There has been much talk of the digital divide between Americans with easy access to technology and those without. A similar divide exists in financial services where megabanks and venture capital-fueled fintechs use state-of-the-art digital banking services to woo business from credit unions and other smaller institutions. The COVID-19 pandemic brought this divide to the crisis point for many credit unions. Social distancing and stay-at-home orders drove users en masse to their credit unions’ digital channels, which were not always up to the task. As we look ahead to post-COVID-19 life, the industry must face a fundamental question: Is it possible to maintain the established benefits of credit unions and still match the technology of better-funded rivals? If so, how?
Why Credit Unions (Sometimes) Haven’t Embraced Digital Banking
It’s easy to argue the merits and importance of digital banking if you’re a consultant or a company with technology to sell. They’re real, legitimate and pressing. Yet, many credit unions are reluctant to pull the trigger on a significant investment in digital technology — for equally real and pressing reasons. Those include (but aren’t limited to):
- Cost: Developing new technology costs money — lots of it — and the largest banks have vast assets at their disposal while fintechs can draw on venture capital funding. Credit unions, especially small- and mid-sized ones, don’t have similar resources at their fingertips.
- Security concerns: There are legitimate concerns around fraud and user-data security. Remote deposit capture, a popular digital banking feature, is responsible for a disproportionate percentage of check fraud. Forbes reported in 2019 that financial services were increasingly targeted by malware and hackers — a trend that won’t go away any time soon. Numerous financial services giants have suffered data breaches in the past few years alone — a sobering consideration for credit unions with fewer cybersecurity resources.
- Legacy code/processors: The core processors — third parties who provide credit unions with their fundamental computing systems — still typically use legacy code dating back to the 80s or even the 70s. With the best intentions in the world, it’s hard for core processors to tweak these systems to meet rising user expectations in a timely, needs-driven fashion.
- It’s perceived as a threat: The push toward a digital-first or mobile-first strategy isn’t necessarily an intuitive fit for credit unions. It isn’t a case of reflexively rejecting technology because “that isn’t how we’ve always done it.” It’s because credit unions emphasize their personal, user-first orientation as a contrast to profit-driven, big banks. How does that carry over if everyone banks through an app?
In short, there are many legitimate reasons for credit unions to be wary of the new technologies or to adopt a “go slow and feel our way through” approach. Unfortunately for those credit unions, the pressures to adopt a more tech-centric strategy continue to grow.
Pressure to Find a Way Forward
Even when the pandemic was in its early stages, it was clear that 2020 would offer little resembling “business as usual.” Even in areas without strict lockdowns, stay-at-home guidance and users’ natural desire to avoid risk led them to use contactless banking options whenever possible. Many credit unions, for their part, reduced branch hours and staffing to protect their employees. They also instituted social distancing and sanitizing policies which sharply reduced their ability to serve customers in volume.
This restriction of in-branch services, combined with end users’ increased preference for the digital option, represented an unhappy turn of events for credit unions that hadn’t yet embraced the digital-forward model. The crisis eroded traditional consumer loyalties. In December 2020, McKinsey reported that 76% of those surveyed had changed brands or shopping patterns during the pandemic, citing convenience and value.
That’s a significant concern for credit unions whose digital platforms aren’t able to keep up. The same McKinsey study reported that 40% of those who had embraced an online-first model intended to continue with it. This aligns with other research findings. Elray Armazy, custom research director at the Filene Research Institute, said, “Once a person goes through the pain to modify their behavior [thinking of the thousands of users who have embraced digital channels in the last year], it is difficult to go back to a less convenient channel.”
What Credit Unions Bring to the Table
Being forced to compete from a position of weakness — against competitors who are more agile and better-funded — is not a pleasing prospect. Yet, there’s a pressing need in the community for the client-centric credit union model. If anything, the COVID-19 crisis has increased the need for community-focused banking.
From the earliest days of the pandemic, its impact has disproportionately affected those who are least able to absorb that impact. Not only has the virus cut a wider swath through disadvantaged and lower-income communities, but this population has also felt more of its economic impact. Figures collated by the Filene Institute in April 2020 clearly outlined the gathering storm. Younger adults, lower-income households, people of color, women, single-parent households and other vulnerable groups — those largely left out of the post-2009 recovery — were the likeliest to lose jobs or face income cuts, the most likely to be employed in the hard-hit service sector and the least likely to have savings or credit to carry them through the downturn. The same holds true for entrepreneurs and small businesses in those communities who are also disproportionately represented in the hard-hit service sector.
As member-owned cooperatives, credit unions have a more direct stake in the lives and success of their users than banks and other institutions. When credit unions fail or are unable to extend services successfully to those at risk in the community, the community-at-large suffers. As Armazy put it, “Credit unions have an opportunity to intimately address concerns at a local, community level that a national bank cannot.”
