There may be only four or five corporate credit unions within 10 years. There isