A New Horizon for Credit Unions?
Credit unions, with their focus on member service and community engagement, have long occupied a trusted space in the financial landscape. However, the rise of “neo-banks”—entirely digital financial institutions—presents both challenges and opportunities for this established sector. Understanding the history, motivations, and expansion of neo-banks is crucial for credit unions to navigate this evolving landscape and remain competitive. Another term for these neo-banks is “challenger banks”, and so with the rise of neo-banks, neo-credit unions may be on the horizon.
A Brief History:
The term “neo-bank” gained traction around 2013-2015, with early players like Monzo (UK), N26 (Germany), and Revolut emerging in a post-financial crisis landscape marked by disillusionment with traditional banks. These banks wished to focus on mobile-first experiences, offering lower fees, faster transactions, and seamless integrations with financial tech tools. This is different than a “digital bank” which is the term for an established financial institution doing business online, such as “First Direct” by HSBC or “Tangerine” by Scotia Bank.
In 2021, a new CUSO was created to be the first neo-bank for the credit union movement, named Dora Financial it seeks to aid in the field of membership for those not participating in mainstream banking. It is currently sponsored by Affinity Plus, DCU, Inclusiv, LCU, and USALLIANCE. Last year they launched a payroll payment system established for the gig economy, so they are working on staying ahead of the fintech curve and finding ways to really be there for their members. They have also shown that they are worthy of being in one of our #HumanitarianHighlight articles as last month they announced a partnership with the great charitable organization, Sharing Hope.
Motivations and Expansion:
Neo-bank growth has been attributed to a dissatisfaction with traditional banks, with their high fees, complex structures, and the perceived lack of innovation. That innovation with cloud-based infrastructure and open banking APIs has enabled some agile and scalable models of financial institutions. Of course, the growth comes from the same force transforming many industries, the Gen Z and Millennials who are accustomed to their digital experiences and have long embraced user-friendly mobile apps.
These factors along with others have seen the expansion of neo-banks into a global network. Some players, like Revolut, started serving specific regions and then went global. The plan for most of the neo-banks is to start with basic accounts but then branch off into offering loans, investments, and wealth management services, a strategy that has served banks and credit unions well over the centuries. Neo-banks use strong partnerships and collaborations with more established institutions to offer wider services to their customers while leveraging their digital expertise.
There are still challenges and opportunities in this field for credit unions, such as the competition for digital-savvy segments. The neo-banks have shown they cater to consumers who prioritize convenience and innovation so the credit unions who have been looking to fintech to guide their membership growth it would be a good idea to look more into neo-banking, either through a collaboration or a CUSO outreach. There may always be a potential regulatory change in this field, but as we have seen one neo-credit union player on the field there is an opportunity for others who want to better transform banking towards the credit union movement. Now may be the time, for the younger generations may seek these banking options as opposed to the traditional brick-and-mortar options.
There are opportunities here, even if a credit union just wants to dip its toe in the digital pool. Look for ways to leverage your strengths such as offering service and community focus while differentiating yourself. Embrace technology by investing in robust digital platforms and mobile apps, which we have forms that work with all the major database systems. You can also partner with other fintech CUSOs and organizations to better help the new generation who may prefer an app experience for their financial banking needs. Remember, you don’t have to be a challenger bank to challenge banks, but you do need to stay aware of the new market players.
