Understanding credit unions

The number of Americans joining credit unions is growing. In 2016, the number of members had grown to more than 105 million, up 3.8 percent from the previous year and 12.6 percent from 2010, according to the Credit Union National Association. The uptick can be attributed to credit unions’ favorable loan rates over banks’, their resilience in the financial crisis, and recent mergers that have made credit unions easier to join and easier to use by expanding services and ATM networks. It also coincides with a nationwide surge in new financial technology. In fact, the United States invests nearly four times more in the fintech industry than any other country. The way credit unions navigate the landscape of online payments over the next few years could be key to their survival—especially as they court millennials, who currently make up only nine percent of credit union members. (This has grown from six percent in 2011, but the average age of a credit union user is 47.) How easily credit unions can remain the hub of consumers’ financial lives is equally important.

What credit unions are

Though credit unions and banks are often discussed together or even sometimes used interchangeably, there are several notable differences.

Credit unions are not-for-profit organizations whose “members”—that is, customers—are all co-owners. A board of elected members governs the credit union, and any money saved or earned often finds its way back to members in the form of lower loan rates and fees or sometimes even cash rewards. Credit unions are also structured in a cooperative way, which enables them to work with each other and share resources to serve their members. Incidentally, taxpayer money has never been used to bail out a credit union.

Credit unions are also small and not as ubiquitous as banks. Though there were 5,289 commerical banks (plus 833 savings institutions) in the United States as of March 2016 and 6,075 credit unions, each bank had an average of 16 branches, while each credit union had an average of three branches. The biggest difference comes in the amount of assets, which include cash, government securities, and interest-earning loans like mortgages. According to CUNA, an average bank is about 13 times larger than a credit union, holding an average of $2.6 billion in assets, compared to a credit union’s $207 million. Half of all credit unions report less than $25 million in total assets; only 2.8 percent of U.S. banks are that small.

Perhaps because they are small, however, credit unions are often praised for their personalized customer service—one of the features that makes them particularly appealing over banks to many members. Serving a smaller population allows them to devote time and effort to members individually. What’s more, they were particularly resilient during the recession, seeing a large, 23-percent increase in savings from 2007 to 2010, suggesting that investors were choosing the safety of credit unions over banks.

On the other hand, credit unions are often less accessible than banks because they have fewer branches and fewer ATMs and often have limited hours and fewer online banking capabilities—although they have been making changes in recent years to improve these areas. Moreover, credit union membership is often restricted to those who have a certain affiliation, such as with an employer, neighborhood, or association. Anyone can open an account with a bank.

As far as financial services go, credit unions offer consumer services that allow their members to open checking and savings accounts, take out personal loans, or finance their cars or houses—though not all credit unions offer every service. Some credit unions also offer loans to small businesses, but the general focus is on individual banking. The offerings are often more limited in scope than those offered at a bank, but credit unions work to compete by offering low insurance rates, lower NSF and ATM fees than banks charge, higher interest rates on savings, and lower interest rates on loans. A 2013 Bankrate study found that 72 percent of America’s largest credit unions offer free checking accounts, as opposed to 39 percent of banks. 30 percent of credit unions do not charge a fee to use another bank’s ATM, and those that do charge an average of $2.29, as opposed to banks’ average of $2.50. Credit unions’ most common NSF fee is $30, compared to banks’ $35. A credit union’s benefits also go back to its members.

Where credit unions fit into the fintech landscape

Managing online and mobile banking and the various disruptive payment methods available to businesses, consumers, and financial institutions is one of the priorities of many credit unions. Nonetheless, it’s often hard for them to keep up with the rapidly changing landscape. Without the resources—that, say, big banks have—to invest in constantly evolving platforms, credit unions often feel like they can’t adopt new technologies without taking on too much risk. 35 percent of credit union executives say they are risk-averse to investing in new technologies, and 71 percent say it’s a challenge to keep up with technology. What’s more, because such a big part of the credit union philosophy relies on low fees for members, credit unions are hesitant to adopt platforms that require them to pay big interchange fees. A 2015 study by the Filene Research Institute quotes credit union executives saying things like “I realize we’re sleeping with the enemy” and “We figure [paying Apple a piece of interchange] is better than getting a larger percentage of nothing” when asked about the potential for credit unions to adopt Apple Pay.

Nonetheless, credit unions do realize that serving their members requires adapting to the times—and many are doing so successfully. 120 credit unions—serving 10 million members—use CU Wallet, which partnered with MasterCard this year, to provide digital wallet services in their own credit union–branded mobile apps. 54 percent of credit unions currently offer online P2P capabilities, and 45 percent offer them on mobile. And in 2014, large credit unions had implemented more online banking apps than traditional banks had.

But the truth is that most credit unions are small and aren’t implementing as many apps as their large competitors. At least 40 percent of credit unions would have to collaborate in order to attain the scale of a major U.S. bank and partner with appropriate fintech firms. But the prospect of such large-scale collaboration is daunting to many credit unions, who find that reaching agreements on that level would be near-impossible. Still, 64 percent of credit unions are interested in pursuing and participating in the online payments sphere in order to keep up with competition (as opposed to 44 percent of banks who say the same thing).

Credit unions have won loyalty in large part due to their personalized service: Conveying the idea that they want to do what best serves their members. And increasingly, consumers want to be able to have their financial institutions and connect third-party applications to them, too.

Internally, credit unions largely subscribe to the notion of being “fast followers,” meaning that though they don’t have the R&D budgets that major banks do to explore payments options, they work to have frameworks in place that allow them to quickly adopt proven technologies. Their approach to Apple Pay is one demonstration of that in practice.