I have been around credit unions a long time. I work with really smart and forward thinking credit union colleagues. But there are a lot of credit union folks, including examiners and regulators who think that credit unions can just operate as they did in the last century and all will be fine. No, all will not be fine! I try not be cranky about it, but it is becoming harder to understand why others do not see how much the world has changed and how much credit unions have to change to remain competitive.
Financial institutions no longer have a monopoly on lending and payments. FinTechs now account for half of small balance unsecured lending. Rocket Mortgage and Lending Tree are examples of how the mortgage lending market is being disrupted. Cars are being purchased on the Internet so even the traditional car dealer indirect lending channel is being disrupted. Apple Pay, PayPal, and Venmo are competitors. Google is offering a checking account. The FinTechs are dramatically changing the meaning of fast, reliable and convenient service. If a financial institution cannot deliver a full menu of services through mobile devices quickly and conveniently, they will not be a viable competitor.
Credit unions were built upon the net interest margin model. You pay your depositors X% on their deposits, loan the deposits out at X% plus 4% and live off the difference. With a permanent low interest rate environment, there is little or no margin to pay the increasing costs of running a credit union. There is no net margin for small credit unions. They are in a state of slow liquidation. In the past 20 years the technology costs, compliance costs and salary levels necessary to meet the needed expertise levels have increased significantly. Where will the money come from to buy the technology and expertise to successfully compete in today’s financial marketplace?
In 1969, the number of credit unions in the United States was over 21,000. The technology adoption trend in financial institutions began in the seventies. As of 2019, the number of credit unions has declined by over 70% from the 1969 level and continues to decrease at the rate of about three (3%) percent per year. I anticipate that the adoption of artificial intelligence technology and data analysis tools will accelerate the chasm between the technology “haves” and “have-nots.”
Using NCUA’s data the number of federally insured credit unions under $10 million in assets dropped 33% from 2014 to 2019. There were 18% less credit unions within the $10 million to $100 million peer group. Both of these smaller credit union peer groups are losing members. The $100 million to $500 million peer group is maintaining its numbers while the over $500 million peer group has grown by 22%. The undeniable lesson is that scale matters.
The credit union’s non-profit income tax advantage only helps to a point, but scale is king and picks off the smaller credit unions left and right. Credit unions cannot afford to wait until they grow organically one share account at a time. Credit unions need scale and they need it quickly. There are only three choices for credit unions to grow scale quickly: merge, buy bank assets and collaborate. All three require significant organizational and procedural changes to realize the benefits of scale.
The downside of a merger is that one credit union loses its identity and independence. The merged credit union’s brand in the community that was built over many years is gone. In a merger of large credit unions, there is a period of adjustment that requires significant time and resources to work through. Many credit unions merge without a serious effort to reduce employee and infrastructure redundancies which prevents the efficiencies and cost savings the merger was supposed to accomplish. If there are too many mergers, Congress may re-think the need for an independent regulator for credit unions.
The challenge of buying bank assets is that it requires a significant cash outlay and there are not many purchase opportunities. You also have to transform the bank’s culture and convert bank customers into credit union members.
A collaboration between credit unions through a CUSO enables the participating credit unions to remain independent but operate on a larger scale. Even large credit unions benefit from collaboration. One of my CUSO clients saves each of its multi-billion dollar credit union owners over $4 million per year in vendor and operational costs.
Credit unions are no longer disrupters filling a void in the marketplace. Credit unions are being disrupted by FinTech savvy competitors. It is my opinion that credit unions that want to be competitive and survive will need the following:
- Technology tools to meet growing member service expectations;
- Data management and analysis tools;
- The means to contain operational costs;
- The ability to attract highly capable talent; and
- Additional income streams that are consumer friendly and not subject to removal by regulation.
My two questions for every credit union are:
- Does your credit union have the resources, scale and desire to acquire all the above capabilities on its own?
- If not, what is your plan to quickly grow scale to obtain the necessary resources and expertise?
A credit union’s plan to grow scale to meet the competitive pressures is the single biggest strategic issue facing credit unions. The failure to deal with that issue with a sense of urgency is a failure of governance, a potentially fatal failure.
To the examiners and regulators, it is not business as usual. If you want to ensure the safety and soundness of credit unions, encourage credit unions to explore the benefits of collaboration and use CUSOs as part of their business model.
You remember Kodak, Blockbuster and Borders. Advances in technology and their refusal to change their business model turned them from vibrant companies to business school case studies on the consequences of the failure to adapt to changing market conditions. Let’s not let credit unions remain complacent and be “Blockbustered” out of existence.