For many U.S. workers, the pandemic served as something of a wake-up call. Leaving their jobs, either by force or by choice, inspired droves of fledgling founders to try their hands at entrepreneurship. Americans started nearly three million more online microbusinesses in 2020 than the year prior. In 2021, an historic 5.4 million new business applications were filed in the U.S. While most small businesses are run solely by owners with zero employee help, at least 16% have between one and 19 employees.
For credit unions, the explosion of these so-called microbusinesses creates both risk and opportunity.
On the plus side, more small business owners within a membership means a greater market opportunity for a range of business products, including business accounts, business loans, business credit cards, and even services like payroll and merchant processing. Instead of rolling the dice on product campaigns that target only business-member prospects, credit unions can increase the chances of conversion by targeting existing members who are running microbusinesses from their personal accounts. Assuming a credit union can easily access and analyze transaction data, assembling such a prospect list should be an easy lift.
Such campaigns have the possibility of stimulating organic growth and deepening member relationships. Those are two great reasons to proceed. However, a third reason may be even more motivating, particularly for the governance, risk and compliance folks within a credit union. The fact is, encouraging microbusiness owners to conduct their finances in a business- versus a personal-banking environment also mitigates several key risks facing the cooperative.
When credit union members use their personal accounts for business purposes, it can present several risks and challenges for both the credit union and the members themselves. Here are just a few:
Legal and Regulatory Risks: Credit union deposit accounts are typically designed for personal use and using them for business purposes may violate the credit union’s account terms and conditions. In addition, members who are using personal accounts for business activities may still need to comply with some banking regulations and anti-money laundering (AML) rules. If the credit union is unaware that a member is conducting business from a personal account, staying on top of such compliance can be a challenge, but critical.
Operational Risks: Speaking of staying on top of account activity, credit unions may find it challenging to accurately track and manage business transactions within personal accounts. This can lead to operational inefficiencies, and open the door for errors and potential liability. It may also complicate the effectiveness of fraud detection and prevention strategies.
Documentation and Record-Keeping Risks: Without clear financial separation, account audits and requested documentation can become overly complicated, leading to additional inquiries or penalties from state tax authorities and regulators.
Financial and Credit Risks: Mixing personal and business funds makes it hard to distinguish between personal and business income and expenses. That can seriously hinder financial planning and budgeting, not to mention complicate income reporting for tax purposes. What’s more, using only personal accounts may limit a member’s ability to access business loans, lines of credit and other financial products that can grow their business from micro to enterprise. Worse, business debts that get tied to personal accounts or defaults on business obligations can negatively impact the member’s personal credit score.
To mitigate these risks while capturing potential product and service opportunities, credit unions should consider developing specific campaigns targeting the entrepreneurs within their memberships. In addition to encouraging members to open separate business accounts, credit unions can also provide guidance and resources to help with the transition. Additionally, credit unions should ensure members are aware of the potential risks and regulatory requirements associated with using personal accounts for business purposes, and they should consider offering suitable business account products and services to meet the needs of those members.
Sharing with members the risks (and rewards) of migrating business finances to business products is not only the smart thing to do, it’s also the right thing to do. With financial health and wellness as core tenets of the credit union promise, education like this is an essential element of the movement’s purpose. If, along the way, credit unions also benefit by boosting member engagement and business product penetration, it’s a win-win. Financially strong and compliant credit unions are sustainable credit unions, capable of helping America’s entrepreneurs thrive.
Article by Jovilyn Herrick, Senior Director, Client Solutions at ViClarity. Originally published in Credit Union Times on October 20, 2023.
