Message to Credit Union Leaders: The Emperor Has No Clothes
Credit union people are like family to me, but, like family, sometimes there is a need to have a heart-to-heart talk. There is a crisis in our industry, but very few of the people associated with the industry publicly acknowledge it. The traditional credit union model no longer works and will never work again. If we do not take steps to transform the model now, credit unions run the risk of marginalization or elimination.
Since the founding of credit unions, the business model is for credit unions to exist off of the net interest margin. In 2005, the credit union industry's average net interest margin dipped below the operating expense ratio. When a business makes less money than it costs to operate, you can only stay in business as long as the capital holds out. In 2009, the NCUA began to take an additional bite of that capital to pay for the losses to the share insurance fund caused by the meltdown of the investment portfolios of the corporate credit unions.
Credit unions are merging out of existence at the rate of at least 3% per year. This has been true through both good and poor economic times. Our current troubles are aggravated by the economy but not caused by the economy.
Why has the traditional model failed? Costs to run credit unions have increased dramatically, especially those associated with technology and compliance. The economies of scale of the large banks and Internet competitors such as ING Direct and Lending Tree keep a strong downward pressure on the prices for financial services. Credit unions currently have a nonprofit tax advantage, but banks have the means to keep their tax obligation very manageable. Their scale trumps the credit unions' nonprofit tax advantage.
The credit union industry needs to make fundamental changes to sustain itself, but our culture is stubbornly resistant to change. There are no big payoffs to sticking your neck out to make radical changes, especially if you are a CEO near retirement age. There are no profit-minded shareholders breathing down the necks of boards of directors to make changes to keep credit unions profitable. When credit union boards develop concern over the continued viability of the credit union, it is usually too late to do anything about it.
Why is there no sense of urgency to make the changes necessary to sustain credit unions under a revised business model? Why aren't our trade associations and other leaders encouraging credit unions to make fundamental changes? It all seems like an emperor's new clothes dream. We all know credit unions are exposed, but we pretend not to notice because everyone else is pretending. It is time to stop pretending before it is too late.
What to do? The only solution that retains the cooperative credit union structure is to establish extensive credit union collaboration networks. Credit unions need to earn more income and reduce operating expenses, and collaborations have a proven record of success. For example, there are investment and insurance collaborations that have earned millions of dollars for credit unions. There are also operational services collaborations that have saved credit unions millions of dollars while providing better services. Collaborations work for both small and large credit unions.
Collaboration works but only if you are truly committed to making it work. Credit unions could share excess capacity through a network. For example, if one credit union needed a collector but did not need full-time capacity, another credit union could sell its excess capacity to that credit union, transforming this underutilized capacity into an income stream. The collective cost to run credit unions in this country is over $28 billion. Credit unions with excess capacity can tap into this huge market.
The network is invisible to the members. Each credit union would still control the member interactions and protect its members' privacy. Mergers would not be needed to gain scale. Networks would be competing with other networks to provide the best solutions to attract more credit unions. Networks could also join forces for even greater economies of scale. With networks, all credit unions would have ready-made operational platforms-true plug-and-play solutions to help form and sustain new credit unions.
NACUSO is committed to helping credit unions unleash the power of collaboration and has established a certified collaboration professional program with Pepperdine University to teach the strategy and skills to be successful collaborators. However, credit unions will remain at risk until you, our credit union industry leaders, promote the widespread use of collaborations.
We have a very short window to make changes before the momentum of the industry makes it nearly impossible to correct. As the current stewards of credit unions, we owe our best efforts to the credit union pioneers who came before us and to the future generations of members. Let us not shirk our responsibility.
Guy A. Messick is an attorney with Messick & Weber PC in Media, PA and General Counsel to NACUSO. He can be reached at 610-891-9000 or firstname.lastname@example.org