Is the CU Business Model Sustainable?

June 1, 2007

Davis, speaking at NACUSO's 2007 Annual Conference in Las Vegas, says these credit union current strategies aren't working:

  • Continuing on the same course: More branches, market expansion, and imitating competitor best practices.
  • Consolidation: While some mergers are necessary, merging credit unions doesn't change the industry's market share or create meaningful economies of scale.
  • Conversion to a bank charter: The economic and philosophical costs outweigh the benefits.

Other challenges credit unions face, Davis says:

  • Low return on assets;
  • Industry consolidation and hostile takeover attempts;
  • Slow membership growth and an aging membership base;
  • Regulatory constraints;
  • Credit union organizational structures that don't support strategy; and
  • Low consideration among consumers.

"People don't think of credit unions when they do business," Davis maintains. For example, he says only 8% of members use credit unions for share certificates; 4%, home equity loans; 2%, mortgages; and 1% to 2%, retail investments. "We're not considered when people have a financial need."

This, Davis says, begs the question: Is the credit union model sustainable in the long term? Only if they start a new growth curve.

What's the answer?

Davis says credit unions should focus on four factors for credit union transformation: critical thinking, innovation, collaboration/cooperation, and implementation/execution. 

"There needs to be a greater focus on inspiration and innovation, coupled around the unique advantage of the cooperative business model," Davis says. "Critical thinking is a precursor to innovation on the front end, and implementation is a requirement for transforming strategies into results on the back end."

Embracing critical thinking will help credit unions create "disruptive innovations" in the market that differentiate them from competitors. Davis cited the example of Wal-Mart, unseeded K-Mart and Sears as leaders in the retail market.

How can credit unions disrupt the financial services market? "By coming together to meet shared needs and do things collectively rather than individually," Davis says. In short, the CUSO model.

He says the cooperative model:

  • Creates and drives more value to the member;
  • Supports the financial business model by gaining access to significant scale and lower operating costs;
  • Helps credit unions provide convenience through shared branching and automated teller machines;
  • Enhances strategic positioning, consideration, and credibility through efficient delivery of the "desired member experience;"
  • Attracts quality partners and third parties;
  • Spreads risk and capital investment;
  • Owns intellectual capital;
  • Provides an alternative to mergers and conversion to mutual savings banks; and
  • Provides a model for innovation.

"An industry ages not because of chronology," Davis says, "but because it quits pursuing an ideal."