No conversation about the future of corporate credit unions goes very far before an ugly question intrudes. Isn’t it time to extinguish corporates entirely and turn the correspondent service work over to banks?
Which in turn raises the bigger, more fraught question. Can banks be trusted to do this?
Deep in the credit union DNA is a thick distrust of banks and, pointed out Dave Chatfield, chair of the corporate realignment task force. History proves the validity of this position. Roll back the clock 20 years, and many credit unions in the west had turned over their correspondent services to Security Pacific Bank, then a financial giant. But in 1992 it merged with the much bigger Bank of America, which soon decided to shut down the credit union department because it did not fit with BofA’s larger strategic initiatives. That left dozens of credit unions scurrying to fill the void and, said Chatfield, it also left an indelible distrust of banks, at least for him.
Chatfield added, "Banks have jumped in and out of serving credit unions for many years. Security Pacific is not the only example. Credit unions need to remember this when thinking about turning over their settlement and correspondent services to a bank."
And yet this argument will not be settled so easily for two big reasons.
The first is that many credit unions lost large amounts of capital in the recent wave of corporate collapses and these credit union have little affection for corporates. For them, in choosing between trusting a corporate or a bank, it probably comes down to holding their nose and flipping a coin.
The other reason is that banks have gotten highly efficient at providing correspondent services, said Lawrence Remmel, an attorney with Pryor Cashman in New York who specializes in financial services. "The big correspondent banks have scale and efficiency. It is very hard to compete with them. And it is very hard for a corporate credit union to maintain the infrastructure required to stay competitive."
Added Remmel: "It would benefit credit unions to outsource correspondent services to the banks that specialize in this. I really don’t think credit unions can compete with them. Doing this [contracting with banks for settlement services] would reduce the costs to credit unions."
Not everybody buys Remmel’s argument. Chatfield, for instance, is adamant that a corporate of sufficient size–one with a large volume of member business–would be capable of matching a big bank’s offerings, particularly since the corporate is under no pressure to turn a profit for shareholders.
Then, too, firms like Lending-Tools.com, a developer of automated correspondent systems, now are pushing into the corporate credit union marketplace and what they are selling are exactly the tool kits used by banker’s banks. A first customer is slated to be Kansas Corporate Credit Union in a deal announced in February, but Eric Goering, CEO of LendingTools, said he anticipates more deals with corporates imminently. Goering also stressed that systems such as LendingTools’ will indeed enable a corporate to compete effectively against banks for settlement business.
Corporate credit unions with highly efficient tools just may in fact be the ticket. Said Scott Waite, CFO at Patelco in San Francisco and a board member at Western Bridge: "Many credit unions want a credit union solution. They don’t want a bank. They want a credit union. And they want a credit union that is highly efficient."