Deep Dive: Why Microbusinesses Could Be The Next Innovation Frontier For Credit Unions

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Credit unions are keeping microbusinesses front and center as they plan for future technological innovations. Microbusinesses usually generate just $250,000 to $1 million annually, but they are a significant force in the American economy, and large FIs, CUs and smaller community banks are vying to create services for the more than 30 million SMBs across the U.S.

Many CUs are innovating to swiftly fulfill microbusinesses’ requests for digital support during the COVID-19 pandemic. Roughly 250 credit unions are leveraging a CUNA-developed digital compliance system to ensure they comply with recent legislation and help them speed their loan applications, for example.

The following Deep Dive examines how CUs are developing technological innovations to better serve microbusinesses and details the challenges they face when doing so, especially during the current health crisis.

Digital Shift Spurs Microbusiness Innovation

Pandemic-driven social distancing requirements and restrictions on physical interactions have given rise to what is expected to be a long-lasting digital banking shift. Credit unions are thus examining their innovation strategies to help their clients and customers confront these changes, and many are focusing on products and services tailored to microbusinesses’ unique needs.

PYMNTS’ Credit Union Innovation Playbook: Microbusiness Opportunity Edition found that microbusinesses form an important part of credit unions’ client bases and that 40.8 percent of CU leaders intend to boost the number of products and services designed for these businesses in the near future. This share is especially high among smaller CUs, with 55.3 percent planning to do so.

Several key areas stand out when examining microbusiness-focused CUs’ innovation agendas. Research shows that 67.3 percent of CU executive respondents are aiming to provide microbusiness clients with faster transaction processing capabilities, 43.9 percent are examining innovations to help microbusiness members meet their customers’ shifting demands and 40.8 percent are simply aiming to satisfy these firms’ needs. Such digital-minded investments could be especially crucial during the pandemic as members look to maintain nimble operations, even as in-person transactions remain limited.

This digital emphasis is also evident when examining the tools and innovations in which microbusiness-focused CUs plan to invest over the next couple of years. PYMNTS’ findings reveal that 66.7 percent of these credit unions are eyeing mobile banking capabilities, while 61.1 percent are interested in digital wallet solutions. Credit unions eager to cater to microbusinesses are also significantly more interested in another key area compared to non-microbusiness-oriented CUs: fraud management. PYMNTS’ study shows that 55.6 percent of the former are keen on investing in innovations to help their members manage fraud risks, compared to just 31.3 percent of the latter.

These investments show that CUs serving microbusinesses must offer innovative digital features that can give these businesses the flexibility to respond to the current economic situation and bolster their operations as commerce continues to move online. These CUs also appear aware of the fraud risks that this digital migration creates for microbusinesses, and they are willing to invest in fraud management solutions to address them.

The Lending Dilemma 

Microbusinesses occupy a crucial space in the U.S. economy and have seen significant investments from credit unions, but many still face barriers, especially when it comes to lending. These can include high rates, dwindling branch-based lending options and financial challenges unique to smaller business owners. Many microbusinesses that cannot receive adequate lending options from traditional FIs are seeking assistance from nontraditional sources, such as digital payments service provider PayPal, which is being used by 39 percent of U.S. SMBs to manage their day-to-day finances.

FinTechs are also emerging as competitors to traditional FIs, including CUs, in catering to microbusinesses and smaller businesses. One recent report revealed that 70 percent of SMBs had applied for federal PPP loans by early April, but it noted that credit unions and other traditional banks were struggling to keep pace with FinTechs when approving and disbursing the funds. The report explained that CUs could automate their systems and leverage innovative technologies to retain their members, however.

CUs can also satisfy existing microbusiness members and appeal to new ones by offering them financial relief during the pandemic. Colorado-based Ent Credit Union recently announced that it would roll out a program to defer approximately $90 million in loan payments, reduce fees, expand businesses’ credit lines and issue more than $24 million in loans to its 370,000 members, for example. Such support could go a long way toward helping microbusinesses access needed funds and pay for critical expenses rather than forcing them to worry about their short-term loan repayment obligations.

Microbusinesses present a significant opportunity for credit unions, but they must be prepared to offer innovations and products that can adequately address these firms’ specific needs. CUs that can continue to offer digital-first solutions as well as flexible and fast loan services are likely to earn — and keep — their business.

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