Every industry faces change and the credit union industry is no different. Market developments and new regulations are challenging credit unions to find new sources of noninterest income in order to grow. While it can be difficult to thrive or even survive in an unstable environment, change also brings opportunity. One option for credit unions is using strategic mergers and acquisitions.
The right acquisition can enable a credit union to adapt to changes that are beyond its control and continue growing noninterest income.
For example, through a CUSO a credit union could buy or invest in an organization that sells technology services that are not dependent on interest rates, thereby increasing the organization's noninterest income. To think more precisely about the possibilities of strategic acquisition, I recommend using a tool called the Opportunity Matrix.
The Opportunity Matrix is a simple two-by-two matrix that compares markets, industries, customers, and geographies on the horizontal axis, with products, services or capabilities on the vertical access. The resulting matrix has four quadrants, each representing a field of opportunity:
Consolidation – offering more of the same services to the same market
Distribution – offering the same services to new markets or geographies
Breadth – offering new services to your existing market
Diversification – offering new services to new markets
The first step is to identify the quadrant that is best for your credit union at this time. The next step is to identify options within each quadrant to explore how the right acquisition could reposition your organization in the selected quadrant.
Traditionally, credit unions have focused more on the first quadrant of consolidation, through merging two credit unions. Consolidation can be a great way to grow stronger with existing markets and in existing services.
However, with today's challenge of finding new sources of noninterest income, consolidation may not provide a new solution. If you merge with a similar credit union, you may find yourself facing the same struggle to raise noninterest income, but on a larger scale.
Credit unions should think about which quadrant will help most with their strategy to increase noninterest income. While consolidation is the least risky option, it also has the least potential gain.
On the other hand, diversification is the most risky, but holds the highest potential for growth. An example would be to acquire a new technology, and then market it in a region or to a demographic you have never approached.
With distribution, or selling the same products and services to new markets, credit unions can sell to new geographic, vertical or even demographic markets. In other words, you take your existing product mix to a new set of members. For example, if you have determined that millennials are interested in your investment services, you have just found a new way of boosting your noninterest income by expanding your demographic reach without changing your existing offering.
You can also choose the breadth quadrant, which is offering new products to your existing markets or members. What unmet needs can you identify among your current members? Which products could meet those needs, including products you do not currently offer? Of course, you can always develop new products, but an acquisition or partnership may be a quicker way to meet the demand before your competitors take action.
Using a CUSO can be especially helpful in executing this strategy because it can give you the flexibility to expand beyond your typical products and services. For example, we once helped a credit union client acquire an insurance and benefits company and we helped a CUSO acquire a cloud technology company. Both these were examples of acquisitions in the breadth quadrant that helped credit unions grow.
Having served clients in this industry for over a decade, I'd like to challenge credit unions and CUSOs to focus on using investments and acquisitions strategically. Be sure to consider all the quadrants of the opportunity matrix, and look beyond consolidation. In particular distribution and breadth provide more opportunity for growth and repositioning, which can be just what your organization needs to increase noninterest income.
Here's the principle to bear in mind: If you want to grow outside the box, you'll first need to think outside the box.
John Dearing is a managing director at Capstone. He can be reached at 703-854-1910 or [email protected].
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