The emerging trends shaping U.S. credit union finances

The U.S. credit union industry is at a crossroads and there are many moving parts reshaping the landscape. Credit unions are wrestling with the digital age, as well as growing competition from fintechs acting as financial institutions and larger banks that are adapting faster to customer demands for online experiences.

While credit unions are experiencing slight asset growth, the need for increased focus on consistent deposit retention, cybersecurity and overall membership growth must be addressed.

Competition facing credit unions is at an all-time high, with big banking players such as JPMorgan Chase, Bank of America and others, as well as emerging players, including Robinhood and Rocket Mortgage, piling on the pressure. Credit Unions must evolve their delivery infrastructure and provide additional financial services to their members.

These are the key trends that will continue to directly impact the credit union industry, some of which mirror what is reshaping financial services as a whole.

Digital transformation

Credit unions are investing heavily in improving the online banking experience, especially mobile, as well as focusing on leveraging data analytics and increasing automation/digitization as part of their services.

Nearly three-quarters of all credit unions are considered small, or holding less than $100 million in assets. And while they don’t have the deep pockets of large banks, overall it is vital that credit unions of all sizes identify the most cost-effective, efficient and impactful options when investing in digital transformation initiatives this year and next.

Partnering with a fintech that can provide the functionality to deliver the transformative digital experience is often the way to go. First determine what your members are most interested in, and then find the right fintech to deliver that solution. Think of it as “digital investing.”

Cybersecurity measures

Credit unions are prioritizing cybersecurity measures in response to digital transformation trends, such as enhanced encryption and AI-driven security systems and tokenization to protect sensitive data during transmission. Credit unions are aware that they must establish proactive measures to protect their members’ data while maintaining trust.

As credit unions invest in their digital transformation initiatives, it’s important to combat these threats through multiple measures, including ensuring that the partners they work with are SOC II Type II compliant and focused on the security of their systems and their member accounts. Credit unions must identify the strengths and weaknesses of their programs, hosting independent assessments of cybersecurity programs and risk assessment frameworks. Credit unions can then prioritize investment and ensure defenses are in place.

Loan demands increased

Credit unions’ non-revolving loan share rose to 15.9% late last year, surpassing 2022 figures. There has been a significant increase in loan demands, but this is offset by a decline in deposits held by credit unions as members withdraw funds, creating steep outflows of assets.

Despite loan demands rising, generating interest income for Credit Unions, there is a liquidity risk due to deposit runoff. This means that some credit unions might not have enough liquidity to facilitate withdrawals. Many credit unions are focused on their deposit retention strategy as a means to increase their liquidity for loans. Providing new solutions to their members, including investing from within the online banking experience, can assist with this effort greatly as long as the right partner is involved.

And of course, the interest-rate picture is shifting as the Federal Reserve in late September kicked in the first interest-rate reduction, a robust half-point, in several years.

Heightened competition

Credit unions face intense competition from fintechs and online lenders with lower overhead costs, lightning-fast loan approvals and larger banks investing in easily accessible digital capabilities.

Credit unions announced eleven bank purchases in 2024. Yet, the reduced traction of bank mergers and acquisitions has led credit unions to make up an increased share of buyers, rising to 11.2% in 2023 from 9% in 2022, according to S&P Global Market Intelligence data.

Interest from credit unions will continue for 2024 and into 2025 as they look to diversify using banks’ commercial lending expertise. Nevertheless, they will continue to face stiffer competition from fintechs.

Credit unions are renowned for providing crucial financial services across the United States but must evolve with the ever-changing financial landscape to remain competitive. As threats and opportunities increase in tandem, credit unions must take the initiative and embrace innovation, engaging with the opportunities presented by the digital age.

Kian Sarreshteh is CEO at InvestiFi.