I am the CEO at Happy Money and have spent my career connecting ‘fin’ and ‘tech’ by uniting the benefits of Silicon Valley and Wall Street.
The collapse of Silicon Valley Bank and Signature Bank within two days was an unexpected start to March 2023. The downfall of SVB and Signature largely came down to the mismanagement of interest rate risk on their balance sheets in a rapidly rising rate environment. And while these are some of the most recent examples of turmoil in the traditional banking model, there are many other historic failures. At its worst, this model prioritizes profit and can put customers at risk, creating an opening for other institutions like community-based credit unions to demonstrate the safety, strength and resiliency of a not-for-profit, relationship-based banking model.
Where Credit Unions Can Win
Nearly half of all venture-backed startups in the U.S. banked at SVB. Following the collapse, businesses scrambled to diversify their cash and find safer places to put their money. I learned recently through a conversation with the co-founders of Slumberkins, a children’s education brand, that they moved funds to their local credit union when they regained access to accounts. They did this for a few reasons: The credit union was one of their earliest supporters, back when they were just a team of two; the credit union had offered financial guidance as the company grew and, based on their past experiences, they trusted that their account would be safe and available for things like payroll and vendor payments. This example illustrates the power of credit unions’ relationship-based banking model.
However, that doesn’t mean credit unions weren’t affected by the unprecedented rate increases we saw in late 2022. Every financial institution was hit hard. But the risk to credit unions was mitigated by several factors. Most importantly, 91% of deposits at federally insured credit unions were covered as of Q4 2022. Instead of a relatively small number of big accounts that are mostly uninsured, credit unions thrive with many members and many smaller accounts, making a bank run on a credit union less likely.
Moreover, credit unions are member-owned, so loyalty isn’t to stockholders, which can sometimes drive risky decision-making. And because they are tax-exempt, not-for-profit organizations, credit unions must return any profits to their members, which often creates a foundation for lower fees, higher savings rates on deposits and better loan terms.
There are also the intangibles that provide value, trust and strength. Credit unions allow members to be part of a community—banking with others in the same town, the same line of work or fellow military service members and families. There’s something to be said about being a member and owner in a financial institution that reinforces a commitment to serve your fellow members.
How Credit Unions Can Evolve
Despite the benefits of banking with a credit union, leaders can do more to showcase their strengths and attract and retain customers in the digital era.
Improve customers’ virtual experience.
If the relationship-based banking model relies on members physically visiting a brick-and-mortar location, it’s a losing strategy. Today’s consumers require digital access. In fact, roughly 43% of people used mobile banking as their primary method of account access in 2021, up from 15% percent in 2017. In order to thrive and remain competitive, credit unions must find a way to translate the sense of community and relationship development to the digital realm.
At countless businesses across the country, teams are now fully distributed and quickly learning to create community and culture in a digital workplace. Credit unions can adapt in the same ways by meeting members online at point of purchase or as they’re researching financial products and being quick and responsive to questions and needs via text, email or live chat.
Translate your brand online.
Credit unions are limited in their main revenue streams, relying on home, auto and personal loans, which are increasingly secured online. In order to continue offering better returns and competitive interest rates for members, credit unions must find a way to develop a brand and a presence online.
There are several strategies that credit unions can use to boost their online presence (paywall) and improve omnichannel marketing efforts. They can also work together with fintech platforms to build their presence in the larger online lending ecosystem.
Choose the right fintech partners.
Partnering with values-aligned fintechs can help credit unions scale and expand their membership base quickly, while maintaining long-standing trust and resiliency. There are a few things to look for when collaborating, including reliability, resilience, and simplicity when operating with the partner. You also want to look for alignment in lending practices. Does the fintech lend to the fullest extent of a person’s means, or do they protect some net-free cash flow, which has positive correlations with reduced stress and improved financial well-being?
Established financial institutions think they have more time than they do. We have seen such rapid change in the last two years, and technology is moving fast. Rather than take a wait-and-see approach, now is the time to lean forward. If credit unions ignore the advances in banking and technology, they will be left behind. I invite all credit unions to come together and find strength by collaborating in innovative ways that will solidify their relevance and longevity in our financial ecosystem. Hold your values close—community-centric and relationship-based banking that have built such trust—while pushing forward to introduce new benefits to new generations.
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