Difficulties in CU Start-ups Lead to Lack of Interest in New Charters, Economist Says

ARLINGTON, Va.-Starting a brand, spanking new credit union is not the same as it was in the old days. “It used to be in the past that leagues and the trades and NCUA tried to help credit unions form,” NAFCU Chief Economist Tun Wai explained. They are not in that business as much any more, he said. That is not to say they do not help at all any more. He pointed to NAFCU General Counsel Bill Donovan’s involvement in the chartering of Shiloh of Alexandria Federal Credit Union. Wai also commended NCUA for its work in chartering low-income credit unions. In fact, he credits this with the slight increase in new credit union charters, from the single-digits and teens from 1996 through 2001 to the twenties in 2002 through 2004. “The increase in formation is because NCUA has done an excellent job with low incomes. The problem in terms of making these institutions viable is some of them just don’t last very long,” Wai said. He did not have statistics on the life span of these newly formed credit unions. “I do know that smaller credit unions are being gobbled up.I do know that some of the ones being gobbled up have been around for a while,” Wai stated. He did say that 60% of the net potential membership growth has come from low-income credit unions. The reality is that NCUA can offer funds from its Community Development Revolving Loan Fund and other help, but, in the end, survival boils down to the support of the membership. It is much easier-and more lucrative-to open up a bank, according to Wai. “Banks can start up with stock and capital and credit unions start with members contributing their shares, and until somebody takes out a loan, you can’t make any money,” he explained. In today’s world consumers do not have the patience for a financial service provider that only provides savings or checking, which is how credit unions start out. Actually, CUNA Chief Economist Bill Hampel cited this as the number one reason for the decline in new credit union charters. “The biggest reason is that credit unions now tend to be full service organizations, not your basic savings and loan accounts.” he said. “Now, straight out of the gun, if an employer may have grown [large enough to support a credit union], it would take a long time for that credit union to be a full-service credit union.” Hampel also highlighted a key difference in credit union law, which is the fairly recent permissibility of multiple group credit unions. It is much more attractive for a group that might be large enough to begin its own credit union to join an existing credit union specifically to start with a broad range of services. Additionally, an employer base was an easy way to form a credit union, NAFCU’s Wai said. Your potential membership was all right there, the sponsor often provided space for the fledgling institution, and people stayed in the same jobs for 30-plus years. Not so any more. SEGs have saturated the larger companies and have whittled down the medium and smaller ones as well, he explained. Also, people change jobs a lot more frequently these days; mergers and acquisitions are rampant, as testified to by NCUA statistics that show the number of federal credit unions down from 7,302 in 1996 to 5,626 at year-end 2004. Thus, start-ups are more likely to come from a church or other organization, where it is “harder to get that kind of commitment.” More money must be spent on marketing, strategies need to be developed, and generally a greater effort is necessary to get a new credit union off the ground. Also, “You need your reputation to occur,” Wai said. “You will always have people interested in joining a credit union,” he explained, but starting one from scratch is a whole different ball game. “It’s easier to say you want to join a credit union than forming one.” While fighting for the Credit Union Membership Access Act, interested parties came up with 3,000 potential members as the magic number for a realistically viable institution, he indicated, which is another hurdle. Other factors that can impact the viability of an institution can be a change in the local economy and, again, lack of member interest due to lack of products and services. Wai noted that the reason many of the small credit unions are merging is to expand their service offerings. “Having new credit unions always is a good thing,” he said. With just over one credit union per member, Wai said, “I don’t think there’s tremendous market saturation here.” However, Hampel said he does not foresee the trend away from new credit union charters reversing itself. “That would require an easy say for a credit union to become full service,” he said. Possibly, if a credit union were managed by another until it could splinter off on its own, similar to the relationship between Latino Community Credit Union and Self-Help Credit Union and State Employees Credit Union in Durham, N.C., it could more easily become viable, according to Hampel. He also predicted that mergers would slow but not to the point they would become fewer than new credit unions. Hampel said his hunch is that the number of credit unions will level off around 5,000. But, it is important to keep your eyes on the prize, he reminded. “The ultimate goal is to have as many consumers as possible become members of credit unions,” Hampel said, and that can be accomplished through the chartering of new credit unions or by joining an existing one. -