Credit unions (CUs) may attract consumers for the contrast in their offerings compared to other financial institutions (FIs). Members may feel they encounter better customer service and personal attention at CUs than at larger FIs or banks. CUs also tend to offer more personal financial education, such as in-person seminars covering everything from homebuying and retirement planning to credit card management and identity theft prevention.
CUs, which are nonprofit entities, also offer members direct financial benefits. Those benefits can come in the form of lower interest rates when borrowing or higher returns when depositing. Some CUs send out periodic dividend checks. CU members may also benefit from lower ATM fees, lower overdraft charges and reduced minimum balance and deposit requirements.
Individual members are not the only potential beneficiaries of CUs’ services, however. Small- to medium-sized businesses (SMBs) became the focus of lending during the pandemic as they sought support to stay afloat through federal assistance initiatives such as the Paycheck Protection Program (PPP). CUs are consistently the highest scorers of all FIs in customer satisfaction with lending practices, yet they rank at or near the bottom in the actual share of loans held by SMBs. Moreover, CUs accounted for just a fraction of PPP loans during the pandemic. These findings represent significant opportunities CUs cannot afford to miss.
The following Deep Dive examines how CUs rank in meeting the challenges SMBs face in the current economic environment. It also explores how CUs can leverage their value proposition of outstanding, personalized member services to capture SMB banking opportunities.
CUs Lead in Satisfaction but Not in Financial Services Provision
CUs have high lender satisfaction, scoring the highest among lenders in a 2021 Federal Reserve SMB credit survey for their lending practices. Lender satisfaction among small firms approved for at least some financing was 87% for CUs, followed by small banks at 81% and large banks at 68%. CUs also had the lowest portion of dissatisfied respondents among approved loan, line of credit and cash advance applicants, at just 5%. At the opposite end of the spectrum, just 43% of applicants were satisfied with online lenders, with 18% of these respondents feeling dissatisfied with their experiences.
Community Development Financial Institutions (CDFIs) and small banks ranked the highest in terms of support from primary financial services providers during the pandemic, with 70% and 61% of firms satisfied with these FIs, respectively. At 48%, CUs still beat out large banks, which garnered 41% satisfaction and left online lenders and FinTechs far behind at 18%.
The same survey showed that 49% of SMBs had accounts with large banks, followed by 45% with small banks. Just 12% had accounts with CUs. Additionally, CUs accounted for just 5% of PPP loans during the pandemic.
Value Motivates CU Members
Even CU members do not always turn to their CUs first for banking services, and PYMNTS research showed that a disturbing 55% of members look to other FIs for financial products — an increase of 2.4% from 2020. Even more troubling for CUs is the share of those services that are products such as mortgages and business lines of credit, which are some of the most profitable products offered by CUs. From 2020 to 2021, the portion of members seeking business lines of credit from other FIs rose 16%.
At the same time, CUs appear to have a disconnect when attempting to understand their members’ motives in seeking services from other FIs, further exacerbating efforts to stem portfolio leakage. Ninety percent of CU leaders said they believe that at least one of the reasons members go to other FIs is that their CU does not offer the financial products they are seeking. Fifty-two percent of CU executives said they believe the problem comes from a lack of desire to invest the money required to offer specific credit products, and 40% said they believe other FIs offer products in a manner that is more convenient or easier to use.
Some CU members seek out financial products from other FIs because they cannot get them through their CUs. Twenty-five percent of members said their CUs do not offer all the products they need. On the other hand, 28% of members — the largest portion — said they went to other FIs because of lower interest rates, and 16% cited lower fees. Twenty-four percent said they went with a different FI for a specific purchase or special plan. These findings suggest ripe opportunities for CUs to grow their business banking services by innovating credit products to meet consumers’ — and specifically SMBs’ — lending needs.
Meeting Small Business Lending Needs
CUs often offer the same services as other FIs that have a larger share of the market. Some services, such as SMB loans or merchant credit card processing, may even be available to nonmembers. SMBs may also be able to realize cost and service benefits they do not receive from larger FIs.
Small-balance business loans — ranging from $25,000 to $250,000 — offer CUs an opportunity to shine, not just because of the characteristics CUs bring to lending but also because of the unmet demand for these loans. Business lenders generally avoid small-balance business loans due to their relatively low return on the time invested in processing them. That leaves many new and existing entrepreneurs shut out of traditional business lending.
FinTechs are responding to this need through automation and technological efficiency, but FinTech lenders also offer higher pricing and lack the benefits that CUs can bring to the table as depository institutions. CUs may even find that many entrepreneurs attempting to start a business already are CU members.
CUs stand to reap substantial benefits by including small-balance business lending in their strategic initiatives. Credit union service organizations (CUSOs) and other third-party partners can offer advice and assistance on modernizing and automating the lending workflow to lower costs and risks. By taking a page from the FinTech playbook while maintaining the personalized service they are known for, CUs can turn SMBs’ unmet lending needs into infinite growth possibilities.