It's pretty much a Darwinian survival-of-the-fittest idea. The more firms that enter a market, the greater the likelihood the poorly-performing participants will disappear. Enhanced competition sparks innovation and efficiency gains among the incumbents.

The trend in credit unions toward mergers has been echoed by banks, Posen reminded Credit Union Times.

"Our primary interest was the impact of entries on the performance of incumbents," he indicated. "Over the last 20 years there has been a lot of entry in banking and recently a lot of consolidation. "In the banking context, and there's no reason to believe this wouldn't be the same in the credit union context, the emergence of entrants–even entrants that subsequently fail–spurs incumbents to innovate and increase efficiency. This is sort of independent of the arguments that financial institutions are merging to get economies of scale, for instance." If the entry of new credit unions is low, Posen said, that can be a problem. New entries bring fresh ideas, competition and vitality. Posen focuses on efficiency. Efficiency doesn't necessarily correlate with size, he said. There is a strong pattern of more efficient banks acquiring less efficient ones. Will the U.S. banking industry, which now has thousands of players, end up more like the picture in Canada where a half-dozen or so banks enjoy national prominence? Not in the near future, Posen predicts, even though consolidation will continue.

Tight margins are certainly among the concerns bothering the financial industry, including credit unions. It's tough to make a buck.

"The products have become more commoditized, and credit unions' products have come to look like the products of commercial banks," Posen says. "There's certainly pressure on both credit unions and banks. Commoditization and consolidation go hand in hand, and I don't see that stopping.

"When I wanted to buy a home I investigated mortgage alternatives from banks and from credit unions. From a consumer viewpoint, they were very interchangeable. I think that's a problem for credit unions. A lot of banks have adopted operating practices that are highly efficient. I think credit unions will increasingly have to compete with that."

Credit unions have taken pride in being good corporate citizens and helping their communities. But Posen believes the jury is still out on how effective that is from a purely bottom line standpoint. Being seen as a bad corporate citizen is harmful for a business, he notes. But are people willing to pay for even worthy programs by remaining members of a credit union, or will they move their accounts down the street for 25 basis points? To the extent commoditization makes products look the same, he continues, price becomes the dominant factor. Loyalty holds little power.

"Credit unions have to make sure they end up with efficiency gains that rival the banking industry. That has to happen," Posen said. "Also, just saying you are different is insufficient. You have to show that the bundle of services you get from a credit union is somehow markedly different from the one from your local or national banker. You have to enhance the consumer experience and also reduce the cost. "The challenge is everybody is thinking the same. As loans for example, are based on credit scores and not relationship, it further commoditizes the situation." Recently the decision by Comerica Bank to relocate corporate headquarters from Michigan to Texas generated front page headlines and a lot of negative reaction from local leaders. As the state's oldest and largest bank, Comerica's announcement was seen as a major blow to the pride as well as the employment headcount of the struggling state. Michigan Credit Union League President/CEO David Adams used the occasion to underscore the credit union difference. "Iconic Michigan institutions such as National Bank of Detroit, Standard Federal, Old Kent and others have been acquired by huge out-of-state banks–or, in the case of Standard Federal, by European bankers," Adams said in a statement. "When the going gets tough, Michigan credit unions don't retreat to more profitable markets. They are all locally owned, employing Michiganians and helping to move Michigan forward–especially in tough economic times. As banks get bigger and more profit-driven, credit unions continue to thrive as consumers and small businesses local for a 'local' partner. This latest Comerica announcement will simply fuel that trend." –[email protected]