How Credit Unions can Navigate their Rapidly Changing Industry

This article was originally published on CUInsight.

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Despite the economic headwinds credit unions are facing right now, they’re also entering one of the most significant transformational periods the industry has ever experienced. This is largely due to the rapid digitization of how credit unions operate and engage with members – a direct response to fundamental shifts in consumer demands and priorities. While this period will come with inevitable logistical obstacles and short-term crises, it will ultimately put credit unions in a better position to build their membership bases and compete with other financial institutions. 

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There’s no doubt that 2023 will be a difficult year for credit unions: Fed interest rates will remain high, refi and purchase mortgage volume will shrink, and many members will be under considerable financial stress. However, there’s also good news: tappable home equity will likely remain strong, while home equity loans and HELOCS will be essential sources of liquidity for members. But the most important good news is the fact that credit unions have demonstrated a willingness to adapt as the economic and technological landscape shifts beneath them. 

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With that fact in mind, let’s take a look at the biggest developments in the industry and how credit unions can be prepared.

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Consumer expectations are evolving

How consumers manage their money and interact with financial institutions has undergone a series of transitions in recent years, and the pace of change will only continue to accelerate. For example, a 2022 Ipsos-Forbes survey found that 78 percent of banked Americans prefer to do their banking digitally. While banking experiences were already digitizing, the COVID-19 pandemic forced financial institutions to make this change even more proactively. 

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Consumers also want more personalized financial services and experiences: 72 percent of bank customers rate personalization as “highly important,” a proportion which is higher for Millennials and Gen Z than older generations. Credit unions have always excelled at meeting their members’ individual needs, and the ability to continue doing so will be a major competitive advantage in the years to come. 

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There are many other demands credit unions have to meet: consumers want to be rewarded for their loyalty in the form of cashback offers and other perks, and they want the convenience of services like mobile check deposits, recurring payment alerts, peer-to-peer transfers, and so on. The credit unions that address these demands most effectively will maximize their TAM and market share in 2023 and beyond.

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Economic volatility will continue to be a challenge

During the COVID-19 pandemic, government assistance and a lack of consumer spending led to an explosion of savings, while the real estate market surged to unprecedented heights. The average sale price of a home in the U.S. was around $375,000 at the beginning of 2020 – a number that spiked to almost $548,000 by the third quarter of 2022. But as inflation proved to be much stickier than many economists had predicted, the Fed was forced to drastically increase interest rates and a major decline in the real estate market now appears imminent. 

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Amid all this economic turbulence, credit unions should expect a slowdown in loan growth and mortgage originations. In November 2022, the Mortgage Bankers Association projected a 12 percent reduction in total mortgages this year, while an analysis conducted by the Credit Union Times found that the 25 largest credit union mortgage producers saw a 50 percent reduction in originations from the year prior. 

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While these are startling numbers, there’s no reason to panic. At a time when homeowners need access to capital, they will prioritize home equity loans and HELOCs over other sources of funds (such as savings accounts, early 401(k) withdrawals, and credit card debt). Homeowners still have plenty of tappable home equity, and they will put it to use in 2023 and 2024. As members deal with even more economic chaos, credit unions will be a critical source of stability. 

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The digital transformation will gain momentum

There’s a reason 89 percent of bank and credit union executives regard fintech partnerships as important for their institutions: consumers increasingly want digital services and experiences, and this trend shows no sign of slowing down. This is particularly true for credit unions, a much higher proportion of which view these partnerships as a strong driver of growth. 

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Less than 30 percent of consumers say they prefer to bank in person at a local branch, while over three-quarters want to do their business either on a bank’s website (37 percent) or a mobile app (41 percent). Beyond providing in-demand digital services such as online bill-pay and mobile check deposits, credit unions should prioritize open and ongoing engagement with members to determine how their needs and concerns are changing (or staying the same). In some cases, this will mean providing hybrid experiences that fuse digital and human interactions – 63 percent of consumers say they prefer conversations with real bank representatives over chatbots. 

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The digital transformation is both a cause and an effect of the other major trends in the sector. As technology improves, member demands and expectations will keep pace. And as credit unions confront a difficult economic environment, the move away from the maintenance of costly physical branches will simultaneously reduce overhead and meet members’ needs.