Credit Union Contraction Is Not Inevitable
There are alternatives to CUs following banks’ M&A playbook – viable ones to retain CUs’ independence, relevance and member relationships.
There seems to be an almost inevitable acceptance that the smaller guys, facing the headwinds of a changing industry and the crippling strains it places on them, will have to contemplate throwing in the towel and marrying up.
The topic of contraction in the number of credit unions through mergers requires a consideration of alternatives. Particularly in one created with collaboration as its “DNA.”
While in some cases, mergers may be the right course, we would submit that there are alternative partnerships that can preserve a vibrant and active credit union movement: Credit unions cohabitating to fulfill their mission of providing financial well-being to the underserved.
That our industry is facing a sea change that will impact our ability to adequately serve our 126 million members is undisputed. Rising costs, diminished returns and lack of scale are creating a seismic shift in our operating environments. They require innovative approaches for survival and growth.
A review of Q2 2021 Call Report data showed a direct link between low loan-to-share and high operating expenses/asset ratios for mid-sized and smaller credit unions, as described in a previous article published by CU Times. The data support the contention that high non-interest expense can constrain interest rates smaller credit unions can charge borrowers and offer in dividends.
The same data also show that while declining, small and mid-sized credit unions do have capital: Q2 2021 net worth by asset showed that smaller credit unions are not leveraging their higher capital levels to remain relevant through technology investments and other avenues.
Scale is needed for efficiency and effectiveness; it is irrefutable. It’s also true that significant capital is required for necessary investments.
Without merging and through collaboration, both can be achieved.
Our concern is that the merger path erodes the defining characteristic of credit unions: Member-owned and member-centric financial cooperatives. The movement has very proudly and successfully distinguished itself from banks that must serve customers in a commoditized structure with inflexible rules and return to shareholders being the priority.
The alternatives available for small and mid-sized credit unions can be illustrated as:
There are many examples of successful collaborations amongst credit unions of all sizes. These credit unions recognized the necessity of scale for efficiencies, the need to make critical investments and the ability to attract talent. They chose to do it collaboratively. They realize their advantage comes in member engagement and member responsiveness. Their ability to understand the unique needs of their members and tailor financial solutions for them.
They concluded that back-end processing of necessary business operations is not differentiating and can be achieved through collaboration. Significant economies of scale are created in this manner.
They have made enormous strides in processing efficiencies. Furthermore, they have shared investments in digital technology and jointly negotiated favorable major vendor contracts by bringing the purchasing power scale afforded them.
They retain their independence, brand and field of membership. Their Net Promoter Scores are higher. They have grown, some exponentially, enabling them to serve their core membership better rather than diluting them within a larger entity.
Andy Jaeger, CEO of Credit Union of New Jersey ($418 million, Ewing, N.J.) and board member and secretary of MSS LLC (a shared services CUSO) said, “One of our key tenets is that it places our credit union members’ interests first, because without them, we are nothing. Our members may never notice some of the operations changes we’ve made, but we see them in the bottom line. The savings have been significant and really given us the flexibility to evolve and thrive.”
Similarly, 13 state trade associations, facing economic challenges, have collaborated to form their own back-office shared services CUSO, which now serves them and other CUSOs.
The effect on the credit union industry that dramatically shrinks in numbers through mergers has other consequences. The Savings and Loan Industry lost its regulator, the Office of Thrift Supervision, due to the lack of numbers to justify a separate regulator. If credit unions are regulated by a division of the FDIC and not the NCUA, will the distinctions in the cooperative business model survive?
Credit unions that use collaborative business models do not need to sacrifice their unique identity and community connections to obtain scale. While a merger is always an option it should not, in our opinion, be the first option.
Respectfully,
Leo Ardine, Board Chair, MSS LLC and CEO, United Teletech Financial Federal Credit Union ($328 million, Tinton Falls, N.J.)
Jack M. Antonini, President/CEO, NACUSO
Vim Anand, CEO, MSS LLC
Guy Messick, CEO, NACUSO Business Services
Denise Wymore, Marketing Manager, Q Cash Financial