Banking

Why are credit unions changing vendors at a higher rate than banks?

Written by Stephen Greer

Credit unions need to think about how to best streamline their operations to remain viable, says Stephen Greer.

Credit unions are almost twice as likely to change vendors as banks, with competitive churn rates of 7.6% compared to 2.7% for banks. Churn rate measures the number of institutions in a given time period that either change or drop a vendor contract. Churn is broken down into two components: competitive churn, which measures the rate at which institutions are opting to change vendors, and consolidation churn, which measures uncontrollable factors such as acquisitions or liquidations. The figure below (powered using data from FI Navigator) references total churn for the year ending 31 March 2016.

Total churn for the year ending March 31st, 2016. Source: FI Navigator

The figure reveals significant differences in churn between banks and credit unions, but why is this difference so large? There are two possible drivers:

  1. Customer centricity. A focus on the customer could be a driver for higher churn. Banks and credit unions operate differently, and Celent has explored the variations in blogs and publications. The mission statement of the credit union market has historically revolved around extreme customer-centricity. Over the last decade, mobile has become a critical component in quality customer service. Emphasising the needs of the customer could be driving credit unions to take more concerted efforts to maximise mobile/digital, exploring competitive options more frequently than banks. Credit unions are low-margin businesses that often give higher interest rates for products such as auto-loans or deposit accounts through nonprofit tax breaks. Being member-owned, most of the smaller profits also go back into the business. This creates a natural incentive to streamline the back-office, and credit unions have adopted cost-effective technologies at higher rates. Thin margins, combined with a focus on customer service, could mean credit unions are more likely to evaluate provider options more frequently.
  2. Solution providers. Another perspective is that it’s the vendor market, not the CUs, that are driving the churn. The vendor spectrum for credit unions in the US is much more diverse, with 43 vendors compared to 22 selling to banks. This would reinforce the argument that competitive dynamics are more intense, and it would be reflected in sales cycles. With cost pressures that originate from their smaller size and lower margins, credit unions are more likely to look for alternative ways to provide products and services, leveraging mechanisms such as credit union service organisations (CUSOs) to enhance the business. Other similar joint ventures leverage cooperative arrangements to develop homegrown software products. Consortiums not present in the banking market would introduce more competitors into the market, and as a result impact competitive dynamics.

Credit unions skew much smaller than banks (the mean credit union asset size is $200m vs banks with around $2.5bn), leading to a noticeably higher consolidated churn. Celent examined the pressures on credit unions here. As minimum viable institution size continues to get bigger, smaller institutions will be challenged to stay afloat. Vendors will face the risk that their customers are becoming targets for M&A activity, resulting in more vendors competing for a shrinking demographic.

Credit unions need to think about how to best streamline their operations to remain viable. This includes a mix of cost-effective customer service technologies such as mobile banking. Vendors need to have a better understanding of the competitive landscape into which they sell, because competition is intense. Better data and detailed benchmarks can help vendors plan their strategy.

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: ponsulak, Shutterstock.com

About the author

Stephen Greer

Stephen Greer is an analyst with Celent’s banking practice and is based in Madrid, Spain. His research focuses on retail banking trends, with an emphasis on digital channel technology.

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