It’s very possible that credit unions and smaller banks could lead the way when it comes to technological innovation, and that’s a good thing if they want to attract the new generation of banking customers.

As in any business, the larger the organization the harder it is to promote innovation. As Tom Bryan, CEO of Nymbol Technology in Atlanta, wrote on an editorial in Credit Union Times this week:

“Not only is technology better, less expensive and more widely available than ever, more important, smaller institutions like credit unions are simply more agile. The enterprise-wide IT systems big players installed 20 years ago were cutting edge then, but today are legacy systems, often with outdated architecture that is difficult and expensive to upgrade.”

Younger customers have come to expect conveniences such as online banking and mobile check capture to be the norm. They are more inclined to make a cloud-driven transaction than walk into their local credit union or bank. Customers want virtual banking to be faster and accessible across a wide range of tools and apps. Frictionless transactions are the latest trend and it seems likely that smaller banks and credit unions will take the lead because they can be more nimble.

This agility to adapt to the rapidly evolving needs of customers is what gives the smaller institutions a leg up on their competition. Being able to bring new products and new product bundles to market faster will make these smaller institutions innovators that will attract early adopters. And these same institutions have the added advantage of experimentation. It doesn’t take as much effort to roll out a new product that has never been tried to see how well it’s accept. Larger institutions take longer to create and launch a new product or initiative, and when they fail they usually fail big. As they say in the world of innovation, fail fast so you can retool and try again.

And using technology can help make you even closer to your customers. New technology platforms, like social media, are providing a conduit for two-way dialogue between banks and depositors so you can ask what they want and how you are performing. That means adjusting banking products as policy based on consumer feedback. Here, too, the big institutions often fail because they try to make customer service a “one-size-fits-all” proposition with the result that no one feels particularly special. It can be argued that smaller institutions have a better opportunity to listen to their customers and deliver what they ask for.

Whether or not the Davids will beat out the Goliaths in their fight for consumer loyalty using technology has yet to be seen. But it’s going to be interesting to watch the battle for innovation in the meantime.

With the current downturn in deposits, consumers are abandoning banks for non-profit credit unions according to a recent article by Motley Fool contributor Rich Smith. Reporting on a recent report by the National Credit Union Association (CUNA), credit union membership hit a record high in 2011, then exceeded it’s record with a new high of 93 million members in the second quarter; the largest quarterly increase since 2008. Clearly, consumers are looking for more from their financial services providers than banks have been providing lately.

A recent report from SNL Financial states that credit unions are gaining in a number of areas:

Credit card loans to consumers from credit unions rose $2 billion over Q3 2011 levels, exceeding $38 billion, a 5 percent increase. During the same period, credit card loans from commercial banks were at $669 billion, down from $671 billion in the third quarter of 2011. According the Smith:

The surge of interest in credit unions stems in part from recent highly publicized efforts by commercial banks to load up their customers with new fees -- on debit cards, on checking accounts, on ATM withdrawals. As well, there's the banks' role in the 2008 financial crisis, which came close to destroying the American economy. And toss in the banks' tooth-and-nail fight to preserve high interest rates, high service fees, and "universal default" policies on credit cards for a third.

Where  credit unions are winning the hearts and wallets of their members is through services. Where all the large commercial banks used to offer free checking accounts, since 2009 the trend has changed and almost no banking institutions offer free checking these days. By contrast, 38 of the top 50 of the largest credit unions offer free checking to members. And where the interest rate for platinum tier cards averages 9.9 percent with banks, rates are as low as 5 or 6 percent for credit union credit cards.

Credit cards are also leading in loyalty programs, including rewards credit cards that provide airline miles, credits on purchases, and even cash. Interest on these types of cards average 11 percent among commercial banks, but credit unions offer robust rewards programs with interest rates at 7.5 to 6.25 percent. One credit union, the Educational Systems Federal Credit Union, even offers platinum and rewards cards at rates as low as 3.25 percent.

With tough times, consumers are shopping for better rates and terms over convenience and other factors, and credit unions are able to offer a more attractive options, particularly as banks continue to add new fees and raise existing fees to make up for low deposit rates. Banks need to find new,consumer-friendly services that will attract depositors, or they will need to find other tools and bundled products to win back depositors.

We recently posted a blog entry about how mobile banking is adding to the coffers of financial institutions in unexpected ways. Credit unions in particular seem to be benefitting from mobile remote deposit capture (RDC), where customers take a photo of a check and make the deposit using their smartphone. A recent article on American Banker states:

“While larger banks offered the service initially, credit unions and community banks are also quickly adopting mobile RDC, a move that can boost overall use of electronic channels. While almost all financial institutions want to boost mobile and web banking, it's vital for smaller institutions to do so to reduce service costs and accommodate the lack of a geographic footprint.”

Mobile RDC is one of those areas that we identified in our recent Lifestyle Financial Services study that consumers not only want but are willing to pay for. Our research shows that about 63% of consumers want RDC, and nearly 67% of credit union members are willing to pay for mobile RDC. According to market reports, once credit unions embrace RDC, other benefits will follow.

