How the new NCUA succession rule can benefit FCUs

At first glance, the National Credit Union Administration’s new succession planning rule might just seem like a lot of time-consuming paperwork. On the contrary, the RIN 3133-AF42 Succession Planning rule (passed 12-17-24) hands federal credit unions (FCUs) a powerful competitive tool for retaining members and acquiring new ones.

The rule, which goes beyond typical succession planning to require specific actions for board and executive capabilities, training, competitive strategy planning and more, comes at a time when two major trends are converging to threaten the existence of credit unions:

1. Major banks are eyeing community banking (traditionally the territory of FCUs and small, local or regional banks) as an attractive new source of revenue.
2. FCUs that have held off on making investments in technology are finding themselves forced into mergers.
   

Let’s dive into #1 first.

Big banks in the neighborhood

As large US banks seek to diversify revenue streams and deepen customer relationships, several are targeting community banking—long the territory of federal credit unions and local banks—as an attractive new source of new customers and incremental revenue.

With their vast resources and extensive brand recognition, large banks can leverage their scale to offer competitive pricing, sophisticated technology, personalized services and a wide range of products and services for the community banking environment.

For example, JP Morgan/Chase has expanded its branch network to include 100+ flagship “community center” branches and is offering tailored products and services to local markets. Bank of America has launched initiatives to support small businesses and underserved communities, including programs to provide access to capital and financial education.

This trend of large banks competing for community banking dollars is expected to put added pressure on FCUs, threatening deposits, loan portfolios, member bases and, by extension, revenues.

Now let’s look at #2.

An epidemic of mergers

Because FCUs in the US are owned by their members, their officers have always felt a great sense of duty when it comes to spending money on the FCU itself. Now, in an environment where financial institutions (FIs) must spend money on technology to be able to offer their customers the services and features they expect, many credit unions are struggling to allocate funds for those technological investments.

The situation is compounded by the fact that the average age of credit union board members is 76.3 years and 83% of FCUs do not have term limits for board members, many of whom are using merger payouts as essential parts of their personal retirement strategies.

This has led to a disturbing trend: more mergers of credit unions, typically those that haven’t kept up with the digital transformation in financial services (even though many of them were well capitalized). At the end of 2022, there were 4,760 FCUs in the US. A year later, 156 of those had closed, and six months after that, another 71 had joined them.

NCUA found that, of the FCUs that fell to mergers, 32% had no succession plan or an inadequate one (compared with 25% of all FCUs with no succession plan or an inadequate one).

Hence the NCUA’s succession rule

The new succession rule is designed to help FCUs 1) compete effectively with the banks that are making inroads into community banking and 2) succeed with investments in the new technologies that are essential to both the member experience and operational efficiencies. Its goal is to ensure that the credit union has leadership and expertise in place to support its continued viability and effective operations in light of current issues and trends, including those described above.

NCUA’s strategy for accomplishing this is to take FCUs beyond the traditional scope of succession planning (which typically focuses narrowly on identifying who will succeed to a position or inherit a title or property), requiring them to fill executive positions and board room seats with leaders who have the skills and competencies to keep the FCU competitive and successful, such as experience using technology to maximize availability of services and drive efficiency in FCU operations.

What does the succession rule say?

The rule mandates a thorough evaluation of existing leadership, identification of potential successors and the development of clear career paths for key personnel, including the CEO/president, chief financial officer (CFO), chief lending officer, chief information officer (CIO), board chair (or equivalent) and board members.

It emphasizes leadership development and training programs to help FCUs cultivate a strong bench of future leaders with the skills and vision to guide the organization through periods of change and innovation (so leading-edge expertise doesn’t have to mean hiring from outside the organization).

The rule encourages FCUs to embrace diversity and inclusion to build diverse leadership teams that can contribute a wider range of perspectives, experiences and ideas—crucial for navigating complex challenges and identifying new opportunities in a dynamic market.

9 ways FCUs can leverage the rule to better compete

By ensuring a smooth transition of leadership, the NCUA succession rule provides a critical foundation for long-term strategic planning and sustainable growth. Here are nine ways FCUs can leverage this rule to navigate the competitive landscape:

1. Develop a succession plan that includes skill and competency requirements for executives and board members along with investments in leadership development programs to cultivate leaders with viable skills in today’s financial services environment.
2. Prioritize digital transformation by investing in cutting-edge technology to improve member service by offering innovative new options—for example, video banking at ITMs—to provide a more integrated member experience across their online, mobile and self-service banking channels. ‍‍
3. Embrace data-driven decision making, leveraging data analytics to mine valuable insights into member behavior, market trends and competitive threats. This data-driven approach can inform strategic decision-making and guide investments in technology and services.
4. Foster a culture of innovation by encouraging experimentation and innovation within the organization. Create a culture where employees feel empowered to share ideas and explore new technologies.
5. Focus on value to members. Emphasize the unique value proposition of credit unions: not-for-profit status, member-centric focus and commitment to the community. Research shows that awareness of the not-for-profit nature of credit unions is low among members of the Gen Z and millennial generation—30% of Gen Z and 21% of millennials aren’t even aware they can join a credit union—so this point bears repeating.
6. Cultivate strong, long-term member relationships through personalized service, community engagement and financial education programs. Leverage the cooperative model to foster a sense of community among members and empower them to participate in the decision-making process.
7. Explore strategic partnerships with other credit unions, fintech companies or community organizations to enhance service offerings and expand reach.
8. Monitor the competitive landscape and adapt strategies accordingly. Stay informed about the latest industry trends and best practices.
9. Target member segments where you have an advantage over big banks and give them what they want. Start with small business. Focus on serving specific member segments or niche markets where larger banks may not have a strong presence including young adults, seniors or specific industries.

These strategies require investments in technology. Make them.

It may seem unnatural to long-time FCU leadership, but acting in the best interests of members doesn’t always mean not spending their money—especially when it comes to investments in technology that will deliver the convenient services they want and reduce operational costs, which can in turn save them money.

It may seem unnatural to long-time FCU leadership, but acting in the best interests of members doesn’t always mean not spending their money—especially when it comes to investments in technology.

The good news is, such investments have been proven to pay for themselves: in a recent survey, nearly 80% of all CUs report a favorable return on investment from their payment innovation efforts, a share which jumps to 90% among the 30 top-performing FCUs.

Top performing FCUs also led in several other metrics:

• 87% increased their membership in the last year and were more likely to report boosts in member engagement and satisfaction with their online and mobile banking services.
• 90% saw upticks in member satisfaction with their mobile app over the past year.
• 83% noted an increase in the number of mobile app downloads.

Conclusion

FCUs can take the new NCUA succession rule and use it for their own purposes. It offers a critical foundation for long-term success in the face of increasing competition from large banks. By leveraging this rule to strengthen leadership, enhance technological capabilities and reinforce their cooperative advantage, credit unions can not only withstand the pressure from larger FIs but also gain a competitive edge and thrive in the evolving financial landscape.