Credit Unions and the New Age of Financial Crime

With roots that go back to the 1850s, credit unions remain an integral part of the global financial system. They provide services to underserved communities as well as large urban settings. Credit unions differ a great deal from banks in that they are member-owned nonprofit cooperative financial institutions (FIs). They may offer financial services equivalent to those of other FIs, although normally only a member of a credit union may deposit or borrow money. In several African countries, credit unions are commonly referred to as savings and credit cooperatives, or SACCOs.

Worldwide, credit union systems vary significantly in their total assets and average institution asset size, ranging from volunteer operations with a handful of members to institutions with hundreds of thousands of members and assets worth billions of U.S. dollars. The World Council of Credit Unions reported that membership in the global credit union movement surpassed 411 million members with assets surpassing $3.7 trillion in 2023. By the end of that year, there were 411,008,249 credit union members in 104 countries.¹

In Canada, credit unions grew rapidly during the 1950s and 1960s, primarily driven by the need to use members’ savings to provide mortgages and short-term loans to other members within the cooperative. This was primarily driven by the demand for lower administrative fees. Many credit unions were located within large manufacturing facilities which allowed for inexpensive premises and convenient service hours for the workers. As times changed and employment for many across Canada has moved away from manufacturing work, the membership base of the credit union has also changed, creating the need to rethink their product and service offerings as well as how to attract new members.² One trend in this decade is that larger credit unions are absorbing smaller ones with a desire to offer a broader range of market-leading banking products, services and enhanced digital opportunities.

Updating Services and Serving Younger Generations

With the shift away from memberships being formed through affiliations with specific industries, credit unions have needed to become creative with their marketing efforts to attract not only new members but also members from younger generations. While their technology offerings can at times lag behind larger traditional banks, credit unions continue to lead the way with innovative and user-friendly alternatives. These offerings are often driven by direct engagement with their younger members through community partnerships such as education awards, community sporting events and summer employment opportunities through local colleges and universities.

Understanding what younger generations expect from their credit unions is essential, and relying on their ability to foster relationships through a sense of community is what sets credit unions apart from their competitors.

How Credit Unions Are Adapting Overall

While implementing out-of-the-box solutions can be costly, credit unions have been keen to partner with fast-growing fintech platforms. These collaborations produce leading-edge developments that provide seamless omnichannel solutions to their members. Online onboarding and the implementation of passwordless user journeys, which include the use of behavioral biometrics, has created an enhanced member experience by removing the frustration that often comes with passwords while at the same time reducing one-time password costs.

Ongoing in-person touchpoints also help keep a pulse on what members are thinking and feeling about their financial wellness. Community engagement and partnerships are key avenues that allow for building rapport outside of the traditional walls of the credit union. Through these engagements, committed partnerships are formed, solidifying to the members that their financial well-being matters and that their voices will be heard.

Credit unions continue to steer away from a one-size-fits-all approach to their financial services offerings. Staff are trained to keep their members’ financial well-being top of mind, while offering custom solutions that will fit or enhance the member’s current financial position. Financial literacy is always a key component of the member’s journey with credit unions, and products and services are offered with a “needs-based” approach. The profit of the credit union is never at the forefront. As all of the members are owners, every solution offered is done with the credit union’s values in mind because the financial success of the membership ultimately reflects the credit union’s overall profitability.

Competing priorities will continue to be the main challenge facing credit unions, which is why having a formal strategy around new and original offerings is key. Pioneering product and technological offerings will be paramount to setting credit unions apart from traditional banks and capturing the market share of younger generations.

PAT Machines and Member Solutions Teams

Some of the solutions that have been leading the way for credit unions to connect with their younger demographic are reworks of known solutions. One of those offerings comes in the form of an ATM with a twist. The personal assisted teller (PAT) machine has the same functionality as a traditional ATM but also handles coins, offers a digital signature pad and provides a live video interface so members can interact with a real teller while they do their banking. These machines allow for self-service banking while adding the personal touch of in-branch services if and when needed. The PAT also extends the hours typically offered for in-branch services.

