by Mark Ridley

**This article was originally published on CUInsight.com. It was updated on October 5, 2021.**

Current State of Credit Unions

As of February of 2020, we’ve seen a rationalization in the number of credit unions over the last 10 years from almost 7,000 down to 5,091. We expect a further 2.7% reduction by the end of December. 

That being said, business growth in the sector has risen over 3% in the last five years, largely due to increased memberships, interest rates, and consumer borrowing. So, it seems that demand for services from member-owned institutions remains positive and strong – even while brick and mortars crumble.

This demand is driven by consumers – and in large part – by small businesses that are in search of what a credit union can offer. But with credit unions having to use their own funds to finance operations and product development, there’s a long way to go before they are able to compete effectively with the average bank – especially when it comes to international products and services.

How Credit Unions Can Grow with Memberships

So what happens when the small business member grows and requires more sophisticated services, such as moving money internationally in order to pay for imported goods and services? Fortunately, some credit unions are able to handle this process, but it’s usually through an affiliation with one of the larger competitor banks on the same street. Wells Fargo, JPMorgan, and Bank of America are three such examples and have a significant market share of the CU business in North America.

CUs are generally sent a fixed rate sheet by their affiliated bank each morning. In some cases, it is possible to obtain a live rate through an online banking platform. In either case, the margins tend to be relatively wide and are driven by volume. What happens, then, when a credit union’s member doesn’t like the best rate a CU can provide? Chances are, they will relent and speak to a large bank that will gladly quote a rate – probably still not the most competitive rate, but one the member is happy to accept.

What comes with that rate, however, is the prerequisite that the member move all of his or her business banking. This stands to reason, given that the profitability on the payments alone is not enough to meet the larger bank’s minimum revenue hurdle.

In most cases, we know that the small business doesn’t actually want to have to transfer their banking needs away from the credit union. After all, they chose the CU because of the high level of member service and the ability to form business relationships. In these relationships, they feel like a member and a partner, rather than a small fish in a large pond with a 1-800-GO-AWAY member service number to call for assistance.

How a Payment Service Provider Can Help

This is where a FinTech payment services provider (‘PSP’) might be able to help. By partnering with smaller financial institutions and offering a robust and compelling referral program, a PSP can support the need a credit union might have if their member is unable, or unwilling, to accept the wide FX margins forced upon the CU by the larger correspondent bank.

This will not only allow the credit union and their members to continue enjoying their well-founded and often long-term relationships – while, at the same time, the CU continues to reap the benefit of the day-to-day banking revenue – but will also provide an additional fee income stream to the CU from referral fees. Relying on deposit interest income alone has proven to be a rather foolhardy strategy, particularly during times of economic stress like post 9/11, the global crash in ’08, and again in COVID times.

Businesses banking with a credit union join for a variety of reasons, but as they grow and their needs change they may find it harder to justify sticking around. 

A credit union certainly doesn’t have to be all things to all people. Outsourcing or partnering in order to continue to be able to provide members with the white-glove service they signed up for in the first place is a smart, future-proofing move. Members are asking. Isn’t it time to change?

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