Credit unions and the ultimate category killer

Wikipedia defines a category killer as a product, service, brand, or company that has such a distinct, sustainable competitive advantage that competing firms find it almost impossible to operate profitably in that industry (or in the same local area).

Category killers are large companies that put less-efficient and highly specialized merchants out of business. One of the best examples of a category killer is Walmart; the chain has hurt the bottom line of many stores in a wide range of specialized categories.

New and off the shelf

Last week, Walmart announced its new, low-cost checking account, which will launch nationally by the end of October. The new Walmart checking account boasts an $8.95 monthly fee for direct deposits of less than $500 per month. Account qualification is easy for almost anyone older than 18 who can prove their identity. This new off-the-shelf product is intended to be a low-cost alternative to traditional bank (and credit union) checking accounts.

The $8.95 monthly fee doesn’t sound so low to credit union free-checking loyalists, but for those members who occasionally…er, regularly…overdraft, the Walmart checking is a low-cost option, directly benefiting consumers living paycheck-to-paycheck (how many credit union members live this way?) In fact, no fees for returned checks or overdrafts will help may consumers avoid predatory overdraft programs.

Besides providing affordable checking options to tens of millions of Americans, the easy qualifying system will link tens of millions or more consumers, who were previously underbanked, to a checking account.

Killing credit unions

Is Walmart checking a category killer? It’s too soon to tell, but it doesn’t look good when one considers that 30 to 50 percent of a credit union’s fee and other income comes from overdraft protection. What happens if consumers realize that besides convenience, they could save hundreds of dollars per year in reduced overdrafts? What happens to the bottom lines of the majority of our credit unions, those with less than $50 million in assets and an average ROA of 19 bp (CUNA Economic and Statistics)?

More is at risk than overdraft fees. Walmart’s checking package includes its Bluebird prepaid debit card, a natural addition to the package that puts interchange income at risk. And finally, how strong are member relationships when you lose the transaction link?

Our world is changing rapidly, and I haven’t even said a word about Apple Pay.

Clean up on aisle four

How can you compete (survive) with a category killer? Here are a few strategies for you to consider:

• Prepaid card program. Offer a prepaid debit program. Three demographics continue to show high adoption rates for prepaid debit cards: Millennials, low- to moderate-income, and Hispanic markets. While Walmart and others are after these demographics, there is still an opportunity for credit unions to leverage their brands to keep or attract these consumers.
• Communicate easy approval process. Survey underbanked consumers in your market and you will find that one reason they remain underbanked is because they assume that the bank (you) will deny the account because of a negative check-system rating. While many credit unions don’t deny new checking accounts based on this this criteria, it remains the perception, and Walmart will capitalize on that. If you offer consumers a “second chance,” let them know.
• Leverage member loyalty. For those credit unions serving the low- to moderate income, more credit-challenged consumers, remember that you have one thing Walmart does not have (yet): affordable access to credit. My experience working with credit unions that serve a lower-income target market has shown that by extending credit, one creates a significant amount of loyalty. Consumers remember the person who helped them through a rough spot. Consider how many members have stayed with your credit union because you at some point helped them when nobody else would. While this target market is specifically the market Walmart serves, they do not yet offer the financing piece. Exploit that, but remember that if you do not consistently lend to this group, you cannot expect to retain their checking. If you’re thinking personalized, friendly service, I hope you will reconsider that competitive strategy.
• Offer and promote a “second chance” checking with no overdraft option. I know that members are offered an “opt out,” but I know from experience that there are many consumers that want this option for a checking account because they cannot afford the convenient overdraft trap. This option is the essence of the Walmart product and, personally, I think it is going to be well-received by millions of consumers.
• Other underserved groups. Overlook the Hispanic community at your own risk. I work with many best-practice credit unions that embrace and serve their Hispanic community. And while Walmart has embraced this group, I know that member loyalty remains high at the credit unions who actively serve and meet the credit needs of this group. It’s no secret as to why the credit unions serving this group are growing loans, membership and revenue so quickly: their members consistently demonstrate their loyalty through a very high number of personal referrals. If you serve these communities, I strongly recommend you consider a Citizenship loan program for this market. What better time to capitalize on loyalty and solidify your checking account relationship.

Ignore Walmart checking and prepaid debit at your peril. One of the dominant strategies I see within credit unions today as I travel across the country is profitable checking-account growth and deeper member relationships. If you do not have a strategy in place to combat this threat, how long will it take your team to have one?

Love ‘em or hate ‘em, Walmart is the ultimate category killer for so many stores, brands and products. It’s perhaps the best in the world at exploiting low-cost commodities and – let’s face it – credit union checking accounts are as much a commodity as a tube of toothpaste.