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The credit union value proposition is under fire

Potential reasons for declining member satisfaction
August 1, 2021
A woman and a man sitting together looking at a computer

By Steve Heusuk, Senior Manager, Customer Intelligence

Despite an expected rebound in lending growth in 2022, the credit union value proposition is under fire from multiple directions. It has been widely reported that credit union member satisfaction, as measured by the American Customer Satisfaction Index (ACSI), has been declining since 2017. Credit unions’ ACSI score now sits at 77, far below its zenith of 87 in 2011.1 Banks now enjoy higher satisfaction levels, on average, than credit unions and credit unions have trailed banks for two years in a row. This article will examine additional evidence that the credit union value proposition may be eroding, and the potential drivers of the erosion.

Loss of Primary Financial Institution (PFI) relationships

The declines in ACSI scores have been matched by an even more disturbing decline in credit unions’ share of PFI relationships. Recent research from Raddon shows major national banks’ share of PFI relationships really started taking off in 2018.2 These gains came at the expense of other financial institutions, including credit unions, community banks and multi-state banks. While the major national banks are really benefiting by capturing more and more of these PFI relationships, we can see the credit union share, which stood at 21% in 2018, declined to just 12% in 2020 (see Figure 1).3

Figure 1:

Change in primary Financial Institution Status Over Time Infographic

Younger consumers are redefining what it means to be a consumer’s PFI (see Figure 2).4 Being the financial institution that provides a consumer’s most used checking account, or where their paycheck is direct-deposited, may no longer be sufficient to be considered the PFI for many younger consumers.

Figure 2:

Phrases That Best Describe the Primary Financial Institution Infographic

Declining market share for certain loan classes

Credit unions’ decline in member satisfaction and loyalty is being compounded by the loss of market share in several key lending categories. According to Experian, share of total vehicle financing has slipped from 20% in Q1 2018 to 17% in Q1 2021 (see Figure 3). While credit unions’ share of both new and used vehicle loans declined during this timeframe, the decline in new vehicle financing was slightly larger (-3.3% vs. -2.1% for used vehicle financing). Captive finance companies, which grew both new and used vehicle financing market share over this same period, were the largest beneficiary of these declines with a gain in total market share of more than 4%.5

Figure 3:

First Quarter Total Auto Financing Market Share Infographic

Credit unions’ share of the unsecured personal loan market has also declined. In 2013, credit unions captured nearly one-third (30%) of this market. Fast forward to 2019 and credit unions’ market share had dropped to roughly 20% (see Figure 4). By contrast, fintech lenders’ market share grew from 7% in 2013 to 39% in 2019.6

Figure 4:

Market Share of Personal Loan Balances Infographic

Mortgage lending seems to be a bright spot for the industry, with federally insured credit unions granting $289 billion in first mortgages in 2020, up 63% from 2019, according to the National Credit Union Association (NCUA).7 Despite this impressive performance, credit unions do not appear to be capturing market share from their competitors.

Prior to the pandemic, credit union’s share of mortgage originations began slipping from 6.9% in 2018 down to 6.7% in 2019, according to S&P Global Market Intelligence’s analysis of the Home Mortgage Disclosure Act (HMDA) data.8 The 2020 HMDA was recently released to the public, but S&P has yet to update their analysis. However, a recent Credit Union Times article reports credit unions’ share of first mortgage originations declined year-over-year from 8.9% in Q1 2020 to 6.8% in Q1 2021.9 These results suggest while credit unions grew first-mortgage originations in dollar terms, their growth rate was not sufficient to maintain or grow their market share between 2018 and 2020.

Why has the credit union value proposition become less attractive?

Fees, mobile banking and interest rates are the three most important reasons why consumers choose a financial institution (see Figure 5).10

Figure 5:

Mobile Banking Infographic

The challenge for many credit unions is they are facing stiff competition on these three drivers of consumers’ financial institution choice. For example, credit unions charge an average overdraft or non-sufficient funds fee (NSF) of $28.36, according to CUNA.11 By contrast, Ally Bank announced in June it would no longer charge a $25 overdraft fee. This change applies to the roughly 3.6 million checking, savings and money-market accounts at Ally’s online bank.12 Challenger banks, such as Chime, Dave, and MoneyLion also tend not to charge overdraft fees or minimum balance fees.

