Small CUs: Top Challenges Yesterday & Today

The existence of healthy small CUs is vital to our continued political strength.

February 3, 2010

Ten years ago, the biggest challenge facing small credit unions was the need to offer a wider range of services. Today, that concern isn’t on the radar for most small credit unions, those with assets of $35 million or less, which make up 70% of the nation’s 8,000 credit unions (half have less than $16 million in assets).

Why Support Small CUs?

• Political strength and unity. As not-for-profit, democratically controlled financial services cooperatives, credit unions enjoy a special, legislatively mandated role. The existence of viable, healthy small credit unions is vital to the continued political strength of the credit union movement.

• Members like them. There are nearly 13 million members in credit unions with assets of less than $35 million.

• They provide choice. Small credit unions offer unique features, including the sense of belonging to a small, closely defined group, volunteer opportunities, and more access to management and the board.

• Philosophical roots. Many believe small credit unions exemplify credit union philosophy in action.

• They’re the source of all credit unions. All credit unions started out small. And more 400 credit unions that started 2006 as “small” institutions (less than $35 million in assets) outgrew the classification by mid-year 2009.

• Democratic models. Small credit unions provide opportunities to volunteer and participate in democratic governance. There are more than 55,000 volunteers in credit unions with less than $35 million in assets.

• They preserve credit union charters. It’s difficult to start up a new credit union, so extreme care should be taken to preserve credit unions already in operation.

• Diversification. Concentrating all credit union resources in a few institutions would produce a system that’s less robust and able to adjust to a changing world. Diversification also makes the credit union movement less susceptible to financial and other risks.

That was one finding of a 10-year review conducted by the Credit Union National Association’s (CUNA) Small Credit Union Committee.

The economic landscape has changed dramatically since CUNA published findings of its Small Credit Union Task Force in 1999. Today, most small credit unions offer a wide range of services, and operating expense ratios vary little across credit union asset size groups.

According to CUNA’s Small Credit Union Committee, small credit unions’ overriding challenges now include:

1. Regulatory burden. This is widely regarded as small credit unions’ No. 1 concern. Today, more than 25% of U.S. credit unions are operated by three or fewer full-time equivalent employees, and more than 1,000 credit unions are operated by one or fewer full-time equivalents.

The crush of post-crisis regulatory initiatives and the constant drumbeat of changes to existing regulations significantly hamper credit union employees’ effectiveness.

While policymakers discuss the theoretical issue of institutions that are “too big to fail,” small credit unions worry that policymakers see them as “too small to save.”

2. Back-office redundancies and lack of collaboration. Substantial increases in operating expense ratios moderated in 2009 as savings inflows dramatically increased. Nevertheless, small credit unions recognize that this reversal is likely to be short-lived.

Small credit union survival hinges on the ability to spend more time interacting with members and less time mired in noncore tasks such as payroll, accounting system management, and data processing.

3. Succession planning. This challenge has less to do with the succession-planning process and more to do with the increasingly difficult task of in finding qualified people willing to work long hours for relatively low pay. The difficulty in finding qualified directors willing to accept the growing risk of oversight responsibility magnifies this challenge.

4. Corporate credit union issues. Small credit unions are apprehensive about their ability to bear the significant costs associated with corporate credit union stabilization. And they’re concerned about the National Credit Union Administration’s willingness to do everything in its power to avoid permanent depletion of corporate capital.

Next: What's the solution?

What's the solution?

The Committee didn’t find any “silver bullet” solutions that will magically address problems small credit unions face. However, it did identify actions that, if taken by various levels of the credit union movement, will help small credit unions thrive and grow:

1. Share the burden. The responsibility for assisting smaller credit unions doesn’t rest with any single element of the movement. All must be involved.

2. Expand and streamline outsourcing for economies of scale. One way for small credit unions to increase efficiency is to purchase operational services from larger firms that enjoy economies of scale.

These larger firms could be other credit unions or vendors. Services that can be outsourced for greater efficiency include data processing, credit card processing, share draft processing, loan centers, call centers, collections, shared branches, Web site development and maintenance, etc.

In addition, system entities should seek ways to educate, support, and otherwise help small credit unions establish credit union service organizations (CUSO). There’s value in the collaborative services CUSOs provide, which could be a significant contributor to future success.

Established CUSOs are likely to expand through collaboration to provide compliance officers, audits, and other services that small credit unions now pay for on a piecemeal basis without the power of scale to negotiate pricing.

3. Encourage larger credit unions to assist small credit unions. Large credit unions can help small credit unions with mentoring programs, donations of used equipment, fill-in staff for vacations and training, access to large-volume purchases, and assistance with marketing and planning. Local and state-level organizations should help facilitate such efforts.

However, large credit unions should be sensitive to small credit unions’ needs when offering such assistance. Small credit unions may be suspicious of such offers, believing them to be the initial steps of a merger investigation.

4. Form peer networks. Small credit unions should routinely meet with local peers and operate e-mail support groups. Often, the best source of advice to deal with an issue is a similar-sized credit union that has already dealt with the same problem.

5. Exploit group buying opportunities to reduce per-unit costs.

6. Promote small credit union price discounts.

7. Produce basic operations, policy, and compliance manuals for small credit unions. These could be joint projects of small credit unions and state and national organizations, and could be made available and updated on the Internet.

8. Provide low-cost hardware and software to small credit unions.

9. Examine shared branching. Explore the feasibility of small credit unions making their locations available to each other’s members for basic counter transactions to increase accessibility and encourage membership growth.

10. Preserve charters wherever possible. When merger is deemed unavoidable, encourage small credit unions to join similar institutions to preserve uniqueness and provide growth opportunities to other small credit unions.