Mergers, network credit union operations and shared services can save credit unions as much as 30% in back-office operational costs. The primary, strategic reason for consolidating is to create scale and lower the credit union's expense ratio, but it must execute an actionable plan in order to reach that goal.
Credit unions are struggling with how to grow and innovate, yet manage expenses. How do we invest in innovation and simultaneously produce enough income to sustain our capital? Reaching both goals is essential. The first requires continuous investments in people, technology and product development. The other requires managing expenses to create a strong return and sustained member value.
To achieve both, extract value from back-office operations and technology (in other words, use scale, mergers and collaboration to save money) and funnel those saved resources into innovation and your bottom line.
Credit unions have three options for creating scale: Completing a merger, following the network credit union model or creating a collaborative operational CUSO. Each is based on a foundational financial services principal – that scale ultimately matters in our highly commoditized banking world. Banks have been successfully pursuing this strategy for decades with more and more mergers. Their main purpose is to create financial value by lowering their average costs. Credit unions have also been pursuing mergers with gusto over the last seven years and now average more than 250 a year, but they have not consistently achieved the same cost savings as banks.
Financial institutions are required to run a number of back-office operations that add little value for members and are even less valuable to income creation. Think of the operating departments that are must-haves but create little or no member value: Accounting, core technology operations, compliance, legal operations, internal auditing and most of HR. Don't get me wrong – these functions are essential to a professional and sound institution, but they can operate almost anywhere and should be managed at the lowest possible cost. Some member-facing areas like collections, deposit operations and back-office lending can also be run at a lower cost when merged together. Banks are determined to save money by merging these departments, but credit unions have not achieved the same success. They often promise to keep all their employees and end up increasing their costs.
So how can your credit union lower its operating costs?
Locate a merger partner and pursue it, but think strategically about where you can grow and save money. I suggest very carefully analyzing what you are planning to save and creating a plan and timeline for how you will achieve your savings. This is where most mergers and collaborations fall apart.
Review the new network model. It is in many ways a kinder and gentler merger. It creates an organizational structure that supports multiple brands, sustains the legacy of great credit unions and keeps members at the center of the governance model while decreasing expenses through a shared services platform. The most important driver, however, should be savings.
Consider an operational shared services CUSO. Operating CUSOs create the same savings as the first two options without the commitment of a merger. The savings are real and sustainable, but an implementation plan with benchmarked financial goals is essential to creating value. A thoughtful governance model must also be in place so each credit union's culture adapts to and supports the new operational model.
The entire financial services industry is working hard to create scale in order to save money and invest in innovation and growth. While every credit union should follow its own unique path, sitting on the side lines is simply not an option.
Kirk Kordeleski is CEO for the Edge Consultancy. He can be reached at 516-528-5057 or [email protected].
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