Most of us know the analogy of the frog in the warming water. As the water warms gradually, the frog becomes more uncomfortable but continues to survive and stay in the water, until one day the water reaches a boil and the frog dies. The trends were clear – the frog should have known that the heat would eventually be deadly – but it remained in the water, willfully ignorant of the adverse trends, or aware of the trends but delaying the decision to act. Many credit unions are thinking like that frog.
I began my journey with credit unions in the mid-1980s. Car loans were king in the credit union world. Car loan rates in the 1980s were between 10% and 16%. At those rates, credit unions lived very comfortably on the net interest margin. Operational costs were covered and there was enough left over to add to capital.
Beginning in the 1990s, point of sale loans started to erode credit union lending opportunities. Direct car loan opportunities for credit unions declined as car dealers made more loans at the point of sale. It is hard to imagine now, but there was a huge debate among credit unions whether they should sully themselves and get into indirect lending arrangements with car dealers, or remain "pure" and continue to have only a direct loan channel. Of course survival instincts won that debate and indirect car loans now make up a significant portion of credit union loans. Point of sale lending is growing by leaps and bounds today, expanding to all types of products thanks to the likes of Amazon and Google.
Financial institutions had a near monopoly on consumer and business lending for centuries. That is no longer the case. Fintech companies such as Lending Tree, Prosper, Lending Club and many others make loans over the Internet much quicker and more easily than those made in the traditional financial institution model. Each year fintech companies are taking a larger and larger market share of loans, especially in the younger demographics.
Control of payment systems was once a reality for financial institutions, but that is no longer the case. PayPal, Apple Pay, Chase QuickPay, cell phone carriers and other disrupters have positioned themselves to reduce the financial institution industry's share of the payments market each year.
In the beginning of this century, overdraft fees and interchange income became huge revenue sources for many credit unions, but both have been cut back severely by the CFPB and Congress.
In the meantime, the costs of running a credit union have risen precipitously. Higher salaries, higher technology costs and higher compliance costs are choking many credit unions.
Not all the trends are bad, though. Through the use of CUSOs and collaboration, I have witnessed increases in all types of lending opportunities for credit unions, such as indirect car loans, business loans, mortgage loans, time share loans, student loans and credit card loans. CUSOs provide the expertise for credit unions to make a wide variety of loans safely and profitably, and can help credit unions source new lending opportunities.
Through the use of CUSOs and collaboration, I have witnessed increases in credit union fee income that is not going to be wiped out by the CFPB or Congress – fees that are generated by sharing commissions for investment and insurance services. It is not uncommon for credit unions to annually earn in excess of $1 million in fee income from investment services. In the case of one of my clients, its investment income offset loan losses suffered during the financial crisis.
I have also seen credit unions reduce their operating costs, increase their operating expertise and obtain greater bargaining power with vendors through the use of CUSOs and collaboration. I have client credit unions that jointly run their IT services through a CUSO, and by doing so, each saves $4 million per year in reduced operational costs and greater bargaining power with their vendors. They do all of this while measuring and confirming that the CUSO services are equal to or better than the level of services each credit union enjoyed prior to the collaboration.
Credit unions have a great story and great history. The traditional credit union model worked well in the 20th Century, but the economic conditions, society trends and ubiquitous Internet of the 21st Century have put the traditional model at risk. Without a modification of the traditional credit union model, many credit unions, especially the small to mid-sized ones, are on a path to eventual extinction. Even large credit unions face risks. There are much bigger and nimbler competitors that have access to technology and fresh capital – and the ability to outperform large credit unions.
The negative trends are obvious, but so is the positive impact that CUSOs and collaboration can make. This is not theory or speculation. Using CUSOs and collaboration to modify the traditional credit union model has generated the net income credit unions need to survive and thrive. What other tools do credit unions have to generate net income so effectively? If the management and directors of credit unions are not actively exploring and implementing collaboration to generate more net income and capital in the face of the overwhelmingly negative competitive trends, they are doing their credit unions a great disservice.
The water continues to grow hotter. The choice is yours. Wait until you boil or take positive and effective actions now to reduce the temperature of the water.
Guy Messick is an attorney with Messick & Lauer P.C. He can be reached at 610-891-9000 or [email protected].
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
