The Tactic Small CUs Can't Do Without
COLUMBUS, Ohio-The fact that not enough small CUs are collaborating to survive was evident during the Ohio CU League's annual meeting.
During a breakout session only three CU attendees out of 30 raised their hand when asked if they are collaborating with other credit unions. Guy Messick, general counsel to the National Association of Credit Union Service Organizations, asked the question and got the answer he wasn't looking for. He emphasized immediately that the financial services business environment has changed and the traditional small CU business model has to be altered to drive economies of scale.
"There has been a lack of urgency around collaboration until the last few years," Messick said. "Now you have reason to do that." Messick reminded that anemic net interest margin and investment opportunities, loss of interchange income, and reduction in overdraft fees make it difficult for small shops to have a positive ROA and grow.
According to Messick, some of what's preventing partnering to the degree needed is fear of the unknown. "Fear of getting out of your comfort zone, and fear of losing authority or prestige."
Small credit unions must go after scale, insisted Messick, suggesting they collaborate on financial services, such as an insurance agency or real estate brokerage, or operational services, such as marketing, collections, compliance, and loan underwriting and servicing.
"The low-hanging fruit is marketing, collections, loan processing, bulk purchasing, exchanging staff where there is excess capacity, and vendor management," Messick said. "That is where I have seen quick payoff."
It's best to start small, with a group of three to five credit unions, advised Messick. "Don't make it too hard from the beginning. Once you build up the CUSO or the collaborative effort, then you can bring others on." Messick insisted that the business arrangement must have set objectives and performance metrics, which should be routinely tracked. "You have to have performance criteria the group lives up to."
But the real key is in who the players are, insisted Messick. "When have you ever seen a great team without great players who play well together? Find credit unions that have similar goals, business styles, and commitment. I often find when I have to wind down a CUSO it is because the credit union partners had different goals."
There are challenges to collaboration, acknowledged Messick. "Understand that the benefits of scale will require significant revision to your business model and that will affect your employees. You may find that some employees need to be let go, and that's tough for credit unions to do. Most people do not like change, but employees will come along if you explain what you are doing and teach them why collaboration is important. This is not a process you can dictate, you must educate."