The American Banker article notes that RDC draws attention to other mobile banking services. It also highlights other service benefits, such as support for a geographically diversified member base:

"We have a large portion of our members from the University of Texas …mobile RDC helps parents make deposits for their children more easily," says Corina Watts, a senior manager for University Federal Credit Union, an 132,000-member Austin-based credit union that has about $1 billion in assets and lists 17 branches on its website, mostly located in southern Texas.

RDC also is an inexpensive technology to deploy, but it can deliver big returns. There are service organizations that make it easier for smaller financial institutions to offer mobile RDC. Using a software-as-a-service (SaaS) approach, credit unions can offer RDC on a pay-as-you-go basis, either per transaction or on a subscription basis, and the value to members and the light RDC sheds on other credit union services will more than make up for any vendor service fees.

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

According to this week’s National Pricing Indicator report from Market Rates Insight, credit unions have added a total of 725,531 new members during the 12 months ending March 31, 2011, at an average operating cost of $149 per new member acquisition.

The average membership per credit union increased from 12,035 to 12,475. The incremental increase in the average membership per credit union occurred despite a decrease in the total number of credit unions from 7,498 to 7,292 - a decrease of 206 institutions. The absolute increase in the average number of members per credit union was 439. The average same-store increase, which excludes mergers and acquisitions, in the number of members was 97 new members per credit union (Figure 1).

Total deposits (savings) at credit unions increased from $773 billion to $812 billion in the 12 months ending in March 2011 - an increase of $39 billion. The average deposits per member increased from $8,568 to $8,923 over the same time period - an increase of $355 per member.

The greatest increases in deposits occurred in regular shares accounts (savings), which increased by $23 billion, followed by Money Market account up $15 billion and share drafts (checking) up $10 billion. The greatest decreased occurred in share certificates (CDs), which decreased by $12 during the 12 months ending March 2011 (Figure 2).

Credit unions are continuing to struggle to connect with younger depositors. According to recent research from MyCUsurvey, credit unions are struggling to attract younger members. Perhaps it is due to a lack of online banking. Perhaps it’s because younger bankers don’t understand the value or structure of credit unions. Whatever the reason, younger customers just don’t feel engaged. As MyCUsurvey states:

“The latest survey revealed a direct correlation between the age of credit union members and customer satisfaction. According to the findings, there is a 30 point different in satisfaction ratings between older members (over age 65), and younger members (under age 30); older members are just more satisfied with their credit unions.”

Note that only 11 percent of Generation Y polled by Javelin Strategy and Research had a financial relationship with a credit union, as opposed to 15 percent of all other age groups. Compare this to 43% of Generation Y polled who had a financial relationship with a top 10 banks had as opposed to 38% of all other consumers. The reason is the demand for mobile and online banking; an area where credit unions lag.

So what can credit unions do to make themselves more attractive to younger depositors? Talk to them where they hang out in terms they understand. American Banker recently ran an article on how credit unions are building online community to nurture younger depositors, hiring online spokespersons through local contests. From American Banker:

“The online contests, and all that goes with them, are part of the Young & Free campaign, launched in 2007 by Currency Marketing, a credit union marketing company in Chilliwack, Canada. The campaign started from a fundamental proposition: Credit unions, faced with an aging population of members, had to do something to stay relevant and to gain a new, young base of customers.”

This is a brilliant approach that combines new marketing channels with social media. Basically, the program recruits a regional “spokester,” a social-media savvy person in their 20s who will represent the credit union for one year. They are paid an annual salary (typically around $30,000) to engage their peers using social media. Armed with flip cameras, smartphones, and laptops, they feed their social media channels with relevant content. They are required to run a campaign website, develop contacts through social media, write daily blog entries, and reach out to credit union members over Twitter, Facebook, and other channels.

And the campaign yields results. According to American Banker, nine credit unions participating in the program doubled their membership. Social media continues to prove itself to be a powerful tool for recruiting consumers, if you understand how to build a community. The Young & Free formula seems to be working for credit unions, and some of the savvier banks are sure to follow suit.

There was an interesting article posted on BankInnovation.net this week about the challenges social media poses to  financial institutions. New regulations from the SEC, FINRA, and the FSA in the United Kingdom are classifying Facebook, LinkedIn, and Twitter exchanges as public information that needs to be archived and “discoverable” in the event of an audit. Facebook posts are being classified as advertising and LinkedIn recommendations as endorsements, which means they fall under regulatory scrutiny. After all, you don’t want your broker tweeting stock tips. But this poses new challenges to financial institutions who are struggling to keep up with customer communications. As a recent report from Mercator Advisory Group notes:

“Financial firms that wish to excel at CRM must establish a presence and voice in most of the same online communities where their customers spend time. Increasingly, that means participating in social media of many types.”

In related news, a recent customer satisfaction survey conducted by MyCUsurvey reveals that credit unions are not attracting younger members. Part of that has to be due to the way that Generation Y and Generation Z like to interact with vendors.  They live online, talking to their friends by text and on Facebook, and transacting their business on the web. Where banks are more sophisticated in their online banking strategies, credit unions don’t typically have the same resources. So even though banks and credit unions are struggling to harness social media as new channels to communicate with customers, it has to be part of a total online experience. Tweets need to turn into transactions with a click of a mouse or a touch of a smartphone.

