Thrive Through Shared Services
Small CUs can develop a competitive, cost-effective delivery model through large-scale shared services.
The number of credit unions continues to decline, but we can strategically leverage our collaborative spirit to not only survive but thrive moving forward.
Let’s level set. By the end of 2015, there were 6,021 federally-insured credit unions. As of June 2021, that number shrank to just 5,029, according to NCUA data. Membership grew during that same period from 102.7 million to 122.3 million, with total assets growing from $1,204 billion to $1,977 billion, an average growth rate of just under 8%.
The great news is that the membership growth indicates credit unions remain tremendously relevant to consumers. The growth is impressive overall, but those remarkable trends were primarily concentrated among the larger credit unions. Smaller credit unions are vital to the credit union community, as well as their members. Many can and should be saved.
Upon closer examination, it’s clear that smaller credit unions at the $100 million or less size are wilting away while larger entities are growing at an accelerated pace. Moreover, the data illustrate that the smaller the asset size, the more significant the decline.
Size and Scale Matters
Within retail financial services, smaller credit unions possess an amazing grasp of their members’ needs, but that is sometimes outweighed by their inherent lack of resources, which curtails their ability to have a full-service, cost-effective model. The cost for overhead and infrastructure often puts smaller organizations at a disadvantage regarding noninterest expenses.
All credit unions, but particularly smaller ones, must leverage the collaborative power of CUSOs for survival. That is CUSOs’ unique purpose and credit unions’ greatest asset. The NCUA board even expanded CUSOs’ authorities in October 2021 and left the door open for more to come. CUSO are a vital piece of the credit union difference that can help them succeed, but are we leveraging them strategically for scale?
According to research from the Federal Reserve Bank of San Francisco, every 100 basis points of noninterest cost disadvantage puts severe pressure on the interest rates smaller credit unions can charge borrowers and offer in dividends. This limits their ability to lend effectively to the detriment of their ROA that bolsters continued member services.
That fact is still relevant today as Q2 2021 Call Report data illustrates:
The data confirm that scale is necessary to effectively manage expenses, lend fully and deliver results back to the members.
Net worth over the 12 months leading to Q2 2021 shows the current lack of sustainability for credit unions with less than $500 million in assets. Taking advantage of the scale CUSOs can provide is the path forward for these credit unions, and leaders’ responsibility to their members.
Achieve Scale Through Collaboration
If scale is necessary for relevance, how can smaller credit unions develop a cost-effective delivery model that enables them to compete with the goliaths?
The answer is cooperation through large-scale shared services.
Shared services is not a new concept. Global companies have adopted it since the early 1990s. It recognizes that support functions, while necessary, do not provide competitive or strategic advantages. These utilitarian services should be as low in cost as possible to remain competitive and nimble while achieving scale through standardization.
The credit union movement has been hesitant to adopt large-scale shared services because of their individuality and unique fields of membership. However, collaborating for efficiencies in back-office functions that members never directly see, such as core processing and cybersecurity, creates efficiencies that help your credit union focus even more on your strategic objectives and your members.
The results from the credit unions that do leverage the strategic advantage of collaboration have experienced compelling and impressive results over the long term. The secret is to maximize economies of scale through strategic structural change.
On average, organizations employing shared services models, such as through CUSOs, have experienced 25% cost savings annually in their back- and middle-office functions, which typically translate to an overall 10% to 15% reduction in noninterest expense. Of course, this all depends on branch footprints and other front-office costs, but a reduction that significant can greatly boost ROA and net worth.
An analysis of 100 credit unions all on the same core and with less than $1 billion in assets demonstrated an average 500 basis point improvement in net worth and an 85% improvement in ROA.
The Opportunities Are Real and Limitless
To remain relevant and successful requires significant technology investments in modern cores, cloud and cybersecurity. If you’re part of a mid-sized or smaller credit union, collaboration will give you access to the data, digital applications, fintechs and more you need to grow and prosper. Leveraging shared services can provide you with access to more and better technology, tools and talent than individual credit unions of any size can achieve going it alone. Hires in things like card portfolio management, IT and lending are expensive, so spread those expenses over many and gain incredible talent at a fraction of the cost.
Large banks and credit unions are aggressively competing for consumers’ minds and wallets thanks to the financial strength and scale they have built. The credit union movement can stem this tide by playing to its strengths of cooperation and sharing. The results, as the numbers have shown, will surely follow.
Vim Anand is CEO of Member Support Services, a middle- and back-office operations CUSO based in Cranbury, N.J.