These days, financial institutions are under pressure. They must deliver cutting-edge innovations that address customers’ banking needs through a simple tap on a smartphone, and FIs that cannot offer fast-acting solutions risk falling behind the competition. For the heavily regulated credit union market, however, matching the innovations offered by rival banks or FinTechs can be a tall order — an order the market is nonetheless intent to fill.
As consumers have rapidly adopted — and continue to adopt — smartphone technology, both traditional banks and new financial technology firms are stepping up to use mobile-first options to address their financial issues. Banks and FinTechs tend to claim the lion’s share of attention for their innovations, making it easy to overlook the contributions credit unions are bringing to the financial services table.
Among other services, credit unions are offering virtual branch tools, mobile check deposit, online bill pay and P2P transfers. While these services are also offered by banks, credit unions are keeping pace with their competitors despite heavy regulations around how they can operate.
These regulations are perhaps one of the reasons credit unions sometimes get saddled with a reputation for being slower to innovate and adopt new technologies than bigger banks. It’s a perception the National Assn. of Federally-Insured Credit Unions (NAFCU) is working to undo by lobbying lawmakers and policymakers to ease certain credit union regulations — thus giving the organizations greater flexibility to innovate.
Some of the regulations credit unions face came out of the 2008 financial crisis, and the ensuing protocols imposed on the industry were implemented by the Dodd-Frank reforms. According to Carrie Hunt, executive vice president of NAFCU, these reforms put excessive restraints on credit unions’ ability to operate by creating an unnecessary burden on credit unions’ capital and lending requirements. Hunt recently spoke with PYMNTS about the state of the credit union market and commented on how easing regulations could help invite greater innovation from these institutions.
Hunt said credit unions have a history of looking for “unique ways” to provide modern tech solutions to their members, including innovations like shared branches and ATMs. She also pointed out credit unions were early adopters of mobile check deposit solutions.
“Overall, credit unions [have] always looked for unique solutions and [have] always looked for ways to serve their members,” Hunt said.
Some innovations allow credit unions to serve their members more efficiently. For example, the Coastal Federal Credit Union (CFCU) offers ATM video and audio teller services to its members that allow customers to ask credit union employees basic questions about accounts and loans. Branch-based employees are also able to address more complicated questions.
As consumers adopt new mobile technologies, credit unions are recognizing the changing needs of consumers and working to offer services for consumer-facing technologies. But Hunt also noted the size of an individual credit union can be a factor in determining how quickly those solutions can be implemented. For example, a larger credit union with more members will be more ready and willing to implement a $100,000 solution because it has a larger customer base to absorb the cost of implementation.
“The size of the institution does have some impact on that discussion, but it’s not absolute,” Hunt said. She added that even smaller players have demonstrated their drive to innovate where they can. “We have some CUs that are very small, have developed niche markets and are quick to innovate, but economies of scale come into play.”
While Banks and FinTechs might dominate the spotlight for innovation, Hunt is not concerned about a double standard — it comes with the credit union territory.
“Because banks don’t have membership restrictions, sometimes it’s easier for [them] to operate in that space and have an easier story to tell,” Hunt said. “CUs have always have had to fight for market share, and we’re continuing to fight for market share. It’s part of day-to-day competition.”
Ease Regulation, Open Up Innovation
Following the 2008 financial crisis, credit unions saw an uptick in activity as for-profit banks put tighter controls on lending while credit unions did not. And, following the crisis and the financial recovery, credit unions have seen continued growth.
That growth continued into last fiscal quarter when federally insured credit unions added 4.3 million members over the previous year. The National Credit Union Administration (NCUA), the government agency that regulates and monitors federally insured credit unions, reported membership to these institutions reached 108 million in Q1 2017.
But to open the credit union industry to more growth, Hunt says the market needs a break from regulations imposed by the Consumer Financial Protection Bureau (CFPB). Hunt described the agency, which was created as a result of Dodd-Frank regulations, as “well-intentioned” in its rules, but noted that holding credit unions to the same regulations as traditional banks does not make sense.
“Credit unions were sucked into a regulatory regime that wasn’t warranted given our business model,” she said.
For example, some restrictions can affect what credit unions can do with their capital. Because credit unions are traditionally “very conservatively run,” some capital constraints become unnecessary for the industry. Caps on business lending is another area where NAFCU members would like to see greater relief.
“There’s a limit on what percentage of [a credit union’s] portfolio can be used for a business lending commercial loan,” Hunt said. “We’re trying to change that.”
Lifting The SAR Burden
NAFCU leaders also recently urged members of Congress to raise the suspicious activity report (SAR) threshold above the current transaction level of $5,000. NAFCU leaders said these changes would reduce the number of SAR reports members have to file, freeing up resources to serve customers and instead invest in innovations.
Following the financial crisis, credit unions were under pressure to assure they were solvent. Now that the financial crisis has passed and recovery is underway, Hunt argued there is no point in holding credit unions to such strict standards.
“There was so much regulatory noise coming out of Dodd-Frank, and all these other issues that credit unions just had to just get through to comply with rules and regulations didn’t leave time to innovate,” Hunt said. “We’re coming out of that now and need to continue that trend.”
In Search Of An Even Playing Field
In order for credit unions to be able to continue their upward trend, Hunt would like to see more changes made at the regulatory level. But to do so would require lifting regulations and additional competition from new players like FinTechs. New regulations from the CFPB make that goal more challenging.
NAFCU does not want to do away with all financial regulations, but Hunt said the association supports more market-driven solutions to promote industry fairness.
“My hope is that credit unions can continue to grow and thrive,” Hunt said. “In order for that to happen, there has to be a positive regulatory regime.”
Holding credit unions to certain regulations is holding the market back from more effectively offering modern financial services, according to Hunt. For example, she pointed out that credit unions must disclose that they are federally insured. However, the length of this disclosure message does not fit neatly into a text message or a Twitter post, which means the institutions must look for other, less tech-savvy ways to comply with the rule.
“Regulation has to be flexible and recognize that changes to technology warrant changes to regulation,” Hunt said.
In the end, credit unions need to be held to comparable capital standards — and get the same breaks from rules and regulations — in order for these different types of institutions to compete on an even playing field.
“Credit unions need to be allowed to be credit unions,” Hunt said. “They need to have the time to innovate — and focus some of their resources — to adapt to [the] technology and emerging trends that are out there.”
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