Credit Unions Size Up Challenger Banks

The pandemic has been a moment of truth, a reckoning of sorts, for businesses that were not on firm digital footing when 2020 began. In PYMNTS’ May Credit Union Innovation Playbook: Challenger Banks edition, done in collaboration with PSCU, we examine the credit union (CU) sector in the time of COVID-19, with an eye especially on new digital-only banking rivals.

“Not all CUs are well-prepared for the digital transformations that stay-at-home orders have mandated,” the new Tracker states.

“Credit unions that cannot provide the services their members need in an increasingly digital-centric ecosystem risk losing them to competitors that can,” the report states. Analyzing over 4,000 U.S. consumers’, CU leaders’ and FinTech executives’ perceptions of challenger banks, the latest report gauges the scale of the competitive threat to CUs, and even to other FinTechs, posed by digital-first and digital-only challenger banks in a post-pandemic world.

Challengers As Competitors

A run through the latest numbers paints the competitive picture. Firstly, traditional financial institutions (FIs) and CUs should know that about 20 percent of their current client base is fascinated enough with digital-only banks to give them a try.

“Challenger banks may not be the primary means through which consumers access banking services, but many consumers see challenger banks’ digital services as appealing alternatives to those offered by traditional FIs, according to the May Tracker. “Our research shows that 23.4 percent of all consumers are at least ‘somewhat’ interested in using challenger banks. This share is even higher among non-CU members, with 27.3 percent saying they would be interested in using them.”

“Credit union members are not as interested in challenger banks as other consumers, but 19.4 percent still say they would be at least ‘somewhat’ interested in using their services. This goes to show that even among CU members, the idea of digital-first or digital-only banking solutions can be an interesting proposition — enough that a significant share would even consider leaving their CUs.”

Part of the problem is in definitions. “Many CU executives appear to be ill-informed about which types of institutions these challenger banks might be,” the new research finds. “They are unconcerned about the threat posed by PayPal, large retailers and large technology firms, for example, even though many of their organizations’ members express a great deal of interest in banking with them. PayPal is the most notable example. Our research shows that 30.9 percent of CU members cite PayPal as a potential challenger bank that they would be most interested in using, yet only 7 percent of CU executives consider PayPal to be a competitive threat.”

The CU Innovation Moment

When asked, credit union and FinTech executives fear that challenger banks are faster off the mark with innovative products, and better at creating online experiences for consumers. But CUs are customer-centricity experts, and the new study find that other credit unions are more of a competitive threat at this moment than challenger banks.

But this moment is passing fast.

“Our research shows that 58.5 percent of CU executives and 66.7 percent of FinTech executives believe challenger banks could offer their members better overall app and member experience,” according to the May Credit Union Innovation Playbook: Challenger Banks edition, adding that “56.1 percent of the former and 55.6 percent of the latter are concerned that challenger banks would be able to provide better products.”