Credit Unions

Credit Unions’ Bid To Bridge The Challenger Bank Perception-vs.-Reality Gap

In the battle against digital challenger banks, credit unions (CUs) may be facing a bit of a perception/reality gap — and losing market share as a result.

But in an interview with Karen Webster, Jeff Chambers, president at Lumin Digital, a PSCU company, said CUs can more than hold their own — if they leverage the assets they already have on hand.


Especially their brick-and-mortar footprints tied to the digital branch.

Right now, at least as found recently in the PYMNTS/PSCU collaboration, “Credit Union Innovation Playbook: Challenger Banks Edition,” CUs face some competitive pressures. 

As the survey of more than 4,000 CU members, CU leaders and FinTech executives showed, 41.4 percent believe challenger banks will be competitive threats in the coming years. That comes as roughly 36 percent of CU members say challenger banks offer easier-to-use, more convenient services.

Additionally, as many as two out of 10 CU members have said they would be interested in using banking services offered by large tech firms.

According to Chambers, part of the would-be interest from CU members may stem from the fact that challenger banks have been blanketing the airwaves — digital and otherwise — with advertising on a large scale.

He pointed out that while CUs have traditionally been regionally focused, firms like SoFi and Robinhood have spent significant time and money on marketing. “Their marketing budgets are deeper and bigger, and they are national,” said Chambers of these and other digitally-focused firms.

In the days before the coronavirus (remember then?), you could turn on a basketball game and see slickly produced ads for challenger banks, promising to deliver a range of financial services through the convenient small screen of a smartphone.

But as Chambers stated, tech-driven service and product offerings aside, “do I think they’re more consumer-oriented than a credit union? I really don’t. A credit union’s primary purpose and objective is to improve the financial health of its members.”

However, for a firm like Betterment or Robinhood, the objective is to raise the valuation of their company for shareholders.

And yet, noted Chambers, challenger banks have made progress against CUs, with their formidable competitive weapon: the ability to spend (and even lose) money on new offerings and to tap investor funds  as needed.

That ability has allowed challenger banks and FinTechs to grow their market share in personal lending by 760 percent over the past five years, while CUs have seen their total market share slip 30 percent in the space over the same period.

“Whether it’s messaging or it’s true innovation, these challenger banks are making inroads in building a consumer base,” Chambers told Webster.

To close the gap, credit unions are taking deeper looks at their digital banking offerings across contact centers and branch networks (which, in turn, has generated high demand for Lumin’s own digital banking solutions).

But drilling down into the differences between the digital presence of CUs and challenger banks, said Chambers, the majority of CUs are using off-the-shelf banking platforms that have been around for decades.

Conversely, challenger banks’ data-driven, in-house-built, advanced-technology-underpinned platforms can, in effect, predict what consumers will want.

“If you look at the credit unions, it’s more transactional,” stated Chambers. “CUs acquire an account opening platform. They acquire a lending product, and then a digital banking platform. These platforms don’t always work together, so they are just not as predictive in nature.”

Leveraging CU Assets

CUs, however, have assets they can leverage that challenger banks don’t. 

Chief among those assets: trust that has built up over generations. But, as Chambers pointed out, that trust will have to be earned with younger consumers — particularly in the Generation Z and millennial cohorts, who are strongly inclined to use digital offerings.

Against that backdrop, the CUs have their work cut out for them. Chambers said that credit unions have a great opportunity in educating younger audiences about their value, as studies have shown that 87 percent of millennials could not accurately describe what credit unions are and what they do.

“If you want to keep the trust, you’ve got to make sure you’re talking to the right audiences, and that your membership base is going to be there for a while,” he said.

To put it simply, it’s all about interactions — branch interactions, phone interactions and digital interactions, he noted.

And even as so much of financial services moves online, credit unions have added arrows in the competitive quiver: maturity and stability coupled with the branch network.

“Evolving a branch network to where it interacts with the digital channel — that’s going to be a huge benefit to credit unions,” Chambers predicted.  

CUs are making progress in setting up mobile services that help members set up reservations to come into branches and meet with personal bankers, cementing loyalty and trust.

And while CUs might think twice about expanding their physical footprints, Chambers said the branch network will be a “transitory benefit that they can leverage until everybody is doing 100 percent digital banking. But I don’t know if that’s going to be in 20 years or in 50 years.”

Looking ahead, he said it’s unlikely that we’ll see collaboration between the challenger banks and the credit unions. That’s due chiefly due to their different focal points, respectively, of investor returns and member service.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.