So how are banks and credit unions addressing the challenges of tapping into social media without violating the rules? It’s a combination of common sense, proper oversight, and technology. Where financial institutions used to block online conversations altogether, they are now struggling to implement safe practices. Some are providing restricted access, allowing select individuals access to social media from IT-controlled computers to try to minimize missteps. Smarter institutions are adopting “best practice” guidelines with severe penalties for failure to follow the rules, such as termination for tweeting out of turn. And chief security officers and chief compliance officers are relying on technology to enforce the rules.

Vendors like Socialware and Actiance are providing technology platforms (both on-premise and cloud computing based) that give banks the ability to monitor, moderate, and archive online conversations as part of regulatory compliance. Granted, this imposes Big Brother restrictions on financial workers’ online activities, but the consequences of violation can be severe. FINRA levied $4 million in fines and initiated 34 disciplinary actions in 2011 for electronic communications violations.

So while social media poses a potential risk to banks and credit unions, the savvy institutions know they have to step up their online game to meet the demands of their customers. The rewards will far outweigh the risks, especially if they can be sure they abide by the regulatory rules.

To free or not to free? That is the question facing most banks today. Do they offer free checking to customers, or do they try to recoup their growing losses with fees imposed on customers? Despite the bank industry pundits predications, the rumors of the death of free checking are greatly exaggerated. Consider some news items this week:

A news story in the Wall Street Journal states that PNC Financial Services Group is bucking the industry trend by keeping its basic checking accounts absolutely free. Instead of fees, the bank will be looking to gain profits from other common perks:

”The Pittsburgh-based regional bank on Tuesday is expected to start notifying its five million checking customers of changes to some of its accounts, which won't include any new fees. But the free checking comes at the price of other perks: Basic accounts will no longer enjoy debit-card rewards, and non-PNC automatic-teller-machine fees will no longer be reimbursed.”

The bank is hoping to attract defectors from other banks with fee-based checking and drive them to more profitable products, like loans. We’ll see if the strategy works.

Much of this is in response to the new Dodd-Frank financial regulations and the new debit card rules, as well as the new Federal Reserve proposal to cap the amount merchants can charge for debit transactions.

This week also included a new survey from Bankrate that finds that 38 of the top 50 credit unions still offer free checking – no strings attached. And those who have fees usually provide simple measures to avoid paying them, such as maintaining a minimum balance of using electronic statements.

“The survey also found that nearly half the credit unions do not require a minimum balance to open an account. Fees rose modestly from last year as well; bounced check fees are up by about a dollar at $26. ATM fees rose slightly to $2.10, from $2.”

So while financial institutions continue to find innovative ways to overcome profit limitations and government regulations, they still have to find new ways to attract and retain depositors. What we at Market Rates Insight continue to see is that rates rule, and it’s attractive market rates that will keep customers happy and build deposits at the end of the day.

Could this be the year we see new and creative fees applied to banking products. Earlier this week, an article in the Wall Street Journal noted that:

“Banks, in an attempt to wring more revenue out of customer accounts, are conjuring up new ways to raise fees on basic products like debit cards, cash machines and checking accounts.

As regulation curtailing the financial institutions from levying certain charges on consumers has mounted over the past year, banks have had to dream up new fees to replace those now trimmed by laws.”

Some of these new fee strategies are pretty creative, and are sure to promote some consumer backlash. Consider these ideas: 

• Annual fees of $25 to $30 on debit cards and new fees on ATM transactions.
• Limiting the number of debit card transactions or the amount of the transaction.
• New fee on basic checking of $6 to $9 on basic checking, a strategy already being tested by BofA, with no way to waive the monthly fees.

As noted in another recent article in American Banker, the challenge is going to be selling these fees to the customer. The smart banks are going to find ways to increase their share of wallet at the sa

me time they impose new fees by making it more attractive to deepen the relationship with the bank. According to American Banker, BofA is taking a lead here:

“Bank of America Corp. is … testing new checking accounts that in most cases allow a customer to sidestep a monthly maintenance charge only by doing more business with the bank. It remains to be seen whether such "relationship pricing" can help banks soften the sting many consumers may feel as a result of having to pay for a product they have come to expect for free. But experts said the strategy has a better chance of acceptance by consumers than would simply slapping on fees with no way to get around them, a tack that other banks are considering.”

As an analyst from the Aite Group notes, this is a wake-up call for the banking industry that is finally starting to realize that checking accounts are not necessarily the start of a deeper banking relationship. It also means that banks and credit unions are going to see new incentives to cross-merchandise their products and create new “relationship” banking strategies using lower or waived fees as an incentive. A

s the experts note, if you have multiple products at the same bank you are less likely to switch, even if they start adding new fees.

So the question now isn’t if banks will impose new fees – that’s inevitable. It’s how they are going to sell these new fee structures to customers in a way that will make it more attractive to deepen that banking relationship and make them want to come back for more.