Evolving consumer behavior and internet usage trends may have an even more significant impact on the fundamental way credit unions strategically manage their business model and create differentiation in the future—and these trends aren’t necessarily isolated to a particular generation.  Consider the following statistics from the Pew Internet & American Life Project, January 2009:

Today, with many credit unions working hard to allow their members to do everything online, the industry seems uncertain as to how the role of traditional brick and mortar branches may change in the future.  Some ask: Do we keep building them?  Do we build smaller, storefront branches, kiosks or install more full-service ATMs?  What kind of members are using branches vs. those using home banking?  How do I cross-sell if I push my members toward home banking?

Internet-Based Financial Institutions

Adding complexity to the delivery channel issue is the growing popularity of internet-based financial institutions (financial institutions with only an online presence, such as ING or, more recently, Ally Bank).  An article published by the American Bankers Association cited that nearly 40% of internet households have a relationship with an internet-based financial institution—compared to only 20% as of 2007. Supporting this trend is the broadening availability of mobile internet access with the growing popularity of the smartphone.  Despite current economic woes, smartphone sales actually increased 13% year-over-year in the 3rd quarter of 2009—representing the fastest growing segment of the mobile market, according to Gartner Inc.

Cross-Industry Perspectives

In another context, consumers spent 11% more than they did in 2008 on “Cyber-Monday,” according to Coremetrics Inc., a Web analytics company that tracks shopper behavior.  (Cyber-Monday is a term coined in recent years to describe the first Monday after Thanksgiving.) According to Forrester Research, online shopping this holiday season may grow by as much as 50%.  “The shift to online shopping, fueled by deal seekers in the recession, may be coming at the expense of sales at traditional stores later in the holiday season, Forrester says.” (Source:  ‘Cyber Monday’ Sales Appear Strong, WSJ, 12/1/09)

Strategic Thinking

As consumers increasingly use technology, looking for better deals and enhanced convenience (especially in tough economic times), the trend toward using online delivery channels, internet-based financial institutions and online shopping is likely to continue. But remember, back in the 1970s when ATMs were a novelty, many assumed that they would replace branches and tellers.  Of course, they didn’t.  As a matter of fact, from 2002 to 2007, banks alone have constructed over 10,000 branches according to the Associated Press. Nevertheless, consumers’ consistent increase in using online commerce has brought to the forefront some questions that credit unions and other financial institutions need to answer as part of their strategic thinking:

• How do we strategically deploy our finite resources in order to appropriately position our delivery channels for our target market over the next several years?
• If a growing portion of the population is becoming more comfortable using internet-based financial institutions, what differentiation can we create or improve upon for our distinct target market to get our share of their wallet?

These are difficult questions, but seeking out answers should not be avoided.  Moreover, each credit union’s answers will be unique, as there are different delivery channel strategies depending on the behaviors, backgrounds and demographics of various target markets.  We encourage credit unions to approach the questions seriously in strategic planning sessions and discussions, especially in uncertain economic times when operating expenses are so critical to success.

In February 2009, we published a c. notes article titled, Liquidity: 9 “What-Ifs” Worth Exploring.  Even though liquidity is not a concern now for many credit unions, events outside of their control could quickly make it a serious issue.  The article encourages credit unions to answer key valid questions to help prepare them for the possibility of heightened liquidity risk.  The article can be found here.

This blog post is intended for a subset of credit unions that may come to the realization that a business model that assumes a high loan-to-asset ratio is inappropriate for them.  The evolution of consumer spending and saving habits as a result of this economy may provide an opportunity for these credit unions to revisit their business model—focusing on if the credit union should tilt toward specifically serving borrowers, savers or both.  Here’s some background to consider…

Over the past several years, many economists, most notably Stephen Roach of Morgan Stanley, warned of the consequences of the transformation of our economy from being income-based to asset-based.  Said another way, starting in the late 1980s, the rapidly growing value of consumer assets played an increasingly larger role in the economy.

For example, during the second half of the 1990s, appreciation in stock market holdings emboldened consumers to spend due to the wealth effect.  The bursting of the tech bubble reversed this wealth effect and initiated the last recession.

During the subsequent recovery, consumers began to feel wealthy from the value of their homes.  We all know too well that consumers used their homes as ATM machines.  This led to an increase in household debt from 90% of personal income to a record 133% by the end of 2007 as we went into our most recent recession.  For more detail, see this article from the NY Times.

Many consumers have now reversed course.  They are saving more than they are spending.  In September and October, the personal savings rate was 4.6% and 4.4%, respectively (Source: U.S. Bureau of Economic Analysis).  It wasn’t that long ago that consumers had a negative savings rate.

Layer onto this the fact that 14.4% of homeowners with mortgages are behind on their mortgage payments or are already in foreclosure (WSJ, More Homeowners Fall Behind on Mortgages, 11/21/2009) and 23% of all homes with mortgages are under water  (WSJ, 1 in 4 Borrowers Under Water, 11/24/2009).  And the icing on the cake: Over 70 million Baby Boomers are not feeling very wealthy as they head into retirement.  They’ve likely already started to alter their spending habits.

To sum it up, for the foreseeable future there will likely be no bubble in asset appreciation to drive consumer spending and borrowing.  Like they did for decades before the 1990s, many consumers will need to rely on their income to support their debt burden, not the value of their assets.  In other words, they will likely be borrowing less.

What might this mean for credit unions?  With about 18,000 depository institutions in the U.S., competition for loans may become quite interesting.  Credit unions may find themselves facing irrational competitors who have once again loosened underwriting standards to achieve a potentially dangerous loan-to-asset ratio target.  (Read more about appropriate measures of success in our white paper, Managing Success In A Changing World, to understand more about why this target could be dangerous.)

A subset of credit unions may want to take this point in history to revisit their business model and ask:

• Do we have a well-thought out plan to invest finite resources to continuously adapt to the competitive environment to remain a “credit” union, or would our membership be better served if we transitioned more toward a “savings” union?
• If we made that transition, what else would need to change in our credit union so as to serve our members and keep the credit union safe and sound?

There are successful credit unions that, for many years, have had a low loan-to-asset ratio.  Many seem to have a clearly and narrowly defined target market.  They remain successful even through this deep recession.  Besides low loan losses, their low operating expenses contribute to their success.  For example, they don’t need significant branch or lending infrastructure to support aggressive loan generation.  Rather, they have an infrastructure that supports competitively priced deposit gathering and selective, organic loan generation.  Branches that are needed can be low-cost storefronts, as an example.  Investments, usually managed by one person, are very carefully invested so as to not take on undesirable interest rate risk.  Granted, in this historically low rate environment, that means low investment yields.  Many of these credit unions are satisfied with a resulting low ROA as they know they have positioned themselves for the benefits of higher rate environments when they return.

The transition to a “savings” union can take years and has many hurdles.  It should not be taken lightly.  While it will not be a reasonable alternative for most credit unions, it may be worth a strategic discussion for those that are seeing a critical change in the borrowing and saving patterns of their members.  Those credit unions who seek a business model that is not as susceptible to credit risk could also benefit from this strategic discussion.