The plight and protection of small U.S. credit unions came infor new scrutiny last week following a controversial think tankstudy by Celent, the Boston research firm, finding that CUs under$50 million are fast disappearing under the weight of techproducts, competition, compliance and their own“inefficiencies.”

The Celent report, issued as part of the consulting firm's newattention on CU operations, quickly drew criticism as “flawed” in ablast from CUNA economists arguing the Celent data overlookedpositive key data on structure and performance, simply magnifyingindustry “myths” on how CUs function in their not-for-profitrole.

CUNA economists did agree with conclusions in the report,“Tipping Scale: Credit Union Consolidation,” that CUs have declineddramatically in numbers over the past decade.

“However, the Celent report fails to note that the bankingindustry experienced a nearly identical consolidation trend”and  many small CUs are flourishing today with chartersthat persevere, said CUNA.

In CUNA's rebuttal to the 24-page report, Mike Schenk, CUNA's senior economist, charged the Bostonconsultant engaged in “broad-brush” conclusions, producing adocument “which generates more heat than light” on the industry'scurrent status.

The Celent study claimed that previously CUs “simply required abranch or two, a core banking system and an ATM,” but in the past 10 years“Internet banking, bill pay, know your customers and office offoreign assets control compliance” have altered the environment.

“What is driving this change?” asked the report's co-author,Bart Narter, Celent senior vice president. “Competition driven bydemand for mobile banking, consumer and business remote- depositcapture.”

The study found that smaller CUs “don't have the scale to createthese offerings and even the larger credit unions dwarfed by thesize of their bank competitors are finding it difficult to keepup.”

In a positive note, the study, based on NCUA data from 2010,said that while CUs under $50 million are in a fast decline, theindustry appears to be adjusting to the phenomenon.

In reporting on the CU decline, the study noted that the number of CUs in the U.S.has dropped “rapidly from 10,316 at the end of 2,000 to 7,330 atthe end of 2010” and this represents a decrease of 29% “or acompound annual growth rate of minus 3%.”

While the vast majority of the consolidation is under the $50million asset mark, CUs over $500 million, on the other hand, “arevastly outgrowing any other category relative to their tier,” saidthe Celent authors.

The report said the past 10 years have seen CUs of more than$500 million in assets rapidly gaining deposit share and growing innumber.

Smaller CUs, however, find it difficult to keep up “with theever-increasingly intricate product sets and channel offeringsnecessary in order to stay with the curve,” adding that “all butthe largest credit unions lack the infrastructure to run thesesystems in-house or have the buying power to drive service bureaupricing down,” said Celent.

In an executive summary, the Celent writers found that CUs under$2 million dropped by 1,509 over the last decade representing “50%of the decrease in total credit union count.”

The report concluded that it is evident that “running a moderncredit union requires a greater scale than in the past, owed inlarge part to increased regulatory measures, channel support,product proliferation and branch-ATM coverage.”

“Clearly, credit unions with less than $50 million in assets arestruggling to survive, with those under $10 million fading thefastest,” said the report.

Disputing many of the conclusions in a series of charts, Schenk,who also is vice president of economics and statistics for CUNA atits Madison office, noted that many small CUs retain substantialcapital positions and hold “high asset quality, grow and earn atabove average rates and are effective niche players.”

Certainly, admitted Schenk, small CUs feel the pressure toprovide a wide variety of services and be all things to all people,creating “significant strains.”

But having remote branches and the like is not is the biggestchallenge, he maintained. The biggest burdens lie in compliance,corporate stabilization costs, back-office redundancies andsuccession planning.

Countering what he said are the various myths on operatingcosts, he said that over the past decade CUs under $50 millionreported annual average operating expense ratios equal to3.92%.