Credit Unions: The New Road to Success

Engage and build long lasting relationships with members to grow and remain competitive.

Looking back to the year 1909 when the credit union movement began in the United States, it was started with the simple idea that people could make their lives better for themselves and others by pooling their savings and making loans to neighbors and co-workers. Today’s Credit Unions (CUs) have the same goals and are always striving to serve their members and community in as many ways as possible. The difference today is the operating environment. Credit Unions have to navigate through a labyrinth of challenges from the digital technology revolution, fee sensitivity, aging member population and referral decline, the great wealth transfer, competing challenger banks and Fintechs, fluctuating interest rates, pressure to generate non-interest income and much more. How do Credit Unions adapt and successfully move forward through these challenging times? And better yet, how do Credit Unions achieve the competitive edge with a quick turnaround as compared to longer-term projects like “digital transformation”?

Key Challenges:

  1. Retaining and attracting new members is key for CUs to successfully move forward.

    The average age of Credit Union members is 47. CUs must continue to innovate and offer services that appeal to the younger generation or the membership base is at risk of aging out. CUs most loyal members are over 65 (68% of members are >65). New membership and referrals are down. The reason? There are misconceptions about the cost and eligibility to join a credit union and the benefits are unclear to the younger generation. Two out of Five non-members think they can’t join a CU and referrals are rapidly declining.

    ● 90% of members DO NOT encourage their children to join their credit union.
    ● 60% of Credit Union members’ children choose to bank at a different institution.

    Why is this a big challenge? Consider how the generational transfer of wealth could impact Credit Unions as their membership begins to age. When an older CU member passes away and leaves their estate to a non-member descendant, the CU is at risk of losing the money to a competing financial institution. The challenge is to keep the assets in house when wealth is transferred from one generation to the next. The current data shows that measures need to be taken to engage the next generation. Only 1 in 5 Millennials under 25 use a CU as their primary financial institution. Only 10% of older millennials (age 25-34) use CUs as their primary financial institution.

    Most younger generation Americans do not use CUs because they prefer to use digital banking solutions. Either CUs don’t offer it or the perception is that CUs are not up to speed with technology.

    For most CUs, member education campaigns are not high priority items on the marketing agenda. It is highly recommended that CUs integrate member and prospective member education into marketing plans moving forward. Credit Unions must find a way to engage and build long-lasting relationships with their members in order to grow and remain competitive.
  2. Combatting the loss of Interchange Fees from competing challenger banks, fintechs and pending legislation is a real threat.

    Interchange fees are at risk for CUs and they represent one of the larger sources of non-interest income. income. New banks are gobbling up interchange fees by offering consumer friendly options like Pay Cards where customer’s paychecks are deposited on the card. When consumers spend the money on their Pay Cards, which function like debit cards, the issuer (challenger banks and fintechs) get the fees.
  3. Flipping the fee scenario: For recurring account fees, consider giving members choice and control over which fees they pay in exchange for benefits (ex: a no frills checking account vs an account that provides benefits like identity theft protection, cell phone protection, credit insurance etc.).

    Members actually do want services even though there is a perception that they don’t want them. Studies show that members want the ability to choose between a free, no frills account or a fee-based account with perks.

    With regards to overdraft fees that have been perceived as a punitive response, consider flipping fee positioning towards the positive. This can be accomplished by charging reasonable overdraft fees and educating members on how they can use overdraft protection as a tool to manage cash flow from time to time. The question is: are your members using overdraft fees as a service or are the fees just happening to them?

    Lowering fees can have a negative impact on non-interest income but some studies show that when financial institutions reduce overdraft fees, members use the overdraft service more frequently due to a higher perceived value for the service. Therefore, the fee based income increases.

    Waiving overdraft completely is not a recommended solution because when members become overly reliant on overdraft protection, it can reduce member’s financial health by promoting overspending. The solution should be that overdraft fees remain at a reasonable cost and the CU also offers other solutions to help members manage cash flow like small loans, payday advances and access to money more frequently.

    Overdraft and account based fees will continue to exist as long as they add value to members. Even high income earning members want the right tools to manage their cash flow. It’s thought of as a transaction fee for the right solution vs. a penalty fee. The goal is to provide proactive products that help members navigate life’s challenges. Not reactive products like retroactive fees.
  4. Competing with challenger banks that are successfully attracting millions of customers with their digital customer experiences.

    With lower overhead costs, they offer competitive interest rates and lower fees which puts competitive pressure on CUs and traditional banks. Challenger banks are also able to offer innovative, consumer friendly solutions like Earned Wage Access (or On Demand Pay) to bridge the gap between paydays. It consists of giving customer’s access to part of their pay before their pay cycle. It’s handy for consumers when they need to pay a bill on time to avoid late fees. The customer pays a small transaction fee to use the service. It’s a positive fee to solve a problem and Earned Wage Access is used by millions of Americans. To stay competitive, credit unions must provide similar or better innovative solutions for themselves and their members.
  5. Educating existing members on all offered products and services that can be used to manage cash flow and generally make their lives better.

    In general, CUs assume that members know their exact account balances, but in reality, the younger generation does not manage their account balances in the same way as previous generations. They are not using a traditional check register and most likely not reading their monthly statements line by line. The older generation was more proactive in that members balanced their checkbooks and knew their account balance. The new generation leans more towards being reactive. For example, if a member does not use a check register and or balance their checking account and they get an overdraft notification, they do not have a balanced record to figure out what else is outstanding and what has cleared. The key is to provide tools that put the members in control and offer solutions that will help them manage their cash flow.
  6. Attracting the 22% of American adults (63 million) that are under-banked or unbanked.

    This population typically uses pay cards and cash loans. How do you get these potential members to the CU mothership? Credit Unions have an opportunity to attract new members in this category by putting in programs that provide accessibility and flexibility. For example, expanding options on loans (and loan underwriting) and credit for paying utility bills and rent. Since many of these individuals are invisible when it comes to credit history, it can make it challenging for them to get services like loans or credit in a traditional manner. Having access to reputable services will provide more financial freedom to the new members and increase CU membership.


In the past, one of the main selling points was that a CU gives money back to members in the form of higher interest rates and lower fees. This is not necessarily true anymore, particularly with challenger banks offering even lower fees and more attractive rates.

Education for members has become a crucial factor. CUs need to educate and attract new members in the younger generations. In order to attract and retain younger members, CUs need to meet members where they are and provide access to digital self-service platforms, choice of fee-based, value add services, and cash flow tools that reflect the way they manage money today. When it comes to fees, members are willing to pay for something if it is reasonable and it adds value to their lives.

Credit Unions that continue to take action, re-imagine and try new things will continue to engage new and existing customers. New innovative ideas will also help retain and capture the valuable Interchange Fees.

The goal is to engage and build long-lasting relationships with members in order to grow and remain competitive. CUs who continue to focus on enhancing and improving their member’s lives will have the competitive edge.

Closing Thoughts

According to Theodore Roosevelt, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”. The key takeaway is to embrace and act on change. It’s vital to survival.

The Acid Test for whether CUs should try something new:

  • Is it good for the bottom line?
  • Is it good for members?
  • Is it good for employees?
  • Is it good for profits?

If all signs point to YES…. It's time to make a move and continue to focus on enhancing and improving member’s lives.

From the team at Legal Karma: We hope that you found this information to be useful. Legal Karma helps financial institutions combat the challenges outlined in this report, create new non-interest revenue streams, increase member loyalty and generate cross selling opportunities within the branch.

Feel free to reach out to us anytime here.