What strategic choices are credit unions making to drive growth?
By Steve Heusuk, Senior Manager, Customer Intelligence
In "The credit union value proposition is under fire," we learned that competition from major national banks and other competitors, such as challenger banks, captive auto finance companies and lending startups, is beginning to adversely affect credit unions’ share of primary financial institution (PFI) relationships and market share for certain loan types including auto loans and personal loans.
To better understand credit unions’ efforts to remain relevant and continue growing in the face of this competitive threat, TruStage commissioned a research project to explore the strategic choices of credit unions. This research was heavily based on the book, Playing to Win: How Strategy Really Works, which describes an integrated cascade of choices that companies can use to develop their strategy (see Figure 1).1 Per the author, the responses to these five questions collectively comprise the strategy of a firm: 1 — What is our winning aspiration? 2 — Where will we play? 3 — How will we win? 4 — What capabilities must be in place? 5 — What management systems are required?
Our research 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 participants’ survey responses to their credit unions’ NCUA 5300 Call Report Data2, we were able to examine how top-performing credit unions’ responses differed from other credit unions.
Credit unions’ “Where will we play?” choices
We first asked credit unions whether they've grown through expansion into new counties or states. Figure 2 breaks out credit union executives’ responses by asset category.3
Note: Respondents were free to respond or check multiple categories, so columns will not sum to 100%.
We see that roughly two-thirds of the smaller credit unions we surveyed, i.e., those with $250M-$500M of total assets, indicated they had not engaged in any expansion 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, less than one third of the large credit unions, total assets >-$1.25 billion, did not expand into any new counties or states before or during the pandemic, nor do they have any plans to expand by 2022. These results suggest that a common growth strategy of larger credit unions has been to expand into new geographies through either a charter change or mergers/acquisitions.
Next, we explored credit unions’ choices to grow through mergers and acquisitions (M&A). We used NCUA data to understand credit unions’ past M&A activity and the survey to ask about future merger plans. As shown in Figure 3, 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 our Chief Economist, Steve Rick, is expecting to take place between 2022 and 2024.
Note: The overlap in Figure 3 represents the 5% of our 183 respondents whose credit unions merged in the pre-pandemic period or during the pandemic AND are planning to merge again by 2022.
“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 our 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 4).4
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%.
Next, we explored credit unions’ Top 3 sources of revenue prior to the pandemic and what they expect will comprise their Top 3 in 2022 (see Figure 5).5
Unlike what we observed with the Top 3 distribution channels, there was a great deal of stability in credit union executives’ responses between the two timeframes. There were two notable exceptions:
First, there was a significant decline in the percentage of credit unions expecting non-sufficient funds (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, e.g., challenger bank Chime, are increasingly touting their lack of fees
- Some credit unions have recently announced they are dramatically cutting their overdraft fees
- There may be some concern that the Consumer Financial Protection Bureau (CFPB) will put NSF courtesy pay fees under further scrutiny
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, we explored their current, self-reported Top 3 sources of competitive advantage. The twelves sources of competitive advantage receiving the highest percentage of 1,2 or 3 rankings can be found in Figure 6.6
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 the “courtesy and helpfulness of staff” and “call center satisfaction”.7 If credit unions no longer lead banks in terms of key service indicators, how can member services be considered 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, our survey explored credit unions’ adoption of key technologies and digital capabilities. Figure 7 shows those digital capabilities with the highest adoption rates.8
By combining the "had pre-pandemic" and "acquired during pandemic" values, we see a majority of credit unions surveyed adopted APIs for vendor relationships and partnering, digital new account on-boarding and end-to-end digital new account opening prior to or during the pandemic.
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 yellow 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 a digital capability but are planning to acquire it 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.
Our survey also asked credit union executives what they thought their Top 3 non-digital capabilities were in the pre-pandemic period and what their expectations were for 2022 (see Figure 8).9
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 or member experience design and talent acquisition & development.
Several non-digital capabilities decreased in terms of importance over this same timeframe: community relations and outreach, in-branch sales skills, expense management and traditional marketing.
