CU PaymentsOutlook: How active member relationships drive long-term growth
WHITE PAPER
Executive summary Research demography An evolving financial landscape Fintechs are succeeding on credit unions’ home turf Payments are the center of the primary financial relationship 3 keys to gaining active primary financial relationships 1 2 3 What credit unions need to do now 1 2 Co-op is the path to payments and PFR
Growth-oriented credit unions face a daunting set of challenges in expanding the primary financial relationships they have with their current members, as well as reaching new financial consumers. The global COVID-19 pandemic and changing consumer expectations have combined to accelerate the move toward digital banking primacy, reducing the need for in-person, face-to-face interactions in a physical branch. At the same time, new disruptive and agile competitors including Fintech companies, Big Banks, and online-only banks are eating into credit unions’ traditional market share, with growing success. To better understand the current marketplace, Co-op Solutions commissioned global consulting firm EY to survey 3,000 US financial consumers, including both current and prospective credit union members, to determine how their financial behaviors, preferences, challenges and activities have changed. The research confirms that consumer financial behaviors and needs are indeed changing at a rapid pace. To address these evolving expectations, credit unions must develop a comprehensive strategy to address the member experience by employing “needs-based segmentation” to better serve their members. In addition, credit unions must evolve to offer their members comprehensive, “lifestyle” financial products and services, with a particular emphasis on “active” solutions over traditional, “passive” offerings like deposit accounts and eventbased loans. Payments and digital solutions are the key to both meeting the needs of today’s members and establishing or strengthening primary financial relationships (PFR). Lastly, credit unions should focus on providing lifestyle banking services, working to regain the primary financial relationship, and accelerating digital capabilities to serve their consumer base. A lot of work can be done by credit unions to prepare for future member and prospect demands, by “future proofing” their economic and service models. With the support of strategic industry partners with the expertise and ability to provide consultative advice and the right solution set, credit unions will be well prepared to create new business models in support of achieving the primary financial relationship with members.
Executive Summary
Inside
Research demography
An evolving financial landscape
Fintechs are succeeding on credit unions’ home turf
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Payments are the center of the primary financial relationship
3 keys to gaining active primary financial relationships
What credit unions need to do now
Co-op is the path to payments and PFR
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A market research survey of 3,000 credit union members and prospects across the US was conducted to determine their preferred banking behaviors. Only statistically significant measures were used to derive insights; any inadequate responses were removed. The research framework is based on the importance of a holistic approach towards member and prospect experience through the “needs-based segmentation.” 2,000 current credit union members and 1,000 prospects were surveyed across all regions of the US. The survey sample encompassed a diverse mix of demographic groups covering multiple generations, income levels and asset sizes, with a concentration of roughly two-thirds in the “mass market” wealth category.
WHITE PAPER — CU PAYMENTSOUTLOOK
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As the CU PaymentsOutlook research shows, financial consumer expectations are evolving at a dizzying pace, one that has only accelerated during the pandemic period. Digital channels are rapidly becoming the preferred method of engagement for consumers as 88% of respondents are digitally engaged, 73% interact online or through mobile, and nearly one-third (32%) visit a branch less than once a month. COVID has had a significant impact on household finances across generations, with the most severe effects being felt by mid-career workers between 35-54 years of age. As consumers changed their habits to reflect this new reality, they began relying more on digital-first brands across all sectors, from online shopping and grocery, to streaming entertainment and financial services.
Consumer interactions with financial institutions
respondents are digitally engaged
interact online or through mobile
visit a branch less often than monthly
88%
73%
32%
Interestingly, as noted by Jim Marous of The Financial Brand in a recent webinar, the pandemic crisis has forced even late adopter generations like Boomers to give newer, digital and remote forms of engagement a try with their favorite brands and service providers. It turns out they like it. These older cohorts have shown the fastest growth in digital engagement over the past year. As financial consumers’ expectations evolve, their primary financial relationships are becoming increasingly fragmented, with Fintechs emerging as credit unions’ biggest threat. Among the sample surveyed (of which two thirds are current credit union members), 30% of respondents reported having their PFR with a Fintech firm, and 30% with a credit union. The remainder of the sample was split among national banks (16%), regional banks (16%) and wealth firms (8%).
As this “new normal” takes hold post-pandemic, well-established Fintech names like PayPal, Ally and Chime are picking up market share and are now in the vanguard of the nation’s most trusted financial brands. In one striking example, the CU PaymentsOutlook research found that PayPal ranked as the most trusted brand for 25% of credit union members, while credit unions landed in second place among their own members at 21%. Fintechs and other financial brands that are able to demonstrate that they care about consumers’ needs, and can help them reach their financial goals, have rapidly gained trust with both members and prospects.
