There’s a lot going on at your local credit union today.
Nearly 4 million of us are saving over €18bn with them, and they’re lending out over €7bn back into the local community. And there’s a lot of change within the sector. In the past 10 years or so we’ve seen the total number of unions halve and the number of larger ones double, and in that period total assets have grown by 50%.
So they matter.
But they operate in an increasingly complex and competitive market, and are themselves undergoing some fairly consequential changes. It’s a financial landscape with both opportunities and challenges. We’ve seen exits and entries in the mortgage and banking space and credit unions now have the regulatory scope to provide a broad range of products and services, including mortgages, business loans, current accounts and mobile banking.
In this very fluid landscape, the Regulator has a very clear vision – ‘strong credit unions in safe hands’.
The Central Bank recently set out what it sees as some of the key risks facing credit unions including liquidity risks, governance and a concentration in a limited number of third party service providers especially in technology and payment services.
However ‘resilience’ is a watchword in the sector. Credit unions performed well through the ‘Great Financial Crisis’. Currently average loan arrears are now below 3%, having fallen from a peak of 20% just over 10 years ago. As the loan book has grown, so have the unions’ competence in governance and risk management. Reserve ratios in aggregate are very strong.
What’s the business imperative for the credit union movement today?
To grow the loan book.
The sector is under-lent. While the pace of lending has picked up – it’s still too low. Reflecting this, the average return on total assets today is probably just below 1%. Over the last five years it averaged 0.6%.
Just over 10% of the loan book is in mortgages – but the credit unions are a tiny percentage of the Irish mortgage market.
Changes in regulation will allow greater lending.
The sector can and will grow its mortgage book. Recent momentum has been strong and a growth rate of 40% or more in the next two years is envisaged. But as important as how it grows this lending, it’s also critical where it grows – especially in terms of demographic grouping. A recent survey noted how important economic, social and governance factors are for younger age cohorts when making financial decisions. We have also seen ESG as a growing influence elsewhere in the financial sector such as pensions and investments.
Credit unions have a number of key attributes in their arsenal which can appeal to this younger cohort – strong local community engagement, environmental awareness, financial inclusion, social impact, diversity initiatives, an increasing digital footprint, growing online presence – all which have contributed to consistent winning performance in customer satisfaction surveys.
The task is to apply these attributes in growing their market share.
The dynamics of the mortgage market are changing. It will be a very competitive space, not only with the large incumbents but with new digital offerings and European based disrupters.
Research on credit unions globally from McKinsey stressed the importance of winning market share in new account openings. This ensures future momentum. McKinsey also noted that existing members of unions highly value them. The task is transmitting this message to prospective members.
Share of new account openings should be a key performance indicator for the sector. For the newest customers in the mortgage market where issues around the environment, or social concerns can be key, credit unions can tick a lot of boxes.
Credit unions need to catch the wave.
Tradewinds 