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Credit Unions: The Time to Craft Your Open Banking Strategy Is Now

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Credit Unions Have a Demographic Problem

The average age of a credit union member is higher than that of a typical bank customer. A Filene Research Institute study[1] finds that over the past two decades, the median age of a credit union member has risen from 42 to 52.


Further researches[2] shows that only 26% of Gen Z (born between 1997–2012) and 14% of millennials (born between 1981 and 1996) use credit unions.


Younger customers, who favor modern, tech-driven financial services, may place greater emphasis on a seamless digital banking experience than the more traditional components of a relationship banking model. To continue thriving, credit unions must attract younger members by investing in digital financial tools that appeal to the preferences of tech-savvy generations who value convenience and innovation in their banking experiences more than loyalty, as their parents did.


“Attracting younger generation like Gen Z requires more digitally robust solutions and offerings from credit unions to attract these members. Services that can be provided around Open Banking will allow CU’s to provide services and new products in line with those that the big banks can offer via fintech and other solutions", said Sean VanHandel, CIO for CoVantage Credit Union.

The Times They Are A-Changin'

As the song goes, the next several years will prove crucial for many credit unions—and community banks alike.


According to Credit Union Times , the National Credit Union Administration (NCUA) approved 46 mergers during the second quarter of 2024, exceeding the pace of approvals reached during last year’s second quarter. Higher regulation costs and digital-banking expenses are pushing the market towards consolidation.


Ambitious credit unions are seeking opportunities to scale, grow deposits, and acquire a larger customer base. The timing is perfect for those with a growth plan. Here’s why:


With the upcoming Consumer Financial Protection Bureau 1033 rule expected to be released this October, open banking offers credit unions a formidable opportunity to compete for this demographic's business on a level playing field with larger institutions.


The Opportunity

Open banking involves sharing financial data between financial institutions and third-party service providers through secure APIs, with the consumer's consent. Open Finance extends this concept beyond banking to include other financial services such as investments, insurance, and pensions. The anticipated CFPB 1033 ruling will provide the regulatory framework to scale open banking in the US, including:


  • The adoption of an open API standard to enable interoperability across the financial ecosystem.

  • Enhanced consumer financial data rights, enabling the sharing of permission-based consumer financial data, and bill pay portability.

  • The removal of screen scraping, an antiquated and insecure method to collect consumer financial data. It will be replaced by the open API standard making such collection secured.


By providing access to customer transactions with the customer’s consent, open banking enables credit unions to offer innovative, technology-based applications and tools, enhancing their competitiveness and customer retention. Furthermore, open banking will enable credit unions to launch new offerings faster, fueling growth and improving customer loyalty.


There are numerous open banking use cases that credit unions could tap into, such as:


  • Personalized Financial Management Tools: Credit unions can offer tools that help customers manage their finances better by analyzing spending habits and providing personalized advice.

  • Partnerships with Fintechs: By integrating with fintech services, credit unions can offer specialized products like budgeting apps, lending platforms, or investment tools that appeal to niche markets.

  • Enhanced Customer Experience: Leveraging customer data through open banking, credit unions can offer tailored products, such as customized loan offers or savings plans, improving customer satisfaction and loyalty.

  • Financial Inclusion: By enhancing financial inclusion through technology, open banking provide a more equitable access to financial services. For example, open banking facilitates cash-flow-based underwriting, allowing lenders to extend credit to a broader set of applicants, including those who may not qualify based on traditional credit reports. This approach has significantly benefited underserved populations, such as freelancers and gig economy workers, by expanding access to affordable credit.


“78% of consumers expect to be able to see all of their financial data in one place. “When asked what they would do if their preferred bank or credit union did not support connecting to their favorite fintech apps, 72% of U.S. consumers said they would seek out a different bank or credit union that could connect. This was even higher for Millennials and Gen X respondents at 75%”, according to a research study from MX[3]

 

For a more exhaustive and detailed list of open banking use cases, you can access the blog post series “Unlocking the Future of Finance” here.

 

The Threat of Effortless Account Switching

Just as you can now switch cell phone carriers while keeping your phone number, the CFPB's 1033 ruling is expected to include bill pay portability under new consumer financial data rights.


This could make 'account switching' a popular open banking use case, especially among the largest banks that are already largely 1033 compliant. Credit unions and smaller financial institutions should anticipate these banks offering incentives to attract their customers, making it easier for them to switch banks seamlessly.

 

“We’ll pull share out of smaller banks who won’t have the technology to be able to take advantage of open banks,” Regulators are “doing this because they think they’re going to lower switching costs.” […] “All they’re going to do is drain [small] banks of accounts, by big banks who have the technology.” Said CEO of The PNC Financial Services Group William Demchak[4]

Falling to the illusion that there's all the time in the world to adopt 1033

The CFPB has proposed the following compliance timeline, to be confirmed with the final ruling. The majority of Credit Unions fall into the last tier.

 

Tier

Assets

Months to comply from rulemaking

Tier 1

FI > $500B in assets / NonFI > $10B in revenue

6 months

Tier 2

FI $50B to $499B in assets / NonFI < $10B in revenue

12 months

Tier 3

FI $850MM to $50B in assets

30 months

Tier 4

FI < $850MM in assets

48 months

 

If you fall into tier 3 or 4, you might think you have all the time in the world to get ready. That could be a fatal mistake. Why? Simply because credit unions and banks in the above tiers to you will likely comply earlier and, therefore, be in a position to take advantage of the CFPB’s 1033 ruling, putting those who delay adopting open banking at a disadvantage.


Andrew Morris, Director of Innovation and Technology at America’s Credit Unions, noted that there are also practical challenges associated with the CFPB’s compliance tiers. “Credit unions with experience developing APIs have expressed concern that the compliance dates proposed by the CFPB are unrealistic,” he said. “America’s Credit Unions has requested a longer and more segmented implementation timeline to avoid vendor bottlenecks across tiers of institutions, along with other recommendations to help offset the substantial costs associated with the proposal. However, we recognize that when a final rule is published, there may be strategic risk associated with waiting on the sidelines while the largest institutions work to support third party access. A decision not to offer a modern digital banking experience could threaten competitive viability in today’s crowded financial services market.”

Conclusion

Credit Unions are literally the lifeblood of many of the rural communities they serve.  With a majority of the large banks pulling back from rural areas and closing branches in small communities, credit unions and Community Development Financial Institutions (CDFIs) are sometimes the sole source of credit for consumers.


Open banking offers credit unions a significant opportunity to enhance their services, broaden their market reach, and drive customer-focused innovation. Credit unions should not assume however they have ample time allowed by the CFPB to comply. This is a complex regulation introducing new consumer financial data rights, and ending the practice of screen scraping. Complying with CFPB 1033 will take more time than one might think, and credit unions should begin now by defining their open banking strategy—or rather, how open banking fits within their broader strategy—and the role they want to play.


Institutions that are quicker to adapt and take advantage of the CFPB's 1033 ruling will gain a competitive edge, leaving those that delay in adopting it at a significant disadvantage.


By embracing open banking now, these institutions can level the playing field, improve credit underwriting, and streamline cash flow management for small businesses, providing a clearer financial overview. With the right partnerships and technology, credit unions can successfully navigate the open banking landscape and establish themselves as key players in the future of finance.












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