Credit Union Technology Trends
Responding to the crisis is both a business need and a social imperative for credit unions, and it has given rise to a few technology trends and accelerated others. Some notable examples include:
Back-Filling Gaps in Services
Many credit unions, like other businesses, have turned to off-the-shelf tools as a stopgap solution. Users’ need for one-on-one advice can largely be met through Zoom or Google Meet, for example. Third-party signature verification services can replace a physical signature (unless you live in a state that mandates a “wet” signature). At a higher level, you might turn to a third-party provider to add a specific feature that your own digital platform lacks.
Questions About the Software Stack
The push into newer technologies has focused attention on the entire software stack in banking. That’s the whole ecosystem of software used by banks and credit unions — from the core processors providing the raw horsepower to vendors supplying bespoke tools or features. From the retail banks to the core processors themselves, every player is in search of a viable new business model. The processors must decide whether to provide an all-in-one solution or a versatile framework for integrating third-party software. At the same time, institutions need to determine which of those options best suit their own needs.
A Focus on Data and Analytics
Arguably, the sharpest lesson to be learned — from fintechs and Big Tech players like Google and Amazon — is the importance of user data and analytics. Traditional banking software segregates data into siloes — daily banking data is here, credit cards are there, loans and mortgages are in a different place and so on. If legacy institutions can’t “know your customer” as well as Amazon or Apple, what’s to stop end users from turning to Amazon or Apple in the future for banking services? Making all of the data in your system readily accessible for analysis is crucial for staying competitive.
Identifying and Serving Previously Unidentified Needs
Identifying your users’ needs and how you can better serve them is how credit unions can leverage improved technology to maintain their traditional user-first, personalized focus. Your end-users expect personalization and rich datasets (and the analytics tools to interpret them). This is what drives personalization in a digital platform.
The Right Tool For the Job
Stopgap measures are like tarping your roof after a storm. It serves the immediate purpose, but it isn’t a real solution. For that, you need to replace your roof. Similarly, papering over the inadequacies of your digital platform can buy you time but won’t fix the underlying problems. Your users still won’t find the ease of use, personalization and full feature set they want, and you won’t have the technology or data and analytics that would enable you to give it to them.
Problems will only be magnified by the disruptive effects of unforeseen events like COVID-19 because history and your existing models will no longer be reliable guides. Some of your end-users will have flourished during such events — either because their investments did well or simply because they’ve saved a bundle by not commuting, vacationing and eating out. They’ll need your help and guidance in maximizing the benefit of this windfall.
Others will face unprecedented financial stress from the loss of income, a small business or family members whose earnings were essential to the household. Many are scraping an income together from multiple sources. They’ll need your help and guidance, too, for opposite reasons.
So, how can you recognize and address those disparate needs across your field of users? The best answer to that question is a unified digital platform that gives you the necessary tools to make those analyses and act on them.
Using Technology to Complement Your Identity
Choosing appropriate technology for your credit union is about more than playing catch-up with the banks. It’s about perpetuating and emphasizing what sets credit unions apart. Yes, users are driven by convenience, but they’re also looking for opportunities to deal with organizations that are local, ethical and community-centric. That’s the competitive advantage credit unions continue to hold.
Armazy emphasized that point. “The credit union value proposition will be tied to holistic financial well-being,” he said. “At the core of the credit union proposition, there is a commitment to help [users] save more, borrow responsibly and reduce their financial stress. The caveat is that these personal touches will [need to] be complemented with digital elements that enhance the [end users’] experience… To change habits and make them stick, digital tools will be an ally.”
Viewed through that lens, a strong digital platform becomes an instrument of change. It isn’t just about your marketing or business plan, but it’s a tool your users can lean on — wherever they are in their financial journey — to define and meet their goals with your help.
The Bottom Line? Build Back Better
The COVID-19 pandemic has been the social and financial equivalent of a massive storm or another natural disaster. It has left a great deal of destruction in its wake but, like real storms, it will pass. As simple survival gives way to members rebuilding their lives, credit unions are uniquely positioned to help them achieve that. Financial wellness doesn’t come from a high income but from good money-handling habits, and you can help instill those. Asking “How can we help our community rebuild?” is a question of self-interest as much as mission. A credit union is only as strong as the community it serves.
Lumin Digital can provide the tools to help you do that. Contact us today to request a demonstration and learn how our state-of-the-art technology can empower your credit union to be better at what you do.
American Banker – Credit Unions Lag in Tech. Coronavirus is Changing That
Identity Theft Resource Center: 10,000 Breaches Later: Top Five Financial, Credit and Banking Data Breaches
McKinsey & Company: Survey: US Consumer Sentiment During the Coronavirus Crisis
Filene Research Institute: Credit Unions and the Coronavirus: Notes on the Impacts and Implications of the COVID-19 Crisis (Part One)
Financial Health Network: What Banks Need From Their Technology Stack