To better understand credit unions’ efforts to remain relevant and continue growing in the face of these challenges to their competitive position, CUNA Mutual commissioned a research study to explore the strategic choices of credit unions. This research drew inspiration from the book, Playing to Win: How Strategy Really Works, which was co-authored by Alan Lafley, former CEO of Procter and Gamble and Roger Martin, Professor Emeritus at the University of Toronto. Lafley and Martin describe an integrated cascade of choices which companies can use to develop their strategy (see Figure 5). Per the authors, the responses to these five questions collectively comprise the strategy of a firm.
Source: Playing to Win: How Strategy Really Works
CUNA Mutual’s survey focused on credit unions’ choices related to the middle 3 questions: “Where will we play?”, “How will we win?” and “What capabilities must be in place?”. Executives from 183 credit unions with total assets > $250M participated in this research. By matching study participants’ survey responses to their credit unions’ NCUA 5300 Call Report Data, it was possible to examine how top-performing credit unions’ responses differed from other credit unions.
Credit Unions’ “Where Will We Play?” Choices
CUNA Mutual’s survey first asked credit unions whether they’ve grown through expansion into new counties or states. Figure 6 breaks out credit union executives’ responses by asset category.
Source: CUNA Mutual Group proprietary research
Note: Respondents were free to respond or check multiple categories, so columns will not sum to 100%.
Roughly 2/3 of the smaller credit unions surveyed, i.e., those with $250M-$500M of total assets, indicated that they had not expanded into new counties or states before or during the pandemic (1/2018 – 4/2021), nor do they plan to do so by the end of 2022.
By contrast, within the largest credit unions surveyed, i.e., those with total assets >=$1.25 billion, nearly half had expanded into new counties or states prior to the pandemic. One in five expanded their geographical footprint during the pandemic, and another four in 10 are planning to do so by the end of 2022. Less than a third of these large credit unions did not expand into any new counties or states before the pandemic or during the pandemic, nor do they have any plans to expand by 2022.
Next, the survey explored credit unions’ choices to grow through mergers and acquisitions (M&A). NCUA data was used to understand credit unions’ past M&A activity and the survey asked about future merger plans. As shown in Figure 7, nearly one out of four credit union executives surveyed had engaged in M&A activity prior to or during the pandemic. Fifteen percent of respondents indicated their credit unions are planning to do so by 2022. These credit unions could represent the start of the surge in merger activity that CUNA Mutual’s Chief Economist is expecting to take place between 2022 and 2024.
“Where will we play?” is not only about credit unions expanding their total addressable market through geographical expansion or mergers. It’s also about their choices of channels used for distribution and the products they offer.
One of the survey questions asked study participants to name their Top 3 distribution channels in the pre-pandemic period and what they expect those Top 3 to be in 2022 (see Figure 8).
As the colored stars highlight, there were some statistically significant differences between the Top 3 distribution channels in the pre-pandemic period and the expected Top 3 in 2022. For example, the percentage of credit union executives considering mobile apps or online via a tablet or smartphone to be a Top 3 distribution channel increased significantly. By contrast, significantly fewer study participants expect branches and call centers to be a Top 3 distribution channel in 2022 compared to the pre-pandemic period.
Interestingly, some credit union executives expect partnerships with fintech lending platforms to grow in importance. These partnerships represent a new distribution channel by originating loans on credit unions’ behalf. The percentage of credit union executives saying these partnerships were or will be a Top 3 distribution channel grew from 3% to 16%.
Source: CUNA Mutual Group proprietary research
Next, the survey explored the choices credit unions have made in terms of their key revenue sources (see Figure 9). More specifically, it probed the Top 3 contributors to revenue prior to the pandemic, and then what revenue sources credit union executives expect will comprise their Top 3 in 2022.
