Top credit union trends: Practical guidance for navigating 2024

Credit unions are uniquely positioned in today’s marketplace. With the ability to focus on the member experience and provide higher interest rates, credit unions can continue providing value despite ongoing uncertainty in the macroenvironment. While this impacts lower net interest margins, it fuels competition against traditional banks and highlights the differing profit pressures that credit unions face. 

With higher interest rates continuing to add value—partially thanks to the tax-exempt status of credit unions—some reckoning is needed as credit union members begin to begrudge the lackluster digital experience available with traditional banks. There’s also a shift in the reality of who credit unions believe they’re competing against versus who competitors truly are in the market.  

Over the next year, credit unions’ strategy can evolve to provide a member and employee experience of the future—not yesterday—and provide unique values that stand out against community banks, mid-market banks, national players, and fintechs while dealing head-on with the issues impacting them. 

Deposit gathering and larger-scale shifts

As credit unions led the charge to offer higher rates, banks were ultimately forced to follow—with credit unions and national banks being seen as safer resources while community and regional banks overcome lingering headwinds from 2023.  

There’s a heightened focus on the potential consequences of rate increases on banks' operational and strategic decisions—and on their financial stability—as they face fragmentation and competition. The Federal Reserve will continue to adjust rates—either up or gradually down—with credit unions needing to adapt to this ever-evolving environment. For credit unions, this presents an opportunity to continue offering high deposit rates and more expansive member benefits, further differentiating themselves from banks. 

With the increased cost of funds consuming as much as 50% of banks’ total expenses, credit unions are well positioned to support deposits and lending. The current focus on money that is chasing rates may prove to be an unsustainable foundation for long-term banking stability. What’s more, the decline in loan demand will continue to challenge overall profitability metrics for many banks. 

This provides a clear opportunity for credit unions. Having a tax-exempt status and fewer commitments like dividends opens the door to maximize operational efficiency by making long-term investments that traditional banks are unable to make in this environment. While banking peers are getting stuck in a holding pattern, credit unions can—and should—be maximizing the ability to issue indirect auto loans and other solutions.  

Given all of this, credit unions should look at the industry as it stands today; fintechs and middle market banks are starting to take their piece of the pie in various ways. Understanding the benefit credit unions have to maximize on the tight borrowing market for banks will provide greater value during this year and into 2025.  

West Monroe’s perspective

While banks must focus not only on buying deposits through higher-priced deposit rates or brokered deposit but also proactively diversifying revenue streams, credit unions should take a refreshed 360-degree view of the landscape. They must determine where they are ahead or behind in terms of member experience and segments. In the year of cost cutting and reorgs at even the biggest banks, this also means turning attention back to effectiveness—in addition to efficiency.  

This includes ensuring a full product suite with price and experience-competitive features, coaching relationship managers differently, leveraging data to look for silent attrition and shifts in transactional activity they can proactively address, and deepening digital capabilities that empower transactions (e.g. API-banking, automated bill pay setup, digital payments functionality linked to cash flow reporting). 

This can also mean identifying members who joined for high-yield savings and CD rates and engaging them further, turning them into larger-scale members that keep their funds long term. Self-service tools for payments and other day-to-day account management will be put to the test by credit union members this year as more compare their experiences across vendors, partners, and/or providers.  

Strategies will have to encompass both short-term adaptations to the current environment and long-term planning to navigate economic shifts and increasing market share competition. Now more than ever, financial institutions must decide who they are and how they’ll get where they want to be.  

Heightened need for digital in consumer lending

The mandate for strong customer experiences from a self-service and digital platform perspective has arrived in financial services, requiring investments in bank and credit union member engagement projects—even with a slowdown of deposits. 

The challenge for financial services institutions—especially the community and regional banking segment—is that outdated lending operating models lack the flexibility and tools to meet changing customer demands quickly and easily. This is especially true for credit unions. As the largest national banks, fintechs, big-tech companies and even retail companies cater to consumer lending demands, loyal customers may be lured away—thus creating deposit pressures for unions. With lower lending volume across the board, these banks and new players are starting to intercept what demand remains. Credit unions and both community and regional banks are continuing to shift to meet market needs but are experiencing headwinds in an already limited volume market.  

Consumer lending and money management are at a clear inflection point, moving from a traditional organization focus to member centricity as they increasingly expect easy and fast onboarding, hyper-personalization, real-time decision-making, and data-driven underwriting across credit needs and offerings. This shift poses existential questions for legacy consumer lending and overall banking models. 

With volume so low, it’s an important time for credit unions to proactively invest in their consumer lending businesses to retain and even expand market share. This means seizing this moment to rethink overall lending strategies and enhancing the digital experience for members. The credit unions that act now will be advantageously positioned when the market turns: Members will want to stay even when rates balance out elsewhere. 

