Legislative Barriers Are Among Threats to Collaboration
The credit union system has long touted the merits of collaboration and cooperation. As clich?d and overused as the idea may have become, collaboration will continue to be critical to credit unions in 2011 simply because credit unions face a sobering reality.
The truth is that credit unions, small, medium, and large alike, are vulnerable. Painful reminders of the current operating environment include that credit union operating expense ratios exceed net interest margins, noninterest income is under legislative attack, corporate capital investments for many credit unions have been wiped out, loan-loss expenses are at an all-time high, and corporate stabilization and NCUSIF expenses, also at historical highs, may extend for as long as 10 years.
Even without the financial crisis of 2008 and the extended economic recovery that we are now experiencing, two fundamental facts about the credit union system have been nagging at us for years. First, there is the undisputed correlation between operating efficiency and asset size. Secondly, credit union market share has remained flat for nearly two decades hovering at 6% of financial institution assets since 1992.
Long-term, the best hope that credit unions have of competing against the mega banks is large-scale collaboration and cooperation among credit unions. Ironically, far too many credit unions view other credit unions, not mega banks, as their primary competition. The credit union system's collective inability to break the 6% market-share threshold would seem to support the belief that credit unions largely swap members with each other rather than attract bank customers.
Collaboration and cooperation does not mean merger. Massive, large-scale system collaboration and cooperation have enormous potential to minimize redundant efforts and expenditures among credit unions and thereby reduce operating expenses.
In 2011, at least five big-picture opportunities will test the credit unions system's collaborative will:
o Aggregation of back-office functions.
o Collective branding while maintaining CU self-identity.
o Reinvention of a credit union-owned corporate credit union solution.
o Breaking through legislative and regulatory advocacy barriers.
o Collaboration among CUSOs.
First, back-office operational collaboration and aggregation across credit unions are ripe for the picking. Regulatory compliance, internal audit, collections, human resource and benefits administration, policies and procedures management, and core processing technology all represent functions that are unnecessarily duplicated across credit unions. Credit unions pride themselves on the uniqueness of their member service, yet none of these back-office functions would likely be the reason a member would recommend his or her credit union to a friend or family member.
Beyond these more routine back-office functions, rapidly evolving consumer technology poses another back-office area that holds promise for collaborative credit union solutions. With consumers expecting only greater access to their accounts via mobile devices and cloud computing, credit unions will need to solve the challenge of keeping up with consumers' technological expectations while minimizing the capital outlays related to infrastructure and technical capacity.
As the CEO of the recently launched CU Roots Cooperative, my biggest challenges are to distinguish between those back-office functions that require building new capacity versus those than can be delivered more quickly and cost effectively via credit union aggregation and the use of existing providers and to take back-office collaboration beyond a handful of credit unions to realize benefits of scale.
Second, without compromising a given credit union's own unique identity and local value to its field of membership, credit unions have the option of voluntarily collaborating on a collective, unified credit union branding and messaging initiative. One such opportunity is "Credit Unions: For People, Not Profit." This consumer-tested campaign, which was developed by the California and Nevada Credit Union Leagues in conjunction with Attune, the Filene Research Institute and credit unions in Arizona, enables credit unions to share the redundant costs of developing a consumer-tested brand while preserving their respective identities. To the extent that credit unions view mega banks, not credit unions, as their primary competition, cooperative branding can save credit unions enormous marketing dollars and give credit unions a greater collective bang for our collective marketing buck.
Third, credit unions face a critical decision on how they will access services historically provided by the corporate credit union system. Each credit union needs to make the choice that best serves its membership. One size won't fit all. Whether or not the option of a credit union-owned corporate solution (or solutions) will thrive going forward will be a test of both the credit union system's collaborative will and its creativity in tapping nontraditional players.
Fourth, on the federal legislative and regulatory front, the credit union system will be tested on our ability to break through to a higher level of advocacy effectiveness with deeper and broader system collaboration. Yes, we are still struggling with raising the member business lending cap. Yes, interchange income is under attack when credit union net interest margins are at their most squeezed. If we allow credit union frustration to result in a fragmented advocacy strategy, the credit union voice will be divided and further diluted. The credit union advocacy footprint needs to be broadened and deepened not only in the government bodies we lobby but also in the credit union system resources we tap, including CUSOs.
Fifth, not only do we find unnecessary duplication of efforts and expenses among natural person credit unions, we also find it among the CUSOs that provide services to credit unions. Competition among CUSOs is highly desirable to provide checks on pricing and incentives for better service delivery, but CUSOs would serve well to reduce redundancies among them and to minimize redundant charges assessed to credit unions.
CUSOs will be tested on the degree to which we enable credit unions to minimize redundant expenses to realize significant cost savings through aggregation and to engage in new key pursuits that would not be feasible by a single credit union on its own.
Lucy Ito is president/CEO of
CU Roots Cooperative.