What Do Credit Unions Want?

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Last fall, as the nation reeled in the wake of the Sept. 11 attacks, David Preter did something some might consider out of character with his new role as president/CEO of Mid-States Corporate FCU.

Preter packed up and took to the road to find out what services his members wanted and how Mid-States could best go about delivering them.

"People were surprised," says Preter, who assumed his role at $4.5-billion Mid-States last August after stints both with Georgia Central Credit Union and U.S. Central Credit Union. "I repeatedly heard, 'No one ever asked us what we wanted from our corporate before.' "

But ask Preter did. From September through November, Preter held 11 town hall-style meetings in 11 different cities throughout Illinois and Indiana, which Mid-States considers its core market. The corporate CEO put 8,000 miles on his car, but came back with a wealth of knowledge, much of which formed the foundation of the corporate CU's five-year, 115-page strategic plan drafted and approved last December.

"Our goal is service, not profit," Preter says. "We want to do our best to meet all of our members' needs in our two core states."

The results of those travels, the findings of which echo loudly the corporate credit union system's traditional position in relation to its members and the credit unions they serve, are surprising for two reasons. First, the move by all but four of the nation's 34 corporate credit unions to national charters has led to greater choice for natural-person credit unions. This also means broader fields of service, greater specialization and what at one time would have been considered some pretty bold wildcatting on the part of many of those corporates as they vie for competitive position. That's an environment that, by its very nature, operates in counterpoint to Mid-States' position as an all-things-to-all- core-CUs corporate.

Second, Mid-States' back-to-basics position also runs counter to the direction in which the Warrenville, Ill.-based corporate was headed as little as a year before, when it amassed 120 additional credit union members in 20 states other than Illinois and Indiana. In a newly liberalized free-market environment that sees corporate credit unions regularly crossing state and regional borders-both electronically and physically-Mid-States' desire to stick to its knitting is a more traditional strategy Preter believes will weave a stronger, more profitable fabric between the corporate and its member credit unions.

Why the change? Preter smiles: "Because that's what the credit unions have told us they wanted."

Brave New Corporate CU World

Mid-States' road shows and member input solicitation efforts are just some of the changes that have overcome the corporate credit union system. With its $90 billion in total assets, the system's 34 corporates offer credit unions an unimpeachable foundation of financial and service strength. Few would disagree, in fact, that there are better providers for the services corporate credit unions offer.

But changes on the horizon-particularly in the competitive and regulatory arena-have unraveled the closed loop traditionally characterizing the relationship between credit unions and their corporates. The influx of private vendors marketing and providing services to credit unions nationwide, along with NCUA's granting of national charters at corporate credit unions' requests, have changed the nature of the corporate system and its members' relationships to the credit unions they serve.

Some call this brave new world of service "co-opetition," a reflection of the market's evolving blend of cooperation and competition. Others, however, are bolder in their assessment, citing direct solicitations by some corporates to credit unions nationwide as an assault on their relationships with their members. Regardless of the choice of rhetoric, it's clear corporate credit unions have been finding their ways into each other's back yards for the past several years. According to leaders like Preter, it's only a matter of time before what likely will be an inevitable shakeout.

"The number of corporate credit unions has decreased recently from 39 to the present 34," explained Gigi Hyland, executive director of the Association of Corporate Credit Unions and CUNA & Affiliates' vice president of corporate credit union relations. "But that's not a trend as much as it is the natural progression of economies of scale and market forces at work."

With all but four of the corporates armed with national charters, Hyland says the inevitable result has been increased competition. "Corporates realize they have to be more proactive and promote what they do best to better face competition both from within the corporate network and from outside the industry."

Given the complex nature of services corporates provide, that's no easy task. Hyland said efforts should aim first at competitive forces outside the movement and attempt to bring back to the corporate system invested credit union funds that have found their way elsewhere.

"(WesCorp president/CEO) Richard Johnson is fond of saying that there are some $50 billion in investments that credit unions are making outside the corporate system," Hyland says. "Corporates often pay as good or better rates than their competitors, which should give them adequate competitive advantage."

For as noble a goal as that may be, however, it does little to ease the pressure of competition among corporates themselves, or the tendency of natural-person credit unions, in pursuit of the best deals for their members, to shop around. It's become increasingly evident, in fact, that while corporate credit unions clearly offer a safer, more profitable and philosophically aligned haven for credit union investments, the distinction appears to have become less fine for institutions when making the choice among corporates.

"Thanks to NCUA's attitude toward national corporate field of membership, this has become a very level playing field," observed Steve Powell, WesCorp's senior vice president of strategic services. "Credit unions are looking for a competitive advantage in their relationship with their corporates. Slowly, they're beginning to understand that you take the best of the breed and go there for services."

The net result, Powell says, will be the need for greater strategic thinking by corporates. While there will always be a market for local representation to some degree, corporates whose strategy fails to reach beyond traditional approaches to services may find themselves with little growth and maneuverability. In the end, this could mean a significant thinning of the corporate herd through natural selection made by the credit unions that use corporate services.