The research identified the top 3 trust drivers as 1) data protection and privacy, 2) respect, and 3) caring about needs. The CU PaymentsOutlook research demonstrates that the very definition of “primary financial relationship” has changed. Today, financial consumers are engaging and interacting more with institutions that place a strong focus on providing efficient, convenient transactional services. Whereas traditional banking services like deposit accounts (including savings, checking, money market accounts and certificates of deposit), and single-event loan products (e.g., auto loans, personal loans and mortgages) are largely passive and static in nature, digital-enabled services like payments, online and mobile banking encourage regular, highfrequency transactional activity and foster an active, engaged and synergistic relationship between the consumer and their FI.
PayPal ranked as the most trusted brand for 25% of credit union members, while credit unions landed in second place among their own members at 21%
Payments have evolved to become the most important touchpoints between members and their PFR, because they facilitate everyday financial tasks and thus serve as the center of their financial lives. Members use their debit cards for everyday purchases, whether online or at the point-of sale; they use credit cards for big-ticket purchases and for earning rewards; they rely on scheduled bill pay for staying current on their monthly bills and expenses; and they enjoy the convenience of P2P transfers for sending money to family, friends, and small, local businesses. For these reasons, payments have achieved a role of prominence at the epicenter of the member relationship ecosystem, a place previously held by traditional banking products like share savings, checking accounts and direct deposit of payroll.
7 out of 10 respondents owned at least 1 payment product, and 50% would approach their PFR provider as the first place to shop for new digital payment products.
This new payment ecosystem also provides credit unions with a wealth of transactional data on their members, which, when accessed efficiently and analyzed thoroughly, provide deeper insights than virtually any other resource at the institution’s disposal. This data allows credit unions to fully understand their members’ behaviors, challenges and preferences, enabling them to design service-focused offerings like financial wellness tools that are micro-tailored to the specific needs and desires of every member segment, right down to the individual. Unfortunately, according to research from Filene, just 20% of current members consider their credit union to hold their PFR. The CU PaymentsOutlook research delves into the reasons behind this, finding that 7 out of 10 respondents owned at least one payment product, and 50% would approach their PFR provider as the first place to shop for new digital payment products. Yet, among current credit union members, just 34% have contactless payments with their credit union, while 45% have it with a Fintech provider. Similarly, 31% of members use P2P payments with their credit union versus 44% with a Fintech provider, and 29% use their credit union’s mobile wallet as compared with 43% that use a Fintech’s wallet service.
With challenge comes opportunity. Credit unions have several strong incumbent advantages over their upstart competitors, including strong reputations for providing exceptional service, offering trusted advice and ensuring the highest levels of data security. Clearly, credit unions are winning the personal side of the equation, while Fintechs are winning the digital side. The time has come for credit unions to flip the script. To achieve PFR status with their existing members and prospects, credit unions should pursue a 3-pronged strategy: 1. Lifestyle enablement Traditional banking presumes increased financial needs and complexity over time. However, this approach no longer meets members’ needs, as evidenced by the fact that less than 50% of young people own the financial products they need to be fully prepared for a life event, and that on average, consumers own five banking relationships across different financial institutions. To combat this, credit unions should pursue a multidimensional segmentation strategy that considers both traditional, demographic-based market segmentation (e.g., gender, age, wealth tier, marital status, geography), coupled with a needs-based segmentation that incorporates life events, lifestyles and a mix of solutions that address both.
Some leading Fintechs have already achieved marketleading growth through this approach. Chime has effectively broken down its segmentation strategy to a “customer of one.” They have accomplished this by incorporating and analyzing non-standard, alternative data points to develop a fuller, more complex picture of their target customer. To catch up, credit unions must evolve from a productcentric to member-centric design approach and begin offering personalized lifestyle services to their members. According to the CU PaymentsOutlook research, by adjusting their product mix to offer desirable lifestyle banking features, credit unions can retain, capture and recapture PFRs across a broad swath of current and prospective members by offering a mix of “high valued” and “standard” features. To this end, the CU PaymentsOutlook research identified eight “basic” feature offerings that financial institutions provide in the market, including in-person access to a banker or financial planner, ID theft and fraud detection and protection, and offering relevant products, content and insights at the right time. The research also identified 10 “most impactful” features for credit union members and prospects that will help them establish relationship primacy. These enhanced features included control over personal data, virtual access to a financial planner, relationship pricing discounts, up to $10,000 in instant funding and the ability to receive paychecks two days early.
