Lure of shared branching fading for some credit unions
Two large Washington-based credit unions recently opted out of shared branching, and some industry insiders think this could be the beginning of a trend.
Recently Spokane Teachers Credit Union and Numerica Credit Union in Spokane Valley both said they would suspend their shared branching in the coming months. This makes sense given the costs associated with this strategy and the limitations imposed by shared branching, industry observers said.
On top of that, mobile banking usage has surged amid the pandemic, with more consumers than ever utilizing self-service channels. Especially if an institution allows remote loan closings, “the customer's need to visit the branch decreases significantly,” said Tim Scholten, president of consulting firm Visible Progress.
Prior to the coronavirus, credit unions were actively pushing members toward self-service channels for transactions that could be done outside the branch. Now the outbreak has further accelerated this. More than 20% of credit union members anticipate permanently reducing their visits to branches, according to a study from Access Softek.
This declining foot traffic and greater reliance on digital products could reduce the overall number of credit union branches and the need for shared locations.
The $3.7 billion-asset Spokane Teachers Credit Union said it recently suspended shared branching due to the coronavirus pandemic, in part to reduce branch traffic and better comply with social distancing guidelines. Spokesman Dan Hansen told the Spokesman-Review that the credit union’s contract with CO-OP Financial Services runs through March, and it is constantly evaluating its offerings.
CO-OP operates the nation's biggest credit union shared branch network.
The $2.8 billion-asset Numerica Credit Union in Spokane Valley will end shared branching on Oct. 30. Chelsea Maguire, a spokesperson for Numerica, told Credit Union Journal that in the past year the cost for shared branching has nearly doubled, but she declined to divulge the specific amount.
"This decision was made due to declining usage by our members for the past few years, as well as a significant drop in usage this year,” she said. “With so many digital offerings that allow members to manage their money remotely, we felt the value of shared branching was not equal to the cost.”
A CO-OP spokesman noted that STCU and Numerica left the shared branching network years ago as acquirers, in which another credit union’s members can do their banking at those institutions, but the until this year had stayed on as issuers, allowing their members to do business at other credit unions.
'The customer will choose'
That growth of online and mobile banking has led to less demand for shared branching than ever before, and it will decrease even more over time, said John Buckley Jr., president and CEO of the $187 million-asset Gerber FCU in Fremont, Mich.
Gerber has never been part of a shared branching network. When it was founded, the conventional wisdom was that people banked where they worked, and as a SEG-based CU, Gerber provided that.
Originally the credit union served the employees of Gerber, which makes baby food and is now part of Nestle. The credit union subsequently expanded its field of membership and now serves several counties and townships in Michigan.
“There weren't too many people coming into our community who weren't working at one of the large plants here,” Buckley said. “Our membership has never asked for shared branching services. It would be a money loser for us if we were to offer it.”
John Holt, president and CEO of the $499 million-asset Nutmeg State Financial Credit Union in Rocky Hill, Conn., agrees. He said Nutmeg has never offered shared branching but instead implemented a digital strategy that allows anyone, anywhere to bank with the institution.
“I believe there is an expense to it, and you’re not able to solicit other credit unions’ members into your credit union,” Holt said. “With the digital age taking off — especially after COVID-19 — we believe more people will continue to adopt electronic usage over going to a branch.”
Holt believes shared branching could be an advantage for credit unions with smaller footprints and a lack of resources to implement a competitive digital product.
“But I can see where [shared branching] may be becoming less cost effective or less effective overall because of the consumer appetite for wanting more electronic options,” he said.
Scholten said the question of how cross-selling is handled and who ultimately owns the customer can make sharing messy unless it is clearly spelled out in agreements.
“Even then, ultimately the customer will choose which brand they affiliate with,” he said.
And in that way, it can become an ongoing battleground for members, Scholten said. As one credit union serves another’s client, it has the opportunity to address other needs, like a new car loan or mortgage.
“Then whose customer is it? Who gets the loan and/or how much do you get paid for expanding that relationship? Or does the customer now become a customer of both?” Scholten said.
Shared branching is mostly a convenience and cost reduction play, similar to a shared ATM network but with some potential added complexities, he added.
But Kathy Snider, group leader for engage products at CO-OP Financial Services, said there is still a huge advantage for credit unions that participate in the network to compete with the mega-banks that have branches spread across the nation.
And although some credit unions have adjusted operations due to the pandemic, nearly 5,000 branches across the country remain open and available to millions of credit union members.
CO-OP said the network had grown from 5,300 “live teller” branches in 2015 to 5,700 before the pandemic hit.
Snider said the financial basis of the network is that the participants pay each other for member service in the form of network interchange. Using that model, the shared branch network pays the acquirer from the issuer for the service.
“This is a very economical model to grow visibility without the actual expense of building brick and mortar branches,” Snider said.
CO-OP said it could not provide cost specifics that would apply generally as it depends on several variables that make this different for virtually every credit union.
Scholten said the larger an institution’s network of branches is and the better locations it has, the less desirable the shared branching model becomes. But he said it can work for smaller credit unions with limited resources.
Some of those tiny players have banded together and not only share branches but their technology costs too, thus allowing them to deliver competitive services they might not otherwise have been able to afford.
“In other words, they needed to partner together in order to compete,” he said.
This story was updated at 4:35 P.M. on Sept. 11, 2020.