Updated: Feb 8
"Fundamental changes are happening in the banking sector from automation to banks leaving small communities, but can Credit Unions help fill the gap, I think they can."
By: Allan R Kirby
I fully get the fact that we are seeing fundamental and structural changes in the banking industry. In short, more people are turning to online banking instead of going to a local branch. In fact, in 1980, 95 percent of households used a bank branch, according to consulting firm AlixPartners, however, today only 50 percent use branches. Additionally, new fintech companies are springing up to provide services similar to those being offered by traditional banks but with low fees, high savings interest rates, as well as accessibility to small loans and opportunities for micro investing. They still do not have the depth and breadth of service offerings that major banks have, however, they are a cheaper alternative to banks and people have been flocking to these fintechs in recent years.
These changes have put a tremendous amount of pressure on major banks (who are shareholder/profit driven) to close less profitable branches in major cities, smaller towns, and rural communities across North America. This of course has differing impacts. For larger cities, the impact is negligible since there are so many branches around each corner, it is more of an inconvenience. However for smaller communities, especially rural farming communities, the impact can be significant on the local economy affecting small businesses and agriculture especially hard. This could mean:
1. Residents may find it difficult to get loans and services from other branches to meet their needs.
2. Residents and local businesses will have to drive longer distances to deposit money.
3. The loss of the banking jobs will impact many small communities.
4. Banks will lose an understanding of smaller regional economies.
5. Money is not being reinvested back into the community.
6. Increased costs for small businesses to deal with financial issues.
7. Less investment and business prospects because there is no local financial institution.
Filling a banking gap in small communities
So, we are seeing major banks closing branches and more people utilizing on-line services instead of branches. This, in itself, does not mean there is no need for a financial institution in a small community. As mentioned above, there is still a real impact. However, there is an obvious solution. Smaller, customer focused credit unions with a flexible and diversified workforce can flourish and fill the gap left by the big banks in smaller communities. One issue I see with this logic is that credit unions are not big profit engines with huge stock piles of capital. They are small non-profit organizations that have limited capital. Even if a credit union would like to open a branch in a small community, the capital requirements might be too high to take a chance. This is one reason why credit unions have not moved into every community that banks have left. I would discuss political options such as capital funding but that is never likely to happen so let’s just leave it at that.
I am not a fan of major banks, which is why I do most of my banking with online banks and credit unions. I have found the service and ease of use to be superior to the major banks. To prove my point, I recently did a quick check and I found that over the last 10 years, I have paid no fees with my online banks and only $1 for the membership fee at a credit union. This is not the case with my major bank, which is the only financial institution where I have paid a fee with the exception of the $1. Worse, I also had a serious incident where I had to go to my major bank branch and fight to have unauthorized charges reversed. This has yet to happen with my other banking alternatives.
There are great opportunities for credit unions because I believe major banks will continue to squeeze the most out of their branches. This will mean a continuation of closing branches in small communities even when they are profitable. I am actually one of the few who are happy that this is happening, but only if credit unions can replace a bank when it departs. I am so tired of seeing a sign at a major bank saying “In order to better serve you we are raising our fees” the reality is, service is not getting better it’s getting worse because banks are:
• Closing branches and leaving small communities.
• Increasing fees.
• Reducing the number of customer agents.
• Pushing customers to bank machines.
• Ensuring you cannot talk by phone to a person at your branch, you are connected to a National Service Desk, which never seems to be able to help.
This is much different than a credit union where:
• You can talk to someone on the phone (at the branch) or in person.
• More personalized financial experience.
• You know who you are dealing with and who to go to for problems.
• You are able to talk to someone on the phone and not have to go through a series of time consuming option selections.
• Although banks have depth and breadth to online banking, credit unions' online services will meet the needs of most customers.
The reality is that banks will continue to consolidate and smaller communities will get hit the hardest. I am hopeful credit unions will help fill this void. However, unless there is access to capital and credit unions are unwilling to take on the risks, many of these communities may be left out in the cold.