unions revolutionize their payments experience. PSCU and CO-OP, two other CUSOs that offer payments processing as their core capability, have also shifted technical resources to support digital solutions for credit unions. Organizations such as Constellation and Payrailz rose out of the need to address the innovation gap between smaller financial institutions and large banks. These CUSOs have received significant support from their credit union partners.
Keeping their mission in focus. Credit unions continue to remain true to their roots with a focus on community and member experience. According to a 2018 FIS study, 92% of customers are either “extremely satisfied” or “very satisfied” with their credit union relationships compared to 82% for banks overall. The Credit Union Times has noted that approximately 43% of customers heard about their current financial services provider from a family member or friend, indicating the importance of building a community that spurs advocacy among members.
While these trends are helping credit unions stand their ground, large banks will continue to aggressively pursue younger, growing target markets, using their digital offerings and scale to win over customers. Credit unions do not have the luxury of being complacent – they must quickly respond to competitive pressures by differentiating through alternative routes. Leveraging M&A and innovation CUSOs are effective means for credit unions to pool resources to stay in the game. But, credit unions must balance the sharing of resources with maintaining their sense of community to carve out an advantage. As organizations consolidate, the intimacy/personal touch of a CU runs the risk of becoming diluted. As millennials continue to accrue buying power, we can expect the consumer demographic to further change with mobile access becoming more and more important.
As friendly competitors, credit unions must continue to come together to co-develop new and innovative solutions that leverage their unique positions as mutuals beholden to members, not shareholders and pension funds.
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