Innovation at warp speed within credit union business model

By Theodora Lau and Bradley Leimer of Unconventional Ventures 

As the financial services model has gone through so many iterations the past decade, and as fintech startups and tech giants have nibbled at the revenues and customer relationships of incumbent banking providers, one might be wondering how credit unions are faring through all of this. These not-for-profit member-focused institutions do seem to be out of mind in the conversations around business model evolution. But that would be a mistake. Credit unions are still with us — especially in North America — and while there are fewer of them from a decade ago, the credit union movement is alive and well we assure you.

Let’s talk about them and their history a bit more.

As the perfect foil to traditional banks, credit unions are financial cooperatives that function as not-for-profit business entities focused on meeting the financial needs of their members.

These are community focused institutions designed around a simple premise: people helping people.

How does a credit union differ from a bank?

The difference between credit unions and banks comes down to ownership, control, and profit. Each member of a credit union holds a share account of the financial cooperative, representing their share of ownership in the institution. Rather than being controlled by an executive team and shareholders, credit unions have a volunteer board made up of credit union members who then help guide a management team on how to best serve the needs of their membership. The members of each credit union vote on who represents them on the board. Each member is given one vote, regardless of how much money the member holds in the institution (or how profitable they are).

Members are then simultaneously shareholders and stakeholders in the credit union, and in turn the community which the credit union serves. The members’ collective savings are available to help the cooperative offer varied forms of deposits, investments, loans, and other services to the benefit of the collective membership. Credit unions tend to offer higher rates on savings products and lower rates on loans and offer often superior financial benefits when compared to most banks. Offering simpler product lines and added transparency around associated fees, credit unions serve an important role in their communities, especially in serving the needs of those living in low-income areas where many people are underbanked or unbanked.

Why isn’t everyone a credit union member then, if they appear to help people more than banks? Credit union member growth is tied to how credit unions began and how their field of membership — the breadth of members they are allowed to serve by regulators — has evolved.

Where and how did credit unions begin?

Credit unions started in Germany in 1852, when Franz Hermann Schulze-Delitzsch took two initial financial cooperative projects and helped develop the first urban credit union system. Credit unions and similar community-based financial collectives started to spread into Italy, France, the Netherlands, England Austria, and beyond. In these early years, credit unions were often founded by employers or communities in response to the rising costs of accessing credit. The global credit union model rapidly evolved, especially when they moved to North America.

The first credit union in North America was founded in Quebec in 1901, and the first in the United States — now representing the largest market for credit unions — was founded in 1908. At the end of 2019, there were 5,236 credit unions serving the financial needs of more than 120 million members in the United States alone, with deposits totalling USD$1.22 trillion.

Globally, credit unions range in size from smaller institutions dedicated to the needs of a single family, the employees of small and large businesses that sponsor the credit union, as well as many whose membership is focused geographically to the needs of entire communities. The World Council of Credit Unions (WOCCU) reported that there were 85,400 credit unions in 118 countries at the end of 2018, serving 274.2 million members and entrusted with USD$2.19 trillion in assets.

A necessary foil to big banks and alternatives

With continued growth and a commitment to serving the often underserved, credit unions provide many lessons for today’s financial institutions and FinTech startups.

First, their ownership model and not-for-profit mandate drives an often fanatical focus on the financial needs of their members. Second, the value of membership that credit unions provide — the net benefit of the financial relationship — is significant, especially in regard to banks. Third, any perceived shortcomings — whether lacking locational  convenience or robust technology — is slowly eroding as more credit unions work together with innovative partners to ensure this cooperative business model evolves.

The important lesson in cooperative financial models is just that: There are alternatives that focus less on profit, and more on ways to meet people’s financial needs. This is how the old can become new again, and how we can derive new ways to serve the diverse needs of our communities without worsening an already growing divide between those that have more and those who have less.

Inequality is a choice made by the legacy of leaders within any community over time.

Every business model can be refocused toward the arc of the common good, even financial services.

In the age of accelerated digital and tech spending, how do we choose our innovation and investment priorities — at the same time, keeping up with competitive pressure and changing customer needs? Looking back in the year that was — knowing what we know now, what would we have done differently? How do we best meet our customers where they are?

In this episode of One Vision, Theo and Bradley chat with Kelly Wagner-Grull, Director of Innovation and Member Experience at the Credit Union of Colorado, about experimentation, curiosity, and creating new memorable experiences. You can find this conversation on Apple Podcast, Spotify, and All Players.

Please consider hitting that subscribe button and leaving us a review. Sponsorship opportunities for this season of One Vision are available. Visit unconventionalventures.com to learn more about partnerships.

Want to learn more about the credit union business model? You can watch Bradley’s keynote How Credit Unions Can #MakeBankingBetter presented at the Co-Op Think Conference in Miami where he talks about opportunities for credit unions to differentiate themselves in an ever-crowded marketplace. You can also hear Bradley’s recent thoughts in his conversation with CU Town Hall. Bradley’s passion stems from his time running marketing and technology teams at a Bay Area based credit union, now part of Alliant CU. Credit unions make a difference every day. We need to share that message widely.

This article is based on an excerpt from our new book, Beyond Good. Our book is now available for order at Amazon, Barnes & Noble, Kogan Page, and everywhere fine books are sold. Keep in touch with our book launch events at BeyondGoodBook.com.

Beyond Good is a call to arms for business leaders to recognize how they can do well by doing good. Business for good, which is the philosophy that you can pursue profits while delivering on sustainable and societal development goals, is already delivering big changes. With exclusive interviews with experts from the B-Corp world, policy makers and executives, this book also showcases how companies like Microsoft, Flourish Ventures, Ant Financial, Sunrise Bank and Paypal are doing their bit to make our world better — and you can too. Beyond Good is also available at Bookshop.org (supports local, independent bookstores), Waterstones, WHSmith, and everywhere books are sold.

Unconventional Ventures helps drive innovation to improve systematic financial wellness. We connect founders to funders, provide mentorship to entrepreneurs, strategic advisory services to a broad set of corporates, and broaden opportunities for diversity within the ecosystem. Our belief is that anyone with great ideas should have a chance to succeed and every voice should be heard. We work with financial institutions, fintech startups, technology firms, and corporates working within financial services and tangential verticals. Visit unconventionalventures.com to learn how you can partner with us.

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