West Monroe’s perspective

Despite the many challenges financial institutions are facing today, there’s also immense opportunity. The organizations that can apply the right digital tools, embrace customer centricity, and develop proper data governance practices will see higher retention and acquisition of members, increase their competitiveness with fintechs and larger financial institutions, expand their revenue potential, and enhance their risk management. By advancing their capabilities through an up-to-date operating model, credit unions will be able to provide a better customer experience and return on investment, which will help to maintain a positive reputation in the market and improve member loyalty and retention.

Credit union rates for mortgages, car loans, and other offerings are likely the best compared to competitors, creating a major opportunity to retain membership and deposits if the rates are similar or higher and there’s a solid overall digital experience. If the credit union has their information, a seamless member experience, and can process lending and other services quickly, the relationship becomes stickier. This is often how banks retain their share: quick service and self-service that sticks.

As part of this opportunity, there’s room for credit unions to turn indirect members into engaged members. Much of credit union revenue lies in indirect auto-lending, with members making their payments and moving along. If credit unions can add in additional, meaningful touch points and highlight their value add, they can shift these members into sticky relationships through which they can build.

Organizations must begin developing digital-first strategies that enhance their member-facing lending and banking capabilities. This, however, cannot be achieved successfully without also transforming their internal operations to become nimbler, more evolving organizations.

Small business segmentation

A constellation of problems commonly occurs throughout the management of this segment, including the development of product offerings that aren’t purpose-built or utilize disconnected and siloed enabling technologies. How can credit unions better serve this segment?

With an incredibly tight lending market, small businesses continue to have credit and banking needs. 

Small business owners tend to be sticky, reliable customers who look to banks for proactive advice and partnership as they steer their business’s future—both via traditional white-glove service and increasingly through the digital channels we all access in our personal lives. 

Small business banking is ripe for disruption. Frequent shifts in accountability for the segment, overly complex operating models and processes, and products and experiences not specifically designed for emerging owners all come to a head in reduced profitability for regional banks and unmet needs for customers. But the sands are shifting, and generational transitions coupled with digitization of bank experiences are colliding to bring the future of small business banking into sharper focus.  

This is where credit unions have immense potential to shine organically. Most big banks service small business customers as a mass market consumer; credit unions can provide tailored support for small businesses that traditional banks would consider micro-businesses or community banking businesses. This subset has needs beyond lending, for which credit unions can provide high quality support. 

West Monroe’s perspective

Credit unions must take a step back and revise their strategy for serving the small business segment. Big banks and fintechs have been swarming the market, crowding it with not-quite-there-yet attempts. To get your organization to parity with those already winning, embrace a “best of both” operating model that combines the most suitable elements of retail and commercial banking to provide a premier, efficient customer experience fit for small business owners.  

This includes the commercial elements of digital white-glove service, industry expertise, specific product offerings to meet a variety of needs, and cloud-integrated software to manage vendors and other elements to the table—combined with a digital, frictionless, self-service ecosystem as well as automated lending and risk management—will pair small business owners’ greatest needs with the most efficient path toward meeting those needs. Credit unions are especially equipped to serve commercial business lines related to their charter; whether it’s as a trade or retail focus, there’s prime runway for unions to lean into their specific charter and member audience.  

Credit unions have huge potential here given the personal touch for members. In addition to being a trusted financial partner, they’re able to offer additional member benefits like reservable office or meeting space, networking with other members who are small business owners and/or small business-specific members, and access to relationship managers who share advice for navigating financial demands. 

Credit unions are uniquely positioned to provide the best of in-person and physical value-adds and simple, efficient digital self-service in addition to more in-depth financial support. This hinges on their ability to invest in and adopt more unified operating systems from the digital standpoint.  

Working toward this best-of operating model will get you to the table. But differentiating means going a step further to truly demonstrate how well you understand business owners and that you can meet their needs better than anyone else. 

Actions that credit unions can take now

Grow cost-efficient deposits

Credit unions are leading the charge on growing cost-efficient deposits and have room to continue to evolve and retain the hot deposits they’ve received amid shifting rates at banks. While credit unions have attracted a significant amount of deposits, few have effective strategies to keep the funds as the market shifts. Over time when rates go down, deposits will be out of balance from a lending perspective; credit unions should be proactive to shift “hot money” to relationship-building deposits, building the member experience benefits to continue to stand out. 

This could include an expansion of transactional services like debit cards and payment tools or more robust bill pay and transaction tracking to aid in this transition from hot money to more concentrated member funds. Part of this will also include managing product pricing more dynamically; there will need to be more liquidity program management. Weaving in some analysis and monitoring would support member trends: how long people have been at which rate, what is the average rate set, where are the outliers, and how can unions provide additional value related to these trends.

