Throughout this fall’s planning cycle we’ve engaged in a number of conversations about the possible impact of automation and artificial intelligence on credit union operations. The working assumption is that there is a strategic advantage to automate certain tasks and functions in order to make better use of personnel for higher purposes.
Automation and AI, in other words, are fast becoming important operational initiatives for credit unions of all shapes and sizes.
But there is another area of interest when it comes to the impact of automation on credit unions – member income.
We share a number of articles and research papers with planning clients to prep for strategy dialogue, and we have a new one to add to the mix. It is a paper recently published by the Federal Reserve Bank of San Francisco. We’ll let the abstract speak to the paper’s focus…
The portion of national income that goes to workers, known as the labor share, has fallen substantially over the past 20 years. Even with strong employment growth in recent years, the labor share has remained at historically low levels. Automation has been an important driving factor. While it has increased labor productivity, the threat of automation has also weakened workers’ bargaining power in wage negotiations and led to stagnant wage growth. Analysis suggests that automation contributed substantially to the decline in the labor share.
What is the credit union strategy dialogue here? Member qualification for credit union loans in an era of stagnant member wages – especially if loan costs and terms continue to increase (take a look at this recent WSJ article for an interesting view on automobile prices and financing costs & terms from the consumer perspective – subscription required).
Note that I’m not drawing conclusions of a bleak future. I’m simply suggesting that the topic of discussion should be of interest to credit union planners – with the question being, “How do we find success in serving members in the event labor shares continue to decline and/or wages stay stagnant?”
The flexibility to add to fields of membership comes at an opportune time for credit unions – provided court opinions continue to fall in favor of the industry, and credit union’s change their perspective on marketing and business development investment.
Membership Growth Rate Slowing?
Glatt Consulting’s HealthScore includes membership growth as a component of the overall HealthScore calculation, and the industry has seen notable year-over-year membership growth score declines in each of the first two quarters of 2019. Q2 saw a score decline of 7.36% on the heels of a 3.2% decline in Q1. Prior to 2019, credit unions showed a decline only once in 18 quarters.
What is the cause?
We think there are two. First, slower growth in indirect auto loans (both total dollar volume and total indirect loans). Indirect is a channel that fuels membership growth for many credit unions, so the drop in indirect has a definite impact on membership growth.
Second, credit unions are coming up against limits to field of membership – in two different ways. First, credit unions do turn away those that are not qualified to join. Second, and relatedly, credit unions have come close to exhausting the “low hanging fruit” of membership growth – namely those that are already familiar with credit unions and/or that already belong to one or more. Attracting the “unfamiliar” is slow going.
The Challenge, and Competition Ahead
Credit unions, already experiencing slight declines in operating expense scores, may need to pump up spending even more to garner the attention of the next generation of credit union members – those that can belong as result of expanded memberships but that have no idea what a credit union is. These folks will be hard to reach using more traditional approaches – especially if indirect is a channel of concern (meaning credit unions continue to experience slower indirect channel growth).
Consider that SoFi, a non-credit union entity that nonetheless touts their service to “members,” outspends the average credit union to acquire/serve members by about $400/member. And they don’t spend in the same areas as credit unions.
To compete, credit unions will need to spend more, and spend better.
See: SoFi Is Paying Top Dollar To Acquire Its Prime Customers