Executive summary Research demography An evolving financial landscape Fintechs are succeeding on credit unions’ home turf Payments are the center of the primary financial relationship 3 keys to gaining active primary financial relationships 1 2 3 What credit unions need to do now 1 2 CO-OP is the path to payments and PFR
By offering the highest valued product feature for free, or by offering both a most impactful product feature and a basic feature for free, the research demonstrates that the following results can be achieved across various membership segments: • For credit union members considering the credit union their PFR: Upside potential to grow that relationship by 23.5%. • For members who consider the Fintech as their PFR, credit unions can reclaim pfR status: Upside potential to grow the relationship by 27.6%. • For members who favor banks, credit unions could capture a greater share of the relationship if the offered features meet their needs: Upside potential to grow the relationship by 26.9%. • Credit unions can acquire new relationships from Fintech users through personalization: Upside potential to capture new relationships by 30.5%. If, however, credit unions don’t invest in lifestyle banking products and services, they will face declining market share—a reduction from 23% market share of current members to just 5%, and a decline from 12% to 2% of prospects.
2. Pathway to PFR As discussed above, consumers have bifurcated their PFRs between a primary savings institution (read: “passive”) and a primary transactional interface (read: “active”). Whereas credit unions are in a strong position with regard to passive relationships (ranked number one for loans, savings and checking in the CU PaymentsOutlook research), Fintechs have achieved the top slot in active relationships (and credit unions fall to #3). Payment products like contactless, P2P and mobile wallets drive more engagement, and form the heart of these active, transactional relationships. The reasons are that users of payment products stay in the offering firm’s ecosystem, engage with the provider’s other products and services and actively use social media to share their stories and experiences. Members should not be expected to have to leave the credit union’s ecosystem to meet all their financial needs, including payments, mortgage and loan applications, wealth advisory services, insurance and personal financial management, to name a few. To maintain PFR status, the credit union must establish itself as the hub of their members’ entire financial lives. This is evidenced by the percentage of members in the research, across a range of needs-based segments, that consider their credit union as their PFR provider. Although credit unions ranked highly in certain demographic segments such as Gen Z and Baby Boomers, Fintechs have become popular PFR across all age groups (particularly 18-44). Banks also figured strongly into the mix, as most prospects across all age groups consider a local or national bank as their PFR. Among credit union members, credit unions are still a popular choice as PFR, especially for people who are in financial trouble or ready to retire; however, Fintechs lead among several segments including career starters, young family, and those looking to get ahead. Credit union prospects mainly consider local and national banks and Fintechs as their PFR. Moreover, Fintechs are overwhelmingly consumers’ most popular PFR choice to meet their life event, lifestyle and solution mix needs. Today’s credit unions don’t only compete against other FIs, but also with well-respected Big Tech firms like Amazon, Netflix and Apple. Consumers expect and demand the same convenient, 24/7 experience they receive from these household names, and they have little patience to wait for their financial institutions to catch up. 3. Digital ecosystem acceleration Fintechs have risen to relationship primacy over the past few years largely through the deployment of innovative digital technology and solutions. The pathway to primacy for credit unions will require accelerating their investment in digital capabilities and bridging the gap between their digital and non-digital channels. The research demonstrates that if credit unions invest in lifestyle banking product offerings, they can gain significant market share of both members (+16%) and prospects (+13%) versus the status quo. Conversely, their current lead with members can be lost if they don’t invest at all. Data protection, security and rewards are among the most valuable features for credit union members. Digital interactions are taking lead over non-digital channels, yet non-digital channels have not entirely gone away. The credit union of tomorrow will have personal relationships at the center, with compelling digital-branch services and products and strong data security and protection protocols built in. Credit unions already hold strong incumbent advantages: they are their members’ most highly valued providers, offering outstanding service, trusted advice and secure banking solutions. By introducing market-leading digital technology and services, credit unions are well-positioned to offer the broader marketplace a value proposition that would serve as a compelling alternative to the digital-only brands.
CO-OP is the path to payments and PFR
In order to re-attain primary financial relationship status with the majority of their members, as well as attract new relationships, credit unions must leverage their in-person service supremacy, building on the personal touch that has been the hallmark of the movement since the beginning, while evolving rapidly to offer superior digital services, especially in payments. The end result of this strategy will be to capture more active, engaged relationships, positioning credit unions at the center of their members’ financial lives. Business as usual will not get the job done in meeting the expectations of today’s financial consumers. Credit unions should begin by leveraging the vast troves of data they already have to create dynamic, needs-based segmentation models. Through this approach, credit unions will be able to effectively anticipate member needs, and to accurately align the value proposition of their product set with those needs. Through needs-based segmentation, credit unions will be well positioned to attack niche markets by introducing new, convenient features to wrap around existing products and services. This would enable cooperatives to compete with the largest, most trusted digital brands inside and outside of financial services, like Amazon, Google, PayPal, Chime and Apple. However, given the fact that most credit unions have limited resources and budgets, it’s clear that credit unions can’t achieve this transformation on their own. The key lies in envisioning a new partnership model, which may include collaborating with different solutions providers to offer a range of desired services to members, based on the specific life stage and lifestyle needs of particular segments.