Source: CUNA Mutual Group proprietary research
Unlike what was observed with the Top 3 distribution channels, there was a great deal of stability in credit union executives’ Top 3 revenue drivers between the two timeframes. There were two notable exceptions:
First, there was a significant decline in the percentage of credit unions expecting NSF / courtesy pay fees to be among their Top 3 revenue drivers in 2022 compared to the pre-pandemic era. The following factors may help explain this decline:
- Competitors are increasingly touting their lack of fees. For example, the challenger bank Chime publicly claims on its website that it does not charge overdraft fees
- Some credit unions have recently announced they are dramatically cutting their overdraft fees, thus putting pressure on other credit unions to follow suit
- There is likely some concern that the Consumer Financial Protection Bureau (CFPB) will put NSF courtesy pay fees under further scrutiny given recent regulatory actions
The second exception was an increase in the percentage of study participants expecting sales of whole loans or participations to be one of their Top 3 drivers of revenue — up from a low base of 4% during the pre-pandemic era to 11% in 2022.
Credit Unions’ “How Will We Win?” Choices
To understand credit unions’ “How will we win?” choices, CUNA Mutual’s survey explored their current, self-reported Top 3 sources of competitive advantage. The survey provided participating credit union executives a large list of potential competitive advantages to choose from — 19 in total. The twelve sources of competitive advantage receiving the highest percentage of 1, 2 or 3 rankings can be found in Figure 10.
Source: CUNA Mutual Group proprietary research
Credit union executives citing member service as one of their leading sources of competitive advantage is troubling because according to the American Customer Satisfaction Index (ACSI), credit unions are on par with or trail banks in terms of members’ satisfaction with courtesy and helpfulness of staff and call center satisfaction. If credit unions no longer beat banks in terms of service, how can member service be the leading source of competitive advantage for credit unions?
Credit Unions’ “What Capabilities Must Be in Place?” Choices
To understand credit unions’ strategic choices related to their capabilities, this survey explored credit unions’ adoption of key technologies and digital capabilities. Figure 11 shows those digital capabilities with the highest adoption rates.
Source: CUNA Mutual Group proprietary research
As indicated by the maroon portion of each column above, one-half of the surveyed executives reported that their credit unions already had APIs for vendor relationships and partnering in the pre-pandemic period. Slightly fewer (47%) reported having digital new account on-boarding capabilities during this same timeframe. Just under four out of ten (39%) of study participants reported already having end-to-end digital new account opening capabilities and cloud computing during the pre-pandemic period. Other technologies such as advanced data analytics, digital auto loans, digital mortgage loans etc. had adoption rates that were 30% or less in the pre-pandemic era.
Not surprisingly, adoption of end-to-end digital new account opening and virtual or video agent chat capabilities jumped 20+ percentage points during the pandemic as shown by the gold segments. These technologies helped support continued membership growth and remote service of credit union members during the pandemic.
Credit unions that do not yet possess these digital capabilities but are planning to acquire them by year-end 2022 are noted by the blue segments. Nearly half (45%) of respondents expect to adopt advanced data and analytics by year-end 2022. Adoption of personalized communications of offers using artificial intelligence is expected to grow 38 percentage points. Other technologies such as the digital new account opening and digital auto and mortgage loans, are also expected to experience solid increases in adoption by the end of next year.
CUNA Mutual’s survey also asked credit union executives what they thought their Top 3 digital capabilities were in the pre-pandemic period and what their expectations were for 2022 (see Figure 12).
Source: CUNA Mutual Group proprietary research
The percentage of credit union executives considering the following to be Top 3 digital capabilities grew significantly between the pre-pandemic period and year-end 2022:
- Advanced data and analytic
- End-to-end digital new account opening
- Personalized communications or offers using artificial intelligence
- Virtual or video agent chat capability
One technology experienced a decline in the percentage of credit unions considering it to be a Top 3 capability — cloud computing — declining from 24% in the pre-pandemic period to just 14% in 2022.
As with the Top 3 digital capabilities, the survey asked participants about their Top 3 non-digital capabilities (see Figure 13).
Source: CUNA Mutual Group proprietary research
Three of these non-digital capabilities experienced significant increases in the percentage of credit union executives considering them to be a Top 3 capability during the pre-pandemic period versus in 2022: Digital marketing, user (member) experience design and talent acquisition & development.
Several non-digital capabilities decreased in terms of importance, i.e., the percentage of respondents considering them to be a Top 3 capability decreased over this same timeframe: community relations & outreach, in-branch sales skills, expense management and traditional marketing.
2021 CUNA Mutual Group internal data and Experian, “Auto Finance Insights: State of the Automotive Finance Market Q1 2021,” Q1, 2021
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