Ensure sustainable efficiency

Credit unions need to unbundle legacy technology and products, transitioning from human-powered interactions to digitally enabled channels. Part of this will include optimizing middle-and back-office functions, processes, and technologies. The time has come to think about a real tech vision; while there is a transactional core, shifting to a hybrid in-person and online banking platform and implementing smarter CRM are among the best next steps with credit union technology. With regional and middle-market banks offering strong branch service and digital self-service, credit unions need to consider them as a true peer and competitor. While the value proposition and relationship building are different by trade, credit union leaders must appreciate the level of hybrid service banks today are providing and where the gaps exist. 

This doesn’t necessarily mean a massive technology overhaul, but it does mean looking at what can be differentiated and scaled in a reasonable way—and then committing to doing so. Member expectations are rising, and future generations of members will be digital natives; not offering at least foundational enhancements will hinder momentum. Because credit unions are tax-advantaged, leaders should be investing more of this line item toward capital expenditures for member experience long term instead of primarily near-term operating expenses. If you can begin taking the steps to optimize capital distribution more effectively, sustainable changes and efficiencies can be acted on.  

Evaluate today’s table stakes

• There’s a clear need for data in credit unions: It will be critical to implement defined domains for data to provide better profiles of members to inform a more holistic relationship (especially as regulatory requirements shift), transactional activity to enhance servicing within and across channels, and product-specific features and utilization.
• Review your tech stack: Are you sufficiently leveraging technology to make processes more automated or streamlined (with a side benefit of cost efficiency)? The key element here is reducing friction in the member and employee experience. It’s beyond launching an app; it implies an investment in self-service and digital customer service for members that goes beyond traditional branch experience.
• Determine how to differentiate and consider segment-specific opportunities: Members can benefit from services beyond checking and loans. Look at what other financial institutions and consider who truly is the credit union’s competition in today’s landscape.
• Evaluate how banks and emerging financial service providers around you and online are evolving; this type of service and expectation will trickle down through members and prospects as part of what they expect from the credit union.
• Understand the landscape and define key value adds: This includes renovated member centers and bank services that balance strong digital with strong in-person offerings. This will unlock more holistic member relationships; understanding if members are only tapping into lending but has potential for brokerage or CD/checking expansion, credit unions could expand their share of the wallet quickly. Because credit unions aren’t getting fee income, they could consider investing in this type of offering/value add through inorganic growth or a shift toward fee-driven offerings. 

Looking ahead

Consumer lending growth is upon us; much of the credit union traffic is coming from borrowers compared to banks’ traffic today. There’s an extreme amount of demand, with many potential members not even considering credit unions as an option. Credit unions will miss out on the consumer lending upside if they take two weeks to approve a loan compared to banks that can automatically approve someone. It’ll be important for credit unions to take a proactive approach to act swiftly—potentially automating certain approvals—to remain competitive against banks in the market. 

Credit unions’ member engagement also could be up-leveled, with fee-based income and auxiliary services to build stickiness with existing members (coworking space in a branch, for example).  Understand that credit unions’ traditional evaluation of a high-quality member experience doesn’t quite match what members look for in a high-quality member experience today. Alleviating friction in the member digital experience and promoting the in-person experience will help position a high-quality hybrid value. It won’t suffice to tell members and prospects that the credit union is better than banks; it will be necessary to define what is changing, how their experience is enhanced, and what the additional values of the credit union are or will be.  

The implications of a lagging technology stack and gap in how members will expect the experience to be versus how it is, and efficiency (not from cost but ease of doing business) can become great should credit unions maintain the status quo.  

Conclusion

Credit unions continue to provide a different experience for consumers. How they continue to provide this experience—and how they evolve to embrace change and make investments for the long term—will determine how the next decade-plus will look. Understanding the true competitive landscape—what percentage of consumers’ wallets is with credit unions and other financial institutions—and where opportunities for differentiation lie will also be critical in both near-term and medium-term strategic planning.  

The potential digital technology has for union performance—specifically around efficiency ratio—has never been more promising. The new environment only amplifies the need for credit unions to restructure and reorganize to leverage technology as the backbone of their organizations, not just its features. Interest rates and economic uncertainty will position credit unions well with their ability to maintain higher rates. Keeping a finger on the pulse as rates shift and the environment becomes more stable will help credit unions create sustainable changes.  

Credit unions have a tradition of providing a specific member service. Leaning into this uniqueness and minimizing functional friction through streamlined processes and digital upgrades will help credit unions stand out and form stickier relationships.