Bill Handel

Niches, partnerships to shape CUs’ future

Plan for more business lending, less auto lending.

January 31, 2018

In today’s rapidly changing world, predicting trends more than a few months into the future can be a daunting task. Yet a long-term perspective is exactly what is required for long-term success.

While the financial services environment of 2030 is likely to be very different than today, the reality is that much of what we will see years into the future will stem from currently emerging developments.

Economically and demographically, 2030 will be a watershed moment. Baby-boomers will be deep into retirement, with the stresses this will place on our social systems.

Millennials will be moving into their peak earning years, and Gen Z (or whatever name is used) will be the new millennial, looking to buy homes and begin raising families.

Employment will be very different as well, with the replacement of the service economy by the information economy in full swing.

Niche institutions

In the financial services industry, there will be far fewer institutions. There are approximately 12,000 banks and credit unions in the U.S. today. By 2030 that number will decline to 7,500 or fewer.

This trend won’t be caused by cost pressures.  Instead, it will stem from revenue compression and a lack of sufficient differentiation.

We also anticipate far fewer select employee group-based credit unions. A few stalwarts will remain, but most will not have sufficient growth opportunities within the current narrow parameters defined by their charters.

Most credit unions will be community-based institutions, and brand differentiation will be enormously important. By this, I do not simply mean improved marketing. It will be credit unions defining niches—markets, segments, and products—where the institution can truly differentiate itself.

One niche credit unions can claim today is automobile lending. For many reasons, this is less likely to be the case in 2030.

Vehicle ownership and driving itself are likely to be dramatically different in 2030. Uber and Lyft are simply the beginning shift in our relationship with our vehicles.

Over time, we will be less likely to own vehicles and instead will purchase transportation services.

Because of this, the typical credit union’s loan portfolio will be very different in 2030. Rather than 30% to 50% of credit union loan portfolios comprised of vehicle loans as we see today, that percent is likely to drop below 20% for most credit unions.

More small business lending

What will take auto lending’s place? More small business lending, for one.

Small businesses already face difficulty in garnering credit, and this is a logical gap for credit unions to fill. Expect a more rational regulatory environment when it comes to business lending for credit unions, and start to gear up for this transition.

We also anticipate a much broader array of consumer financial products to be offered by credit unions, driven by both consumer and credit union need. The consumer is less likely to feel the need to keep traditional deposit services at different financial institutions from where they keep their investments.

For credit unions (and for all financial service providers), the need for new revenue streams to replace thinning net interest margins and declining traditional sources of non-interest income (overdraft and interchange) will encourage them to engage more deeply in areas such as wealth management, insurance, and financial planning.

The result is that the revenue streams of credit unions are likely to be more diverse. Today for most credit unions, margin income represents two-thirds of total revenue. Expect that number to be less than 50% in 2030.

The continued credit union focus on helping members manage their financial well-being will result in a broader array of product offerings and different employee skill sets. Transaction competency in employees will be de-emphasized as transactions are handled by technology.

Employee focus increasingly will shift to the financial education and support of members. In line with this, an increasingly large percent of branches will resemble brokerage offices, a combination of high-tech and high-touch.

A credit union may have fewer branches in each market, but rare will be the credit union that has only one (or no) branches. And on that note, we are not likely to even call them branches.

NEXT: Two tech trends

Two tech trends

The actual technologies that will emerge in 2030 may not be apparent today, but the technology trends that will drive them are here, two in particular:

First, technology’s benefits will be increasingly available at lower cost points. For example, artificial intelligence (AI) which today we see as the province of players such as IBM’s Watson, Google or Amazon, will be much more accessible to smaller financial institutions.

This is great news for smaller financial institutions.

The second major trend is that technology will increasingly empower the individual in easy and instantaneous ways.

The evolution of the mobile phone to supplant cameras is virtually complete. How many people today purchase any camera other than those at the very high-end?

And in the not too distant future the mobile device will become the all-encompassing digital assistant that Siri portends, managing a wide variety of consumer needs on behalf of the consumer.

So, what will this mean in practice? First, virtually all transactions will happen in real time. Second, passwords will be passé, to be replaced by much more secure means of identification.

Third, the use of intelligent digital assistants will be widespread, most notably via the device we today call the phone.

Part of this will stem from the extension of AI into everyday life. The consumer will have at his or her fingertips tools that can help them be more successful financially.

Credit union differentiation will lie in the trust and feeling of partnership that an individual institution is able to engender among members and small businesses.

Fintechs as partners

One last thought regarding emerging fintechs. Today, credit unions worry about how to compete with them. In 2030 the discussion will be different.

As much as institutions may fear the rise of these companies, emerging fintechs lack the brand and trust credit unions have built with members.

With a few notable exceptions, fintechs are more likely to be credit union partners in 2030 rather than competitors, as they’ve identified ways to reduce the cost curve that can benefit both parties.

In fact, plan to outsource a lot more of what you do today to firms that can do things more cost effectively, allowing you to focus on building and maintaining your relationship with your members.

BILL HANDEL is vice president of research for Raddon.