Guest blog by Rodney E. Hood, member of the Board of the U.S. National Credit Union Administration. This article was first published in Society Matters magazine.

American economist Robert Shiller has argued that finance should serve a social purpose “as the steward of society’s assets and an advocate of its deepest goals.”

Recent turmoil in the banking sector suggests that some of our colleagues in the financial services  industry have lost sight of that sense of social purpose.

The question is, how do we restore the sense of stewardship and trust that is so essential to a soundly functioning financial system? This is where smaller financial services institutions – including credit unions, building societies, and other cooperative finance entities – have a distinct advantage. In a time of declining trust in so many of our society’s institutions, these entities enjoy consumer loyalty thanks to a strong commitment to serving their members and their communities.

Unfortunately, the larger trend in the financial industry is toward consolidation, a trend that threatens smaller institutions like credit unions and building societies. While larger financial institutions have advantages in terms of scale and efficiency, they risk becoming less focused on the needs of the people and communities they’re supposed to serve.

Yet remarkably, many smaller financial institutions still manage to swim against this foreboding tide and flourish. What’s their secret? The answer lies in service, trust, and stewardship.

A report  published last year by the Filene Research Institute, a US-based think tank that  focuses on  the cooperative finance industry, explored how small credit unions are thriving in today’s  marketplace. That report, titled “The Puzzle-Solving Approach That Enables Small Credit Unions to  thrive”, reveals that successful small cooperative finance institutions focus primarily not on growth,  but on service to their members. Growth is still important, but not as an end in itself – it follows as  “an outcome of member-focused strategy.”

“In short, when credit unions serve their members better, they also grow faster,” the Filene report’s  authors emphasize. “Thriving small credit unions are clear about who comprises their market and  what their target members’ needs are. We find that these  organizations think deeply and clearly about what matters in the specific market they serve, and then tailor a focused set of offerings to meet those needs.

How can we create conditions to help these small institutions to continue to thrive? First, from a  policymaking standpoint, regulators and lawmakers should focus on forging a regulatory framework  that empowers small institutions to prosper and to protect their position within the financial services ecosystem.

Second, credit unions and building societies should experiment with innovations to heighten their  competitive advantages in a crowded marketplace. I urge credit unions to explore financial  technology to improve their ability to serve their members.

Finally, I encourage the industry to seek out and nurture partnerships with other credit unions and  building societies, working together to share ideas and strengthen the cooperative finance system as  a whole.

When it comes to financial services, bigger is not necessarily better. We should encourage a diverse  financial services ecosystem that offers consumers a wide range of options to meet their financial needs, while also focusing on the broader needs of the communities they serve and society at large. Credit unions,  building societies, and other smaller financial  service providers, with their focus on service and stewardship, play an important role in that ecosystem, and deserve our support.

Next Steps:

Rodney E. Hood is a member of the Board of the U.S. National Credit Union Administration (NCUA),  and served as Board chairman from 2019-2021. This text is an abridged and edited version of Mr. Hood’s speech to BSA in Liverpool on May 4, 2023. A full version of his remarks is available at the NCUA website.