Why CUs Are Considering Conversions Deserves Examination
Some of my credit union industry friends passionately believe that a credit union converting to a mutual savings bank charter is the biggest rip off of members' equity since Enron. Other friends believe that the charter conversion is a legitimate, strategic option in response to a disabling capital accumulation scenario.
I don't think that any strategic choice should be off limits for credit unions, even this politically incorrect one. Regardless of one's opinion, the trend of credit unions converting to savings banks is an industry-altering force deserving closer examination.
From a practical standpoint, every credit union expects to operate in perpetuity. As a member-owner of that credit union, I will never see my share of the equity as long as my credit union is in business. I get my value from that equity through good rates and services on an ongoing basis. If I choose to leave my credit union, I don't get to take my portion of the equity with me. The credit union keeps my share of the equity, as well as that of every member the credit union has ever had who has chosen to take his or her business elsewhere. Under these circumstances, the dollar value of my credit union equity ownership is largely intangible and extremely limited in its liquidity.
If given the real option to stay with a specific credit union or vote to get my equity and leave, I would have to weigh the value of both choices. I'm sure that some credit union members would vote to leave with their share of equity cash in hand. Obviously their credit union relationships aren't very strong. In any event, whether consumers are members of a credit union or customers of a converted savings bank, consumers always have the choice to vote with their feet and take their business down the street.
Although there is significant third-party evidence that a credit union structure serves the consumer better than a savings bank structure, predicting that any specific credit union conversion will produce something worse is purely speculation. An individual consumer might like it better. Those who would make this decision for that consumer need to look up the definition of "hubris" in the dictionary.
Even my friends who find the conversion of a credit union to a savings bank distasteful should keep in mind that it remains a legal strategic choice. I recently spoke with the CEO of a multi-billion dollar credit union who has spent decades in the credit union industry. He has no current plans to lead his credit union through a conversion, but he adamantly states that he wants to retain the strategic option. Any outside meddling or interference with this choice, no matter how well intentioned or philosophically motivated it may be, is sure to be resented.
'Hands Are Tied'
This CEO's biggest concerns are the limits on the credit union's ability to grow capital only through retained earnings and the prediction that the organic growth of capital through retained earnings is expected to slow in coming years. He believes that alternative and/or secondary capital will be essential to the ability to grow the credit union and remain competitive. Without it, his hands are tied.
Think of the choice to convert to a savings bank as catastrophic insurance. One may hope to never use it, but one is grateful that it is there when disaster strikes.
Rather than using their resources to erect roadblocks to conversion as some credit union associations have done, credit union industry leaders should focus on fixing the capital problem. The capital issue is driving the conversion issue. Credit union regulators, credit union trade associations, as well as the United States Government Accountability Office (GAO-04-849 report entitled, "Credit Unions: Available Information Indicates No Compelling Need for Secondary Capital"), are all trying to get their arms around the capital issue. A politically viable consensus on a solution has remained elusive and not without its own share of controversy. This issue is a political hot potato within the credit union industry and in the halls of Congress (not to mention the bankers associations' war rooms.) I don't expect to see effective alternative capital for credit unions anytime soon.
Credit union conversions will have a domino effect on the ownership structures, customer bases, and business plans of CUSOs, corporate credit unions, and other vendors. CU trade associations will have the gut-wrenching decision whether to serve former credit unions or see some of their best members leave the fold. Credit union regulators are already wrestling (some say meddling) with the public policy and safety & soundness issues surrounding these conversions. The strategic implications for the credit union industry are enormous.
The marketplace forces driving these conversions are real, compelling, and evolutionary (de-evolutionary?). Despite wishful thinking by some in the credit union industry who hope that these conversions simply go away, a strategically significant number of the largest 1,000 credit unions will inevitably seek conversion to the savings bank structure in the near future.
I'm not Nostradamus, but I am convinced that the credit union industry is on the verge of a cataclysmic cultural shift. Change can be scary, but not recognizing and embracing compelling change borders on insanity. I swear to all of my friends on both sides of this issue that I am not crazy, just clairvoyant.
A 30-year credit union industry veteran, Marvin Umholtz is President & CEO of Umholtz Strategic Planning & Consulting Services. He can be reached at mumholtz