Credit unions today are facing a finite set of choices. The cold hard fact is that credit unions must grow in order to survive. Growth brings efficiencies and resources to enable credit unions to successfully compete in the financial services marketplace. Members will not wait days for a loan decision from their credit union when the bank gives them an answer in 30 minutes.
Without greater efficiencies and a full array of competitive financial services, the credit union industry's place in the nation's financial marketplace runs the risk of becoming marginalized. With the loss of about six credit unions per week, the credit union industry as we know it is disappearing before our eyes. Even a billion-dollar credit union is not large enough to reach optimum levels of efficiencies. What is a credit union CEO and board to do?
The first course of action is to grow the credit union internally by adding members. Credit unions have added potential members by adding SEGs and changing to community charters. Many credit unions complain that the numbers of available SEGs of significant size are rare and it is more costly to acquire and serve small SEGs. Community chartered credit unions often have very large potential memberships but no idea how to successfully compete for new members against the community banks and other credit unions. While the number of members is increasing, the rate of increase in membership has decreased.
With this growth pressure, it is not surprising that credit unions are acquiring members through mergers at record rates. While some credit unions are growing like Pac Man, there are only so many dots to gobble up. Once the merger opportunities are consumed, what will be the credit union model to sustain growth?
There are a handful of credit unions that have decided to abandon the charter altogether and convert to a thrift and bank charter. While there have been great financial rewards for credit union officials, there is a dearth of proof that the change in charter has resolved the growth issues for the financial institution.
The Collaborative Alternative
Credit unions have an alternative to mergers and conversions and it is collaboration. By acting collaboratively, a credit union can acquire scale and market power far exceeding its individual size. Both large and small credit unions benefit from collaborations.
CUSOs are the prime vehicle for collaborations. Small credit unions often view CUSOs as either a distraction or a luxury that only larger credit unions can afford. In small credit unions, there is just not enough time and staff to research and implement additional services when there is barely enough time to run the credit union.
At times it must seem like a treadmill. The credit unions try to squeeze enough revenue from a shrinking net interest margin to stay in business long enough to find more members to grow into a size that will bring better efficiencies, while Washington drowns them with additional regulations. An image of someone spinning plates comes to mind.
There are only so many plates you can spin before they start to fall but there is no end to the number of plates that can be spun in collaborative networks.
All mergers are not bad for the industry. There are strategic mergers between strong credit unions that bring great benefits to the members without member attrition. The "bad" mergers are the credit unions that have allowed the deterioration to continue to the point where they have no option BUT to merge.
Members had already deserted them before the merger due to sub-standard services. How can one expect the dissatisfied members to return to the credit union world with such a bad experience? If these distressed credit unions had taken action to collaborate, they could have had a fighting chance to retain and grow membership. If your credit union is not Pac Man, it is one of the dots and the dots must collaborate to survive.
As an industry we must do everything we can to grow membership through existing credit unions and new credit unions...yes, I said new credit unions. With collaboration, new credit union franchises have a great chance to succeed. Collaboration can also help credit unions find effective marketing means to acquire new members. Imagine a marketing CUSO that did not charge for its services unless it succeeded in steering new members to the credit union. Things are possible in the CUSO world that are rare or non-existent in the third party vendor world.
Complicated-Not!
CUSOs do not have to be complicated to be effective. There are examples of small credit unions that have formed a CUSO just to be able to afford to hire an attorney to represent them in collection and bankruptcy matters. They have experienced a significantly greater level of success in managing delinquent accounts. Other everyday functions that credit unions could outsource collectively to CUSOs include compliance, marketing, bookkeeping, and loan underwriting and servicing.
One of the largest and most effective CUSOs serving small to mid-sized credit unions is CU* Answers in Michigan. CU* Answers began in 1970 as a core data processing CUSO and now offers home banking, bookkeeping, ATM, debit cards, marketing services, interactive voice response and item processing. It is about to add loan decision models with alternative financing options so that if a credit union cannot make the loan and no other credit union in the CUSO can make the loan, the loan will be provided by an alternative-lending source.
These alternative-lending sources could be other CUSOs, such as Personal Lending Solutions, LLC, a CUSO specializing in brokering sub-prime mortgage loans. The goal is to never say no to a member. Financial products, human resource services and both in-bound and out-bound phone center services will be offered to CU* Answers credit union owners and clients throughXtend, Inc., an associated CUSO.
CU* Answers has 70 credit union owners, and serves over 165 credit union clients in 15 states and is growing. The credit unions served have collective assets exceeding $9.2 billion and over 1.54 million members. The average data processing credit union client size is $49 million with the smallest being $2 million and the largest being over $500 million. It is exclusively owned and controlled by credit unions. The credit unions select the services they want, the service levels, and the expense and profit model. The CUSO is completely responsive to the credit unions and all profit is funneled back to the credit union owners.
The range of services and the pricing of those services are more favorable to a $2-million credit union in the CUSO than a credit union 100 times as large could get on their own. It is not a revelation that credit unions in this CUSO have an advantage over credit unions that have to supply their own services internally or negotiate with outside service providers on their own.
CU* Answers is helping other credit unions replicate this model in other areas of the country. The first replication is in the Northwest with the newly formed CU* Northwest. CU* Answers has provided services to credit unions for free to help struggling credit unions survive. This is the power of credit union collaborations.
A Collaboration Fund
NACUSO is leading the way by bringing credit unions together to find common ground and start collaborations. NACUSO has a small credit union CUSO project in Michigan where small credit unions are forming a CUSO with the help of volunteer professionals to collectively provide some basic operational services. Other credit union groups in other areas of the country have expressed an interest in forming CUSOs to help them with basic operational issues.
Once credit unions decide to listen and act together, it takes nickels in expenses to form a CUSO that can save and make dollars. In my humble opinion, the time is right for the credit union industry to establish a Collaboration Development Fund.
The Fund would be used to help acquire the resources to create collaborations on a more expedited basis. This would reduce the cost factor that often inhibits credit unions from creating CUSOs. The Fund can help plant the collaboration seeds in regions throughout the nation. Credit unions will find that if they become involved in collaboration for one service, it soon expands into other services. From one seed, many plants grow. Successful collaborations formed through the Fund would be asked to replenish the Fund as they experience success so that the Fund can continue its work. If the industry does not do something dramatic now, the lack of action will dramatically impact the industry in the near future.
If credit unions have the will, NACUSO is committed to helping credit unions find the way. Home runs may win baseball games but so do a bunch of singles. Every little bit helps. The time to act is not when your credit union is on life support. The time to act is now.
Guy Messick is an attorney with the law firm of Messick & Weber, P.C in Media, Pennsylvania. Mr. Messick provides legal and consultation services to credit unions and CUSOs and is General Counsel to NACUSO www.nacuso.org. His law firm maintains a website at www.cusolaw.com. The NACUSO 2005 Annual Conference at the Wynn in Las Vegas will feature the power of CU/CUSO Collaboration.
