October 20, 2015
In recent articles in the series on credit unions, we have provided an overview of the industry as well as the definition of digital transformation and hallmarks of credit unions that might serve as a barrier to the transformation. However, we cannot fully assess credit unions without comparing them to the other major player in the financial services industry. For that purpose in this article we are going to compare credit unions and banks in the 12 wealthiest states in the U.S.
Both banks and credit unions provide the same variety of services. However, the LTP audience may not know that there is a vast gap between the rates for those services. Often overlooked as a possible provider of financial services, credit unions, in fact, have more attractive rates. Further analysis was completed using the latest official statistics provided by Credit Union National Association (CUNA) on the financial industry metrics as of the end of 2014. Even though across the 12 wealthiest states the rates for credit cards are the same among banks and among credit unions respectively, the level of the rates in credit unions is lower than in the banks. Banks rates are at 15.85%, while credit unions have 11.77%.
The difference becomes even more vivid with car loan interest rates. As we can see in the chart below, the overall level of the rates across the states is lower in credit unions than in banks. The highest interest rate for a car loan is in Massachusetts banks – 4.91%. The highest rate from credit unions is at a surprisingly low level of 2.79% (in Hawaii). The highest car loan interest rate in credit union is almost two times lower than the same in banks! The best deal for a car loan can be found in Delaware credit unions at a rate of 1.97%.
Home equity rates are significantly more consistent among banks and credit unions than new car loans. The highest home equity rate from a bank is in Alaska (5.39%), while for the credit unions it is in Delaware (5.05%). The difference between the highest rates from banks and credit unions is just 0.34%. In this case we can say the rates are quite consistent among chosen institutions. However, even the small difference in a rate in the case of home equity loans can make a big dollar difference. The lowest rate across chosen states is in Maryland credit unions – 3.91%.
Moving from a micro-level to the industry perspective, it’s worth mentioning the enormous gap in market shares and asset sizes between banks and credit unions. Having a great offering does not result in a greater market share for credit unions. Banks on average have a 5.5 times bigger market share than credit unions. The largest market share of credit unions is interestingly in Alaska (40.3%) and Delaware’s credit unions have the lowest share (0.4%) - perhaps this apparent discrepancy might be a result of big banks being incorporated in Delaware. The financial services industry across the twelve wealthiest US states is dominated by banks even though the rates are more attractive in credit unions.
Lower market shares have naturally resulted in a lower asset base for credit unions. Interestingly, the biggest assets in size of $1B are owned by Hawaiian banks. Alaskan credit unions with the highest market share of 40.3% also have the largest asset size of $111M. However, no credit unions with their assets come close to the banks’ assets. Again, as in previous cases, there is a huge gap between credit unions’ and banks’ financial power in the market. For credit unions, it reinforces a necessity to modernize operations and break the traditions in order to stay relevant and gain members.
Aside from these comparisons, CUNA provides statistics on the number of credit unions headquartered in each state and membership. Even though Alaska had the highest market share of credit unions and highest asset size, the state has a surprisingly small number of credit unions headquartered there – the lowest number of twelve. The highest number of credit unions headquartered in the state is in California – 377. However, the highest number of credit unions resulted in only 10.3% of market share and the second place when it comes to median asset size ($62M).
Logically, with the highest number of credit unions in California, the state also has the highest membership statistics. Almost 10 million people in California are members of credit unions. The chart below demonstrates how far California has gone from all other states in terms of membership. The next highest number is in Virginia – almost 2.5 million members, which is 4 times lower than the same for California. Even though Delaware credit unions have the third biggest asset size, the membership there is the lowest – a little more than 260K.
The numbers provided by CUNA clearly indicate that credit unions have a long way and significant changes to go through. Having a great product is not enough, credit unions have to learn both from banks and the FinTech industry on ways to make their operations more efficient and improve Business Development along with Marketing. Credit unions are often not an option in the list of places to look up financial services, but in most cases, they actually have the best offerings. Obsolete IT and legacy mindset can throw credit unions into an even bigger shadow of the banks. In the upcoming series of articles, we will provide tactics to improve the operations and become more efficient in increasing the membership and, possibly, the market share for credit unions.