By Guy Messick
Credit unions today face a finite set of choices. They must grow to survive. Growth brings efficiencies and resources that enable credit unions to successfully compete in the financial services marketplace.
Members won't wait days for a loan decision from their credit union when the bank provides an answer in 30 minutes. Without greater efficiencies and a full array of competitive financial services, the credit union industry's place in the nation's financial marketplace risks becoming marginalized. With the loss of about six credit unions per week, the credit union industry as we know it is disappearing before our eyes. Even a $1 billion credit union isn't large enough to reach optimum levels of efficiencies. What's a credit union CEO and board to do?
The first course of action is to grow the credit union internally by adding members. Credit unions have added potential members by adding select employee groups (SEGs) and obtaining community charters.
Association-chartered credit unions complain that the number of available SEGs of significant size is rare, and it's more costly to acquire and serve small SEGs.
Community-chartered credit unions often have large potential memberships but no idea how to compete for new members against community banks and other credit unions. While the number of members is increasing, the rate of membership growth has decreased.
With this growth pressure, it's not surprising that credit unions are acquiring members through mergers at record rates. While some credit unions are acquiring SEGs and members like Pac Man, there are only so many dots to gobble up. Once the merger opportunities are consumed, what will be the credit union model to sustain growth?
A handful of credit unions have decided to abandon the charter altogether and convert to a thrift or bank charter. While this has created great financial rewards for some credit union officials, there's a dearth of proof that the change in charter has resolved the institutions' growth issues.
The collaborative alternative
Credit unions have an alternative to mergers and conversions: collaboration. By acting collaboratively, a credit union can acquire scale and market power far exceeding its individual size.
Both large and small credit unions benefit from collaboration.
Credit union service organizations (CUSOs), which are exclusively owned and controlled by credit unions, are the prime vehicle for collaborations. Small credit unions often view CUSOs as either a distraction or a luxury only larger credit unions can afford. In small credit unions, there isn't enough time or staff to research and implement additional services when there's barely enough time to run the credit union. At times it must seem like a treadmill.
Credit unions try to squeeze enough revenue from shrinking net-interest margins to stay in business long enough to find more members to reach a size that brings better efficiencies--while Washington drowns them with additional regulations. An image of someone spinning plates comes to mind: There are only so many plates you can spin before they start to fall. But there's no end to the number of plates that can be spun in collaborative networks.
Not all mergers are bad for the industry. There are strategic mergers between strong credit unions that bring great benefits to members without member attrition. The 'bad' mergers are with credit unions that have deteriorated to the point where they have no option but to merge. Members deserted them before the merger due to substandard service.
How can one expect dissatisfied members to return to credit unions after such a bad experience? If these distressed credit unions had collaborated, they could have had a fighting chance to retain and grow membership. If your credit union isn't Pac Man, it's one of the dots. The dots must collaborate to survive.
As an industry, we must do everything we can to grow membership through existing and new credit unions. With collaboration, new credit unions have a great chance to succeed. Collaboration also can help credit unions find effective marketing means to acquire new members. Imagine a marketing CUSO that doesn't charge for its services unless it steers new members to the credit union. CUSOs do things that are rare or nonexistent among third-party vendors.
A straightforward model
CUSOs don't have to be complicated to be effective. Some small credit unions have formed a CUSO just to hire an attorney to represent them in collection and bankruptcy matters. They have experienced a significantly greater level of success in managing delinquent accounts. Other everyday functions credit unions could outsource collectively to CUSOs include compliance, marketing, bookkeeping, and loan underwriting and servicing.
CU*Answers is a Grand Rapids, Mich., CUSO serving credit unions ranging in assets from $2 million to $500 million. It began in 1970 as a core data processing CUSO, and now offers home banking, bookkeeping, automated teller machine services, debit cards, marketing services, interactive voice response, and item processing. It's about to add loan decision models with alternative financing options. This way, if no credit union in the CUSO can make a particular loan, an alternative lending source will fund the loan.
Alternative lending sources could be other CUSOs, such as Personal Credit Solutions LLC in Minneapolis, which specializes in brokering subprime mortgages. The goal is to never say no to a member. Through Xtend Inc., an associated CUSO in Kentwood, Mich., CU*Answers will offer financial products, human resource services, and both inbound and outbound phone center services to CUSO owners and clients.
CU*Answers has 70 credit union owners and serves more than 165 credit unions in 15 states with collective assets of $9.2 billion and more than 1.5 million members. The credit unions select the services they want, the service levels, and the expense and profit model. All profits are funneled back to the CUSO owners--credit unions.
The range and pricing of those services are more favorable to a $2 million credit union in the CUSO than a credit union 100 times as large could get on its own. Credit unions in this CUSO have an advantage over credit unions that have to supply their own services internally or negotiate with outside service providers on their own.
CU*Answers is helping credit unions replicate this model in other areas of the country. The first replication is in the Northwest with the newly formed CU*Northwest. Plus, CU*Answers has provided services for free to help struggling credit unions survive. This is the power of credit union collaboration.
Collaboration development fund
The National Association of Credit Union Service Organizations (NACUSO) brings credit unions together to find common ground and form collaborations. NACUSO has a project in Michigan, for example, where small credit unions are forming a CUSO with the help of volunteer professionals to collectively provide basic operational services. Other credit union groups around the country have expressed an interest in forming CUSOs to help them with basic operational issues.
Once credit unions decide to work together, it takes nickels in expenses to form a CUSO that can save and earn dollars. The time is right for the credit union industry to establish a collaboration development fund to help acquire the resources to create collaborations more quickly.
The fund could plant the seeds of collaboration nationwide. Credit unions find that once they collaborate for one service, the arrangement expands to other services. From one seed, many plants grow. Collaborations formed through the fund would replenish the fund as they experience success. If the industry doesn't do something dramatic now, the lack of action will dramatically affect the industry in the near future.
If credit unions have the will, NACUSO is committed to helping credit unions find the way. Home runs may win baseball games, but so do a bunch of singles: Every little bit helps. The time to act is not when your credit union is on life support. The time to act is now.
Guy Messick is an attorney with the law firm of Messick & Weber P.C. in Media, Pa., and NACUSO's general counsel. He provides legal and consultation services to credit unions and CUSOs.