COVID-19 has hit the U.S. economy hard, but few areas were hit harder than small businesses. Roughly 90 percent of them are dubbed “microbusinesses,” which have fewer than 10 employees (and in many cases, just one). In spite of their small size, they play a critical role in both their local and national economies. As PSCU President and CEO Chuck Fagan told Karen Webster in a recent conversation, that’s why credit unions (CUs) are working hard to help microbusinesses survive the pandemic.
“Microbusinesses are the strength of the U.S. economy when everything is really clicking — which it hasn’t been for the last several months,” he said. “On a short-term basis, we’ve seen a surge among nearly all of our credit unions to get something into place for them. Longer-term, it is looking increasingly [like] a viable segment of a credit union’s business, in which we are now seeing really active growth efforts.”
Fagan noted that credit unions have become uniquely positioned during the pandemic to offer products that will help microbusinesses on the road to recovery. And in doing so, CUs can help solidify their own paths forward in an environment that remains incredibly uncertain.
Making Microbusinesses Work Better
As Fagan pointed out, the U.S. Small Business Administration’s Paycheck Protection Program (PPP) was very much a catalyzing event that ignited credit unions’ expanding relationships with microbusinesses. Credit unions received so many applications for PPP loans that they had to accelerate upgrades to services offered to microbusinesses.
But the rush to handle PPP applications also made many CUs realize that serving microbusinesses was a line they wanted to develop permanently. CUs realized they already have a lot of tools at their disposal that — with some slight modifications — could help such businesses, Fagan said.
Microbusinesses have to pay bills, and they want to set up card acceptance programs and mobile and digital-wallet platforms for payments. Fagan noted that many CUs have the tools and technologies to put all of those capabilities into the hands of those small businesses. Moreover, credit unions can help microbusinesses set up things like rewards and loyalty offerings.
“When we work with our [credit unions serving microbusiness clients] now, we're even consulting with some to look at traditional rewards or loyalty aspects tied to card products that have been pointed at travel and entertainment — and [to] think about how to evolve with those segments,” Fagan said. “So, we are seeing a shift to more everyday utilization — grocery stores and the like — but we are also seeing an emphasis on the microbusiness or small business. If credit unions can manage both sides of that, that is a winning equation. They can issue cards tied to local merchants, [and] connect some rewards to loyalty toward the local market.”
That can bring more customers to local merchants by upping a transaction’s appeal while making a credit union’s card “top of wallet” for consumers shopping locally.
That’s critical for CUs taking on national banks that are advertising their nearly ubiquitous reach. Being the card with the most rewards — particularly when consumers are shopping near home — is a benefit that big banks are unlikely to offer.
“I think it's a great strategy for credit unions as they compete with the online banks,” Fagan said. He added that for larger financial institutions (FIs), “a very powerful path is to play to those microbusinesses and push consumers to them.” That’s a competitive advantage they’ll need as CUs and microbusinesses face a future that remains very uncertain.
The Bumpy Road Ahead
While Fagan believes that most credit unions are likely “going to be okay” for the remainder of 2020, the picture for 2021 remains much hazier.
Yes, consumers are saving more, so CUs have a lot of deposits on hand. But Americans aren’t borrowing nearly as much — and even when they do, it’s at very low interest rates.
Unfortunately, Fagan said that means we’re likely to see credit union consolidations and closures. He expects the number of U.S. CUs to dip below 5,000 late this year or early next year.
“That is very dramatic,” he stated. “In the 32 years that I've been in this industry, it's gone from about 15,000 to below 5,000 — and some industry experts are forecasting as low as 2,500 or 3,000.”
That’s a lot of lost credit unions, and a major loss for the communities they serve. But as Fagan noted, the past few months have demonstrated that CUs can think innovatively and act quickly as the need arises – and he expects much more such innovation going forward.