Consolidation of Industry May Heighten Role of Corporates

When I joined the corporate credit union network just over 10 years ago, I was basically unaware of this segment of the credit union system. Of course, I was familiar with my local corporate, but I had never actually heard of the “corporate credit union network” as such, or of the term “natural person credit union.” At the time there were 44 corporate credit unions serving specific fields of membership with minimal overlaps. Diversity of product offerings was limited. Roughly half of the corporates had integrated management teams with state leagues. Most corporates operated profitably by taking spreads on matched investment books and keeping expenses down. There were approximately 13,000 credit unions operating across the country. Things were going well, or so we thought. Jump ahead to 2004 where we now have 29 corporate credit unions plus U.S. Central Credit Union and the number of natural person credit unions has dropped to about 9,300. All or most corporates have national fields of membership. All are operated independent of state leagues. NCUA oversight which reached somewhat of a fever pitch in the mid `90s has mellowed into a more familiar regulator-regulated tension. Total capital within the corporate network has more than doubled as have assets under management. Product offerings have diversified greatly. So what will the next chapter bring us? In the face of shrinking numbers of credit unions, what are the implications over the next 5-10 years for the corporate network? Industry consolidation is, of course, always the first response; however, with all that’s changed over the past 10 years the argument could be framed as follows: why haven’t there been more corporate mergers? Ever since corporate mergers began occurring in 1995, the network has debated the “proper” number of corporates. Predictions run the gamut from only a handful to several dozen. If bigger is always better, why not just one corporate and for that matter why not just one credit union per state? Think of the potential savings in personnel and other operating expenses. And think of the reduced volunteer expenses and reporting to multiple boards of directors and committees. Well, for one thing it’s not that easy or desirable. As the credit union landscape was shifting, corporates figured out pretty quickly that change was needed for continued viability and value to their members. Some corporates determined that merging was the best long-term solution for serving their members. Many others considered the proposition and decided to remain independent. All corporate boards have at least discussed the option. Through this process of self-evaluation, corporate credit unions have become financially and operationally stronger than they were 10 years ago, regardless of asset size. Regulatory changes and member demands have forced corporates to improve their market rate competitiveness and payment product efficiencies. Innovation and creativity within the corporate system is not a by-product of any specific sized corporate, it is a product of the many talented people in the corporate system whose interests are in serving credit unions. New cooperative efforts are emerging constantly in an effort to reduce expenses and provide new services to credit unions. Service and understanding of specific member needs is still a critical aspect of every corporate relationship with its member credit unions. Price competitiveness is a given. As long as corporates can meet these thresholds, they will remain viable. In the end, the number of natural person credit unions will determine the ultimate number of corporate credit unions. Increasing technology and systems costs will constantly put pressure on corporates to be more creative in remaining a competitive option. As the numbers of credit unions continue to diminish, corporates will be forced to maintain earnings margins and services for fewer and fewer end users. The remaining credit unions will be larger, more sophisticated, and more self-sufficient in their operations. They will, however, continue to need trusted partners. Over time, the remaining corporates should actually increase in value to their member credit unions. As the number of member owners shrinks, the control and input into the direction of corporates will become more focused strategically and product-wise. The value of member ownership based solely on the ratio of retained earnings to member capital will continue to increase as the actual number of credit unions drop. Corporates will become more specialized in what they offer in-house and more willing to give up control to consolidate major initiatives that require extensive resources and capital investment. Some corporates may offer only a couple of niche services while others may be more full-service. They will reflect more directly the needs of their member-owners. The fact that a credit union can utilize the services of any corporate will lead to only best-of-breed services remaining in-house at only the most effective providers. To some extent this openness may slow corporate consolidation as it forces corporates to recognize they can not be all things to all credit unions and will thereby focus only on what they can do best for their members. The corporate credit union system will become more specialized, flexible, and responsive. As corporate credit unions go through this transition, the system will be far stronger having more than just a handful of corporates leading the change. I do not know how many corporates will or should survive in an industry in the process of consolidation. I do know that the number of natural person credit unions will continue to shrink and perhaps at much faster numbers over the next several years. I also know that in making my own transition from natural person credit unions to the corporate system, I have come to recognize the incredible asset credit unions possess in the corporate system and what a waste it would be were they to ignore its potential. In many ways, the corporate system epitomizes the cooperative spirit of shared resources within the credit union system. Large and small credit unions all help capitalize corporates and all have a financial stake in their success. The services offered appeal to a broad audience of credit unions, and all credit unions have the ability to be involved with the governance process of corporates. Unfortunately, corporates often operate below the radar of many of the most influential credit unions. Often corporates are not at the table when new system solutions are discussed among credit union leaders. Perhaps the process of consolidation within the credit union industry will help bring corporates back to the level of visibility and value that the credit union visionaries who started this unique system originally envisioned.