Another way credit unions are adapting to the requests for remote banking is through the development of a fully remote member solutions team. These staff members are able to provide the services that would typically be offered in person in a completely virtual setting. Through the use of video conferencing and cutting-edge identity verification tools, team advisors meet with members when and where it is most convenient for them. This solution has been a great success as the younger generation has come to expect virtual offerings. It is advantageous to both the members and the credit union as it checks the box of an online offering while also adding the human touch element that is important to establishing key relationships and increasing loyalty.

Fraud, Technology and the War on Gaps

With all the technological innovation credit unions have implemented there also came risks. As digital access to products and services improved, so did the ability of fraud actors to exploit gaps within systems and rules. With this innovation, threat actors adapted and utilized social engineering, personal identity information for sale, deepfakes and other artificial intelligence (AI)-enhanced strategies to defeat anti-fraud tools and frameworks. This is not unique to just credit unions; it also affects banks and other lending entities. When the COVID-19 pandemic hit, many FIs thought they were “digitally ready” when in fact they were not. During the pandemic and afterward, most FIs tried to ensure they were truly digitally ready for all segments of their customer base. Some of the steps FIs took included improving digital sales channels, improving efficiencies of customer contact centers and striving for greater agility in resolving fraud reports from customers.

What differentiates most banks from credit unions is the level and sophistication of their cyber defenses, transaction monitoring, AI, robotics and machine learning. In Canada for example, the six largest banks have more advanced and more complex frameworks to deal with potential fraud and money laundering. Multiple layers of digitally enhanced redundancy and well-staffed fraud and anti-money laundering (AML) teams ensure banks are meeting the challenges of modern-day threat actors.

Although they have also invested in sophisticated technology and case management tools, credit unions simply do not have the resources of larger banks. In some cases, credit unions use the same case management tools for fraud and AML casework as banks, but do not have the resources to fully utilize the tools or staff them to similar levels. In the early 2010s, Scottish police warned credit unions that they were susceptible to organized crime groups because they lacked the resources that banks had.³ In early 2024, police in Northern Ireland investigated a local gang enforcer who forced members of a community to pay him through loans from their community credit unions as an overall targeted plot to increase criminal profits.⁴

The Future and the Solutions

Although credit unions’ unique vulnerabilities still exist, there are comprehensive and durable solutions and strategies being implemented globally. As an example, in Canada, the total number of credit unions has declined over time, but the remaining institutions are growing in size and sophistication. This strategy ensures that they continue to serve their unique customer bases but also secure themselves against threat actors and organized crime groups through investment in technology and teams. As an intended benefit, these reinvigorated institutions pool their resources and technology, primarily through credit union service organizations (CUSOs.) Through the use of CUSOs, credit unions are able to create new opportunities for improving threat detection capabilities and enhancing the technology they have through their combined size and budget. These opportunities have allowed these critical community institutions to improve AML and fraud detection performance and even contribute to top-line revenue for members. These achievements have been made by CUSOs investing in AI and machine learning, as well as by leveraging shared security infrastructure. As a result, these collaborative efforts have greatly helped credit unions to reduce costs while also greatly improving operational efficiency.

Finally, it must be stressed that the battle is not won. Credit unions still face significant challenges by virtue of their size and present-day capabilities. More investment is needed in modernizing detection tools, case management and reporting capabilities to keep pace with threat actors. Credit unions must ensure that they continue to upskill their fraud and AML teams to ensure regulatory compliance, to effectively combat financial crime, and equally important, to manage the reputational risk of their institutions.

Kristie Lestition, CAMS, director, anti-money laundering compliance & fraud, First Ontario Credit Union, Burlington, Canada, Kristie.lestition@firstontario.com

Cameron Field, BA, MSc, CAMS, vice president, The Vidocq Group, Toronto, Canada, cameron.field@vidocqgroup.com