The traditional product clustering approach does not consider the market’s diversity of needs and lifestyles, forcing consumers to seek out multiple financial services providers to meet their complex set of preferences. In contrast, a needs-based segmentation approach reveals product depth and complexity across both lifestyles and life events. In fact, our research unearthed five distinct micro clusters that cut across both of these factors. We included the “Wanderlust Professional” micro cluster, which captures an individual just starting out in their career, who is open to exploring a variety of financial solutions including digital channels like mobile and contactless payments. On the other end of the needs spectrum is the “Rainy Days No Umbrella” archetype, which represents the stressed, mid-career head of household who is worried about earning enough to support their family. These individuals require simple financial products that meet their most urgent and basic everyday needs.
For example, if a credit union wishes to expand market share in the “Wanderlust Professional” segment, it may not yet have direct access to that market, or the right solutions to meet its needs. However, by partnering with a tech brand that does resonate with that group, the credit union can successfully attract those members and serve their unique needs. Through this approach, credit unions would be able to compete within different micro-segments across the entire field of play, by offering a wider array of services. One challenge for credit unions in pursuing this multisegmented partnership approach is creating trusted partnerships with Fintechs. They need to be confident and comfortable in the Fintech’s understanding of the cooperative movement’s unique culture, philosophy, and commitment to member service. But the complexity of this approach shouldn’t slow credit unions down. They need to start now. Although credit unions have a lot to offer in terms of traditional service and face-to-face, human interaction, the branch experience will likely look different moving forward. The personal touch is still important but credit unions need to adopt a more holistic strategy that employs digital with an in-branch experience. One area of differentiation will consider geographic location. For instance, an urban, city center branch may still serve as the financial hub for both transactional and consultative services, while more dispersed, rural locations may only serve members’ more complex, less transactional needs, with 90% of transactional activity occurring via remote, digital channels. All told, the credit union of tomorrow will feature personal relationships at its center, a full complement of digital services and products to meet the unique needs of specific, niche lifestyle market segments, with the confidence and trust that comes with strong data safety and protection protocols.
Credit union outcomes-based activities will need to include continued growth-oriented investments, the leveraging of a business intelligence platform to leverage deep data insights, comprehensive digital integration across all member solutions and channels, payments processing, and operational tools and support for members and staff. Co-op is prepared to help guide your credit union down the path of active relationship primacy as you evolve to serve your members’ changing needs: Partner on digital products and services Co-op already offers a rich product set of digital technology-enabled products and services that appeal to both credit unions and their members, including contactless, mobile wallet and P2P payments; digital and mobile banking; developer enablement and API support; active card controls and alerts; and fraud prevention software and tools. Provide deep data insights One of the biggest opportunities for credit unions as they strive to capture a greater share of their members’ active PFR is in data analysis. By capturing their members’ transactional activities, especially in payments, credit unions will have at their fingertips a treasure trove of behavioral data to be analyzed—intelligence that in turn can inform the development and release of new products and features. Through new offerings like the Co-op Insight Center, Co-op has the expertise and processes to help credit unions scour their data for measurable trends and patterns, and to analyze such trends for actionable insights. Offer strategic advice Co-op is here to help your credit union make strategic decisions and pivot to an active, needs-based approach to their member relationships. Through Co-op’s SmartGrowth Consultant Services, advisors work with credit unions every day to analyze card portfolios, initiate acquisition and activation campaigns and unearth new opportunities for growth and enhanced profitability. Engage the industry through thought leadership Co-op’s THINK conference has been a “must-attend” event for years. We transitioned to a fully virtual format in 2020, and launched a regular, year-round series of virtual webinars, workshops, panel discussions and “power lunches.” With a mix of live, recorded and published content in a variety of formats, along with growing earned media appearances, Co-op is prepared to lead the industry forward and help your credit union grow.
How Co-op can support you Co-op is well-positioned to act as your partner, strategic advisor and solutions provider to help guide the development of new business models in support of achieving member relationship primacy through: Continued growth-oriented investments Leveraging of business intelligence platforms to leverage deep data insights Comprehensive digital integration across all member solutions and channels Payments processing, and operational tools and support for members and staff
Member and prospect interactions and needs have changed. By providing lifestyle banking services, regaining the primary financial relationship and accelerating their digital capabilities, credit unions will be strongly positioned to thrive well into the future.
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