"Competition is great for consumers, but it's going to have to change the way we think," Powell says. "It's going to be the best of times and the worst of times for corporate credit unions. Certain operations demand significant economies of scale, but member credit unions also want personalized services.

"In the end, I think 34 corporate credit unions are probably too many, but I wouldn't want to guess what the right number is," Powell added.

Rising to Meet Member Demands

When asked, corporate executives will say the proper number of corporates is the number it takes to serve credit unions effectively and help the system grow. Natural-person credit unions leaders may be a little less definitive when it comes to the numbers of institutions, focusing instead on price and service capacity and availability. But all agree that the system's strength, both from an operational and political perspective, is critical to continuing credit union success. Unbridled competition, while good for member credit unions in the short term, may carry some long-term implications for the overall health of the corporate system.

"Competition can make you a little schizophrenic," says ACCU's Hyland. "We're noticing at our meetings that corporate leaders are willing to share less with their peers, because now they're sitting in the same room as some of their competitors."

This changing environment has led ACCU to commission a study of the corporate credit union system and how it might best face a dynamic future. Funded by a grant from U.S. Central Credit Union, the study will focus on how corporates can leverage existing economies of scale to meet that changing environment. Hyland hopes for preliminary results by ACCU's October, 2002, board meeting, but doesn't expect final results until Spring 2003.

One of the expected outcomes is an increase in partnering relationships among corporates, something that's already occurring, that both maximizes service levels as well as emphasizes individual corporates' strongest suits in service to a wider array of members. Economies of scale have long been an issue for some corporates as service demands become more plentiful and complex. Supporters say contracting for services or partnering with corporates with sufficient scale to compete only strengths the system's position and keeps activities and funds within the credit union family.

This may seem like radical thinking to more traditional corporates. For others, however, it's no more than a matter of formalizing strategies and activities that have existed for some time.

"All relationships are based on critical credit union needs and our ability to design and deploy products that meet those needs," explains Mike Paton, vice president of marketing for Corporate One Federal Credit Union. "Our only operational change relates to geography. Our philosophy remains identifying member needs and determining if we can be the best providers."

According to Corporate One CEO Lee Butke, the $4.62 billion Columbus, Ohio-based institution has positioned itself to both provide core services to credit unions in Ohio and Indiana, while at the same time offer national-level investment services. To date, the corporate has met with very impressive financial results through its innovative products and services.

Corporate One's SimpliCD, a federally insured jumbo certificate for which the corporate manages back office operations, is marketing either directly of through as many as 15 other correspondent corporates in 35 states. Butke says the product has realized growth of 500% between 2001 and 2002 with more than 1,200 investing institutions. Corporate One's Alliance One selective surcharging ATM program now boasts 3,100 ATMs in 1,100 financial institutions nationwide, a 252% growth rate in the last 18 months.

Butke says the ability to compete as well as partner in the process has been good both for the corporates and its member credit unions.

"We believed we had an opportunity here and the results both met and exceeded our expectations," Butke says. "I believe competition among corporate raises the bar and will create a stronger, more viable corporate network now and in the future."

In Good Position

Many corporate executives agree with Butke, saying competition forces providers to sharpen their edge, offering more competitive products at better prices to the benefit of customers. At least at the surface level, political issues run second to economic and operational advantages.

"There are no negatives in the current competitive market," says Bob Rehm, senior vice president of sales and marketing for Southwest Corporate Federal Credit Union. "Corporates are in good position to continue serving credit unions because credit unions tend to trust their corporates.

"Because of the nature of what corporates do" Rehm adds, "there is no one competitor that completely replace a corporate. Competition generally is product-specific, which make room for specialized services."

In addition to providing primary services to credit unions in Texas and its contiguous states, the $7.2-billion Dallas- based institution offers electronic banking services through TranZnet Internet service, an array of correspondent services, and QuickCash ATM and QuickCash Plus debit services through its two Texas facilities and a newly established processing center in Jacksonville, Fla.

Such aggressive efforts are a matter of growth and expansion, not for the corporates' sake but for members' sake, Rehm explains. Southwest Corporate has 1,200 members in 24 states and is always looking for new and innovative ways to serve them. "Right now the buzz is on serving small businesses. We're trying to define what we can do to support that interest among credit unions," he adds.

New services are bound to further delineate corporates willing to undertake their development, running the risk of greater fragmentation and increased polarization within the system. For many, however, survival will be based on defining logical and service oriented strategy first, then supporting that strategy with a good business model. Anything less by any business entity, corporate credit union or otherwise, and that entity quickly will be out of business.

"As corporates, we don't know how to compete that well," says WesCorp's Powell. "We'll see some successful cooperation and some competitions will get ugly. At WesCorp, if we can't add value, we won't go there."

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