How top performers’ choices differ
By examining how top-performing credit unions’ strategic choices differ from other credit unions, much can be learned about strategies that lead to growth. Before examining these differences, let’s review how top performing credit unions were defined. For purposes of this research, top performers had to:
- Have a positive change in their return on assets (ROA) between 2018 and 2020 OR
- Be in the top third of credit unions in terms of 2020 ROA OR
- Be in the top third of credit unions in terms of 2020 membership growth OR
- Be in the top third of credit unions in terms of 2020 loan growth
Now let’s see how top performers “Playing to Win” choices differ.10
Top performers tended to be much more active in expanding their addressable market through geographical expansion and/or mergers during the pre-pandemic period. However, merger plans for 2022 seem mixed, i.e., top performers in terms of membership growth and loan growth were significantly more likely to have plans to merge. However, top performers in terms of 2020 ROA performance were significantly less likely to have plans to merge by the end of next year.
Top performers also anticipated major shifts in distribution channels prior to the pandemic. They were significantly more likely to mention the following as Top 3 distribution channels prior to the pandemic:
- Mobile apps (top performers in terms of 2020 loan growth)
- Fintech lending platforms (top performers in terms of 2020 loan and membership growth and 2020 ROA)
- Dealerships/indirect lending (top performers in terms of 2020 ROA)
Considering future expectations, top performers were more likely to say the following would be Top 3 distribution channels in 2022:
- Branches (top performers in terms of 2020 membership growth)
- Call centers (top performers in terms of 2018-2020 ROA growth)
These results are particularly interesting considering the well-documented shift towards digital channels during the pandemic. Could top performers be expecting a return to more traditional channels in the wake of the pandemic? By contrast, top performers were generally less likely to expect online via a computer (online banking) to be a Top 3 distribution channel in 2022.
In 2022, top performers were more likely to say the following would be Top 3 revenue drivers in 2022:
- Debit card interchange income (top performers in terms of 2018-2020 ROA growth and 2020 ROA)
- Unsecured personal loans (top performers in terms of 2020 membership growth)
- Used vehicle loans (top performers in terms of 2018-2020 ROA growth)
Top performers generally were also less likely to expect home equity loans/HELOCs and investment income to be a Top 3 revenue driver in 2022.
Sources of competitive advantage
Top performers tend to rely on sources of competitive advantage that are harder for competitors to copy, such as:
- Organizational culture (top performers in terms of 2018-2020 ROA growth)
- Strong community presence (top performers in terms of 2018-2020 ROA growth)
- Easy to do business with (top performers in terms of 2020 ROA growth)
- Relationships with auto dealers, real estate agents, etc. (top performers in terms of 2020 ROA, 2020 membership growth or 2020 loan growth)
Top performers were less likely to cite the following as Top 3 sources of competitive advantage:
- Member service (top performers in terms of 2018-2020 ROA growth)
- Ability to serve members in the channel of their choice (top performers in terms of 2020 membership growth)
- Low fees (top performers in terms of 2018-2020 ROA growth or 2020 ROA)
Does top performers’ lower likelihood of citing these items as Top 3 sources of competitive advantage suggest they should be considered “table stakes,” rather than differentiators?
Top performing credit unions generally adopted digital capabilities earlier than other credit unions during the pre-pandemic period. Considering future adoption of digital technologies, top performing credit unions in terms of 2018-20 ROA growth were significantly more likely to say they will acquire an end-to-end digital new account opening capability by 2022. Top performers as defined by their 2020 membership growth were also significantly more likely to say they will add a digital personal loan capability next year.
By contrast, top performers in terms of their 2020 ROA performance were less likely to say they plan to adopt advanced data and analytics and APIs in 2022. Given that adoption rates for these capabilities are already high, it’s no surprise that these top performing credit unions will be less likely to acquire these capabilities next year.
Top performers in terms of their 2020 loan growth were more likely to consider their strategic planning process and new product development Top 3 non-digital capabilities next year. These same credit unions, plus top performers in terms of 2018-2020 ROA growth, were less likely to consider user experience design and talent acquisition/development to be Top 3 non-digital capabilities in 2022. Finally, top performers as defined by their 2018-2020 ROA growth were less likely to expect in-branch sales skills to be a Top 3 non-digital capability next year.
This research has shown that credit unions’ strategic choices are extremely varied and there is no single path that delivers growth. Instead, growth is the result of hard strategic choices that create a winning strategy, and then successfully executing that strategy. Top performers tend to make decisive choices — to do some things and not others — at every stage of the “Playing to Win” cascade to ensure their strategy delivers unique value to members and creates a sustainable competitive advantage.
What outcomes are your strategic choices enabling?