As credit unions become more important in business lending markets, we have seen the emergence of business services such as treasury management and payment processing geared to small businesses. This report delves into the decision-making process undertaken by four credit unions in creating and providing business services. The study outlines each context and highlights varying approaches taken to better understand both the motivating and limiting factors of business service development by credit unions.
What is the research about?
This research focuses on the factors that play a role in the development of business services and those that limit their development. To gain insight into the decision-making process behind the adoption of business services, we study four leading credit unions that have made business banking a strategic priority.
Identifying the commonalities between each of our cases allows us to explain the emergence of business services as a result of credit unions’ growing share of business lending markets. Recognizing the distribution of different levels of business services in the system, we also find that the development of services among individual credit unions is limited by the extent of demand from their membership. Focusing on the primary role of network interactions between credit unions and their business clients, we show that the kinds of business services a credit union offers (or may plan to offer) are typically a reflection of the kinds of businesses they serve.
What are the credit union implications?
Credit unions decide to offer business services on the basis of the specific needs of their business membership. As a matter of process, the initial adoption of business services is likely to occur soon after the launch of a commercial lending program. Credit unions that experience significant growth in the volume of commercial lending portfolios inevitably expand their network of business clients. As the credit union’s business-client network expands, “demand signals” or pressure for new or improved services are often communicated to credit unions through routine interactions with businesses. Generally speaking, as commercial lending relationships continue to grow in the credit union system, we would expect growth in the adoption of business services across the system and gradual advances in the level of business service capabilities among successful credit unions that begin to attract more member businesses.
The limiting factors to service development for most credit unions can be summed in terms of the relative costs of risk. Since a majority of credit unions do not have economies or networks of scale necessary to invest in the provision of all business services, they tend to focus on those core services that member businesses use the most. Our cases highlight the bulk of service development costs in the acquisition of expert staff with the requisite experience to lead the implementation of any planned new services or improvements in their delivery. Hiring and internal training measures play a critical role in supporting business service development since they are intended to mitigate the additional risk in expanded operations and are necessary to construct the proper channels to maintain quality and consistent service for member businesses. A dedicated business team provides avenues to establish interaction channels and build relationships with member businesses as well as potential members. Credit unions tend to tolerate these costs only when there is an expectation of sufficient uptake from member businesses.
Regardless of scale and size, credit union business banking should be unique to your institution, supportive of your member base, and aligned with your mission. If you want to expand into or develop your business services:
- Make growing your commercial lending portfolio into a strategic priority.
- Foster business relationships and learn about member needs during routine interactions.
- Grow by relying on referrals, insights from market research, and borrowing relevant member-recruiting techniques.
- Hire business lending experts and train your staff in business service provision. Proficient staff members are crucial to communicating with business members, understanding their needs, and developing value-added services.