Most CUs Seeking M&As Want Bank & Fintech Partners, Not Other CUs: Study

Most credit unions pursuing mergers and acquisitions do not want to merge with other credit unions. Instead, they seek partnerships with banks and fintech organizations to improve technology and growth potential.

Those are some key findings from West Monroe Partners’ “The State of Credit Union M&A,” a white paper from the Chicago-based management and technology consulting firm that found credit unions engulfed by an unstable industry with a consolidation appetite, tightening regulations and digital transformation.

The paper referred to 2018 in which the NCUA approved 187 mergers between credit unions and an additional nine mergers with banks. “Our latest poll of 100 credit union M&A decision-makers demonstrates an unabated desire for M&A activity in the industry, coupled with a marked uptick in interest in merging with non-traditional partners. Among other things, we asked what is driving their quest for M&A, how long they have been looking for a partner, and where potential roadblocks exist,” John Stockamp, a director in West Monroe Partners’ Financial Services practice, said about the research.

The report also discovered 51% of credit unions have participated in mergers in the past 5 years; 34% of credit unions have pursued a merger partner for more than a year; 48% of credit unions will hold off chasing an M&A transaction in the next 1-2 years due to an uncertain economy headed toward a recession; 37% cited the current regulatory environment as the reason they are in a holding pattern; and 62% experiencing a merger delay of more than a year cited regulatory issues as the impetus.

West Monroe polled 100 credit union leaders — whose organizations are actively pursuing transactions — about the current M&A landscape. Questions explored credit unions’ desired transaction partner, size, type and strategic goals, as well as current and potential roadblocks. The poll results extracted insights on their top concerns for credit union professionals in their search for an M&A partner.

Monroe Partners suggested three takeaways positioned to make the biggest possible impact going forward.

1. Credit unions are not primarily looking for M&A transactions with other credit unions. “Credit unions are casting a wide net in their search for the right merger and acquisition partner — and surprisingly, many are looking far beyond other credit unions,” Stockamp noted. Fewer than half (46%) of respondents to West Monroe’s poll are looking to merge with another credit union. Instead, they want to merge with banks (32%) and fintech organizations (22%). “Their primary reasons for wanting bank/fintech mergers are twofold. The first is technology-based: credit union leaders feel that a bank or fintech partnership will facilitate access to technology that would not be available otherwise. The second reason is growth: Leaders feel these mergers will, in the words of one respondent, ‘make our business more viable in the long run.’”

In addition, there is the relative convenience of bank or fintech partner integration compared to merging with another credit union. “In a transaction between two credit unions, both parties have a responsibility to both entities’ customers and board members; those concerns are abated in external transactions, clearing a more direct path forward,” Stockamp explained.

Poll results supports this assessment: 43% of credit unions seeking an M&A transaction with another credit union for more than 12 months cited member alignment as a reason for the drawn-out process, compared with 25% of those looking for a bank partner. No credit unions seeking a fintech partner mentioned member alignment as a delay source, though 88% pointed to regulations as an issue.

2. Credit unions struggle to find the right partner due mainly to regulations and high prices. Thirty-four percent of credit union leaders reported pursuing a merger partner for more than a year; 59% cited pricing and regulatory delays.

The white paper agreed credit union leadership is correctly cautious about remaining in line with regs: 40% said they would want to assess a possible partner’s regulatory and compliance gaps pre-merger. Sixty-two percent of those who faced a merger delay of more than a year cited regulatory issues as the impetus.

Stockamp pointed out those seeking bank and fintech agreements face an educational or buy-in requirement around topics such as lending limits, products on offer and even regulators themselves. “While regulations have loosened in recent years, these mergers still aren’t a simple shift for any credit union.”

3. Credit unions wanting to buy, instead of waiting for an acquisition, see opportunities for cost savings and an expanded reach. About two-thirds of respondents told West Monroe their credit union preferred to purchase within the next two years rather than becoming acquired. Among those looking to buy, the biggest reasons are cost savings (59%) and improving the member experience (56%).

Several factors hold credit union intended buyers from pursuing an acquisition in the next two years: high deal prices, which 52% of cited as a deterrent; and concern about an uncertain economy (47%) — particularly given the looming potential recession signs.

In summary, Stockamp said while there are now fewer than 6,000 credit unions in the United States., they represent 117 million members — about one-third of the population. “To move forward successfully and respond to disruptive change, these organizations should first focus on what their growth plan should look like, then consider strategic M&A activity to support this plan.”