In terms of mobile banking, the pandemic drove a significant increase in consumer adoption of this technology. This growth in adoption came right at a time when megabanks, like Chase, digital banks, such as Ally, and the challenger banks had positioned themselves to capture a larger share of consumers willing to try something new. According to the 2020 ACSI report, “mobile app quality (82) for credit unions slips for a second year showing a net loss of 4%.” While banks’ ratings have also declined, they still enjoy a two-point advantage over credit unions (84 vs. 82).13

Unfortunately, ACSI does not evaluate satisfaction with fintech startups’ mobile apps, but a review of their ratings in the App Store or Google Play Store reveals most leading brands receive good ratings (e.g., 4.0+ out of 5.0 stars). By comparison, it is not too difficult to find regional and community banks or smaller credit unions that do not reach this threshold.

Credit unions have also been challenged in recent years by significant margin compression and an extended low interest-rate environment that have constrained their ability to compete on price. For example, credit unions paid 0.10%, on average, on a savings account with a $2,500 balance at the end of March 2021, according to NCUA.14 By comparison others pay 0.50% or more on a high-yielding savings account. Credit unions’ price advantage on loans has also diminished compared to captive auto finance companies and fintech lenders. In terms of mortgages, credit unions’ interest rates have generally been undifferentiated vs. leading competitors such as banks and online lenders, like Quicken Loans.

Another factor likely contributing to the erosion of the credit union value proposition is the decline in credit unions’ member service performance in recent years. As Figure 6 shows, bad service experiences are one of the top three reasons why people leave their PFI.15

Figure 6:

CX Influences Infographic

Figure 7 summarizes ACSI satisfaction survey results across two important service-related dimensions. Credit union ratings of the courtesy and helpfulness of staff declined from 90 points in 2015 to 84 points in 2020 and call center satisfaction declined from 85 to 79 points. When comparing credit unions’ 2020 results to the bank average, we see credit unions actually trailed banks on the courtesy and helpfulness of staff - 84 versus 85 points. They were on par with banks in terms of call center satisfaction with both at 79.16

Figure 7:

Customer Service Metrics Infographic

Finally, competitors are making it much easier for credit union members and other consumers to switch providers by reducing the amount of time it takes to open new deposit accounts or apply for new loans. Chime, for example, boasts on its website, “Applying for an account is free and takes less than 2 minutes.” SoFi exclaims “Find out if you pre-qualify for a SoFi personal loan in just two minutes” on its website. Chime and other fintech startups appear to be differentiating their offerings through the speed of their digital account opening.

By comparison, traditional financial institutions generally lag these innovative competitors in terms of account opening times. According to The Financial Brand, “more than 75% of online/website account openings took longer than five minutes in 2020, with close to 30% taking longer than ten minutes. Surprisingly the change in time to open a new account online has changed very little since 2017” (see Figure 8). Mobile account opening times were only marginally quicker, according to this same study.17

Figure 8:

Checking Account Opening Infographic

Credit unions may be forfeiting more opportunities than they realize because many consumers abandon the account opening and loan application processes before they complete what they wanted to do. For lending products, the abandonment rate is even higher (see Figure 9).18 While speed is important, credit unions will also need to remove friction, simplify processes, and provide a seamless digital new account opening experience to begin capturing more of this business.

Figure 9:

Speed and Simplicity Infographic

Implications for credit unions

The second half of the past decade was very prosperous for credit unions, but this prosperity was not shared uniformly across the System. When we look below the surface, we see that widely reported System averages have been masking individual credit union growth challenges. Within every asset category in Figure 10, we see credit unions that experienced declines in their overall loans outstanding and/or their membership between 2017 and 2020.19

Figure 10:

Assets Infographic

This split between credit union “haves” and “have nots” could accelerate if deficiencies in the value propositions of the “have not” credit unions are not addressed. Should the gap widen, we could expect an acceleration in credit union consolidation. Steve Rick, TruStage’s Director, Chief Economist, is already expecting an increase in merger activity:

"History shows that credit union merger activity declines during an economic storm. But after the storm has passed and the economic seas are calm again, we tend to see a surge in credit union merger activity as some credit unions determine that their membership will be better served merging with another credit union. So, expect merger activity to surge above normal in 2022 through 2024."