Harvard Profs: CUs Must Control Costs, Expectations Of Loyalty To Remain Viable

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CAMBRIDGE, Mass.-Is the credit union business model sustainable?

Yes, according to four experts who were part of a high-level colloquium at Harvard University here, but only if certain caveats are recognized.

At the Filene Research Institute's "Credit Union Sustainability Colloquium: Evidence and Actions at Harvard University." analysts stressed credit unions must learn from peer leaders, must get expenses under control, and must know that even though members and consumers rank them highly, that's not a guarantee of success.

Harvard Business School Professor Peter Tufano pointed to a classic Harvard business case study to show that growing profits and growing sales do not always a viable business make. In the case study, Butler Lumber Co. had to decide, as credit unions must, the right mix of profit margin (lowering costs, raising revenues or both), asset turnover, leverage (using as much capital as possible), and payout (distributing funds to shareholders). And if Butler Lumber gets it wrong, the company will grow its way right into default.

Tufano, who is a Filene Research fellow, then cited the credit union corollary: CUs with excess capital can manage with low profits for a long time, but without access to outside capital, the only way to grow sustainably in the long run is to pull one of those four levers.

Identify Successful Growth Strategies
John Lass, SVP-strategy and business development at CUNA Mutual, built upon Tufano's sustainable growth theme in examining the sustainability of the CU business model. Lass led a lengthy discussion of exactly what those levers look like at credit unions, saying an excellent way to do so is to use NCUA data to identify what a few big credit unions are doing to optimize growth.

Lass noted that Navy Federal Credit Union in Virginia, for example, relies on a hefty net interest margin and steady asset turnover to win 1.06% ROA and 11.41% ROE (return on equity) through June 2010. The country's second-largest CU, SECU of North Carolina, wins a similarly high ROA (1.07%) and a better ROE (16.37%) with a 2% (of assets) operating expense ratio and a high leverage factor-a capital level that hovers around 7% of assets.

Credit unions, noted Harvard Business School Professor Frances Frei, noted that a business can fail even though nobody dislikes the business. Credit unions particularly have to be careful about trying to be all things to all members, because a drive for across-the-board excellence is much more likely to lead to mediocre performance in all areas, observed Frei.

Instead, Frei said it takes "strategic courage to decide what your credit union will not do well...and make sure you don't do it. If you try to be good at everything, you will run out of money long before you've succeeded-not a recipe for success."

The fourth panelist to discuss the sustainability of the CU business model, Dorian Stone, a partner at McKinsey and Co. and a Filene Research Fellow, said that outsized operating expense ratios are the bane of most U.S. credit unions.

Operating Efficiencies Vital To Sustainability
Stone noted that a straightforward comparison of operating expenses shows U.S. credit unions lagging similarly sized banks by 20% and more. Moreover, competitors aren't likely to get less efficient, so it's time for credit unions to do better, Stone added.

According to Stone, key elements for credit unions to assess include whether they are utilizing scaled operational models, prioritizing the right performance improvements in order to deliver value to the member, and if they have the right accountability in place at each level to ensure high levels of performance.

The colloquium was made possible through a collaboration among the Massachusetts, New Hampshire, and Rhode Island Credit Union Leagues, Harvard University Credit Union, and Filene.

"This Harvard colloquium is one more way Filene seeks to connect credit unions with leading thinkers," says Mark Meyer, CEO of the Filene Research Institute. "It allows all of us to question the status quo and plan for how credit unions can grow out of this recession."

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