Why The Great Divide?

[chris w.]

The credit union as a community may be growing, but nearly half of all credit unions are not. A small percentage of institutions continue to drive most of the industry's growth, while thousands of credit unions' earnings remain flat or in the red, and many analysts are forecasting the situation is not going to be getting better anytime soon. Why? Just a reflection of a tough economy and corporate assessments? Or is there more to it?

[> EVIE@PUGETSOUNDCU.NET]

Yes and no. Yes the economy and assessments have their negative impact. But it’s not that simple either. Smaller credit unions, of which I am two, are just plain inefficient – I know as I’ve walked down that road for a long time. In our effort to ‘serve members’ we gave them the technology and the personal touch, unfortunately we could never afford both. But with high loan to share, high capital, and grateful members we just kept on doing it.
Now, those same members complain because we don’t pay enough on deposits (for those of us who lowered our rates) and our vehicle loan rates can’t compete with the 0% or .9% at the competition so while the members just dearly love us, they can’t afford to always do business with us. And that is only from the members who talk to us, the others just move their business causing us to ultimately not really please anyone.
Throw in the unreasonable expectations from the regulator, there are really bazaar stories, it leads us to mix that is simply not sustainable. Once we recognized some of the problem we searched for solutions and found ‘collaboration and technology’. Between those two events we saved over $700k per year in expenses (not a small feat) and are much more efficient but it’s not enough.
Time to celebrate? No. Growth? No we had to shrink in assets and members to ride out the events of the last 4 years.
There’s no easy answers and no one answer works for everyone.

[> henryw]

The great divide is the result of long term changes in the credit union system. The credit union system evolved from a workplace centered and employer sponsored system with closed fields of membership to a system that now has open fields of membership and little or no sponsor support. The great divide is there because about 6,000 of the 7,000 credit unions did not successfully transition from the sponsor based closed field of membership to what is now a very open field of membership. That has created problems for them in meeting their member's needs.
The credit union business model is very sensitive to scale. Credit Unions have relatively large fixed costs and much lower variable costs. Volumes can increase over wide ranges before additional fixed costs need to be incurred. Therefore high volumes mean lower unit costs.
The old sponsor based model was much less sensitive to volume. A large portion of the fixed costs were covered by the sponsor in the form of free space and subsidized overhead. Sponsor based credit unions have lower marketing costs. The closed field of membership limited competition from other credit unions.
The 6,000 credit unions with assets under $100 million do not enjoy the same unit costs as the 200 credit unions with assets over $1 billion. The billion dollar credit unions have the resources to invest in the new core services that are needed to attract members. The billion dollar credit unions can afford to offer free home banking, free bill payer, free mobile banking and they can support large branch networks to attract new members.
I think the divide will only grow. The new open fields of membership create opportunities for credit unions to grow to much larger size. The larger size credit unions have scale efficiencies and greater resources that give them a big competitive advantage. I saw a recent statistic that said about 3% of all credit unions in 2012 accounted for about 80% of the growth. The most popular member services are the electronic services that require significant investment in both staff and technology to offer. Those services attract new members and help retain current members. Member convenience is probably the biggest factor in why some credit unions are growing and others are not growing. Larger credit unions offer more convenience, not only in terms of the new electronic services but also in term of branches, ATMs, call centers and all of the traditional deliver channels.
The smaller credit unions should look to how the main street hardware stores formed the ACE Hardware cooperative. They gained the same economies of scale as the big box hardware stores such as Home Depot and Lowes.