Technology is Flattening the Credit Union World
Regardless of asset size, technology will help credit unions compete and thrive
Originally printed in the Callahan & Associates 2024 Core Processor Supplier Market Share Guide
In 2005, Thomas L. Friedman's book The World Is Flat: A Brief History of the Twenty-First Century sparked a debate about just how much the world was benefiting from increased technological innovation. Friedman, a journalist for The New York Times, suggested that technological innovation has connected the world.
Friedman believed that this interconnectivity was a "flattening" of the world, as the global playing field was being leveled to include more contributions from nations outside of the "industrialized West." In 2023, it’s hard to dispute the effects that the connected world has had on our lives and the way in which we conduct business.
What Today's Flat World Looks Like
Today, we live in a world that allows for offshore programming, development, call centers, etc. as an example. And while FLEX does not utilize overseas companies for any of its operations, it can be confirmed that many credit union industry suppliers are employing talent overseas. Fintech solutions providers are another example. Over the past 10 years, there has been an explosion in the financial technology sector. Consider the number of services we are now employing for member retention, lending, and digital payments that didn’t even exist 5 or 10 years ago.
Technology by itself has allowed for contributions from individuals from nations outside of the “industrialized West” and has also been a catalyst for non-traditional financial services companies to compete within the traditional banking landscape, regardless of their location or national origin.
Flattening the Competitive Landscape
If technology and innovation have “flattened” the world, it would stand to reason that the same technologies and innovations have the power to flatten the competitive curves and economies of scale that larger financial institutions have traditionally held. When smaller credit unions can harness the same technology that larger competitors are using, their competitive advantages of more personalized services and traditionally lower rates can begin to shine.
Key Findings from Filene Research
Don’t take my word for it. A recent Filene Research project supports how smaller credit unions are excelling despite competitive and economic headwinds. Having worked in the credit union industry for the past twenty-three years, I am personally familiar with the narrative that smaller credit unions are barely surviving. FLEX customer data does not correlate with this narrative.
In fact, our data opposes the notion that smaller credit unions can’t compete. Notwithstanding, the narrative has gone as far to say that if “smaller credit unions” do not scale to $500 million in assets or more they will face extinction by merger. No one can argue the fact that many smaller credit unions have agreed with the narrative and consolidated.
What should give many credit unions pause regarding this narrative is the Filene Research report titled “The Puzzle Solving Approach That Enables Small Credit Unions to Thrive.” This research is a gold mine for credit unions that want to understand how to compete and thrive in the new financial technology landscape. The report is based on qualitative and quantitative data that includes a statistical analysis of 17 years of financial performance of approximately 3,000 credit unions with assets between $10 million and $250 million and is drawn from the NCUA 5300 Call Report.
What Does the Data Say?
The biggest takeaway from the Filene Research report is this: the highest-performing credit unions with less than $250 million in assets outperformed the industry at large in assets, loans, and member growth. Additionally, the highest-performing credit unions with less than $250 million in assets had effectively the same ROA as the peer group of $5 billion in asset credit unions in 2021. If you aren’t swayed by the argument that technology and innovation can power to change the financial industry landscape for smaller credit unions, the Filene data may help change your mind.
Methodology: Qualitative and Quantitative Analysis
Filene separated their findings into two groups. One group was referred to as the “sustainable growth” group which were credit unions that remained below $250 million in assets by the end of the study, which included about 2,400 credit unions. The other group was credit unions that had grown to more than $250 million in assets over the same period, to what Filene researchers called “big gainers”, which consisted of nearly 500 credit unions. The fact that approximately 2,900 smaller credit unions are highlighted as experiencing some type of growth is significant. The data illustrates that not only is there a market for smaller credit unions, but those credit unions can thrive when compared to their larger competitors.
Case Studies: Thriving Through Technology Adoption
Trax Credit Union: Embracing Fintech for Growth
17 years ago, the period when Filene started collecting data, Trax Credit Union, a FLEX customer, held $160 million in assets. The Tampa, FL-based credit union had been growing its membership at a healthy rate for more than 10 years.
However, they began to notice that the member onboarding process was causing friction and deterring new members from making the credit union their primary financial institution.
"We had mastered the process of opening new accounts for members, but when it came to them switching their direct deposits and recurring payments, we had a lot of work to do", said Pete Giorgianni, CEO of Trax. The credit union was using a PDF instruction switch-kit which they would send home with their new members, but it was historically, rarely completed.
In answer to that challenge, the credit union partnered with a fintech company that specializes in member onboarding and account switching, which was incorporated into their core platform ecosystem through an open API.
This allowed the credit union to capitalize on their trained staff’s expertise in member acquisition and supercharge their growth. Today Trax is nearly $500 million in assets representing a growth rate of 208% over the Filene data collection period. Utilizing technology connections, such as APIs with fintech’s can support credit union growth strategies and create competitive advantages.
Tri-CU of Kennewick, WA: Technology-First Approach to Compete
Tri-CU of Kennewick, WA, a FLEX customer, was able to beat larger competitors to market in offering a mobile app and remote deposit capture in 2013, just two years after changing out its core platform. This allowed the credit union to bring to market a technology that would provide its members with top-notch service, while not requiring them to visit the branch to complete transactions.
According to Doug Wadsworth, CEO, “Our members wanted it and there’s good reason they wanted it because we don’t have 50 branches – we’re it. This technology allowed us, a tiny institution, to be just as convenient as a big bank.”
The credit union later expanded its mobile app to include lending. This opened doors to partner with local contractors in offering members short-term, life event loans that didn’t require an in-person meeting. A technology-first approach has helped Tri-CU grow from $20 million in assets to more than $70 million in just over 10 years. A 261% asset growth rate over that period is in part correlated to Tri-CU employing technology as a competitive advantage.
Embracing Technology for Competitive Advantage
A technology implementation strategy shouldn’t be viewed as a one-size-fits-all approach. The two cases above make that point. No matter how large or small your credit union is the right technologies can help flatten the competitive pressures you face. And whether your credit union is looking to achieve sustainable growth or become a big gainer, technology, and innovation need to be embraced as part of your business strategies.