MADISON, Wis.-Two important themes seem to emerge from the latest paper from the Filene Research Institute and The Center for Credit Union Research here, a colloquium co-sponsored by and held at Stanford University in March, 1999: consolidation in the financial marketplace, fueled by the dual fever of mergers and acquisitions and government deregulation hasn't been all that damaging for the average consumer; and technology can indeed be the great leveler of playing fields, no matter the size of the institution. After a decade of consolidation in the banking sector, and a raft of studies that analyze its effect, some interesting, if unexpected conclusions can be drawn. First, some large mergers don't make good economic sense, as they do not provide the much-touted promise of `economies of scale' that their combined size would assume possible. The largest banks may be "merging past the point of gaining economies of scale, perhaps even making themselves less efficient," write researchers Harold O. Fried and William A. Kelley. The good news of that implication for credit unions is that the "cost advantages of very large banking competitors, as reported in much of the trade and popular press, could be exaggerated." The obvious point for CUs is to play to their greatest strength: personal service. If the mega-bank branches can't (yet) or won't out-compete credit unions on price, then a full array of products offered may be more important, if it is backed up with great service. But a key strategy emerges as well. Smaller credit unions need to innovate in ways that "allow them to be the initial point of contact with the member, while a source much larger than the CU provides as much as possible of the remainder of such services." That finding clearly points the way toward smaller institutions to enter cooperative relationships not only with larger credit unions, but with credit union vendors, trade associations and credit union service organizations in an updated version of the correspondent relationships. The study also found that when the biggest of the big get bigger, they move away from small business lending, but when small banks consolidate, they increase lending in the small business community. How pervasive those findings are, and how long they may continue is unknown just yet, said researchers. And why it all happens is a mix of the obvious and the unknown, but one factor might be that a financial institution's "organizational complexity makes it costly to provide locally-based services." Layers of decision-making and management approvals can be at odds with relationship-based knowledge and personal contact, but this is a lesson for large credit unions to heed as much as it is for large banks. That bureaucracy can interfere with service is not a novel idea, just as no one should be surprised that another factor driving consolidation is what researchers call "empire building." As executive compensation increases with firm size, the desire to get big through M&As is glaringly obvious. During the Q&A session, one researcher responded to what was learned about how small institutions can overcome the disadvantage of size. "You need to think about ways of getting access to the technology while remaining small," he said. "That means buying them from third parties or getting into cooperative agreements with other credit unions." (see related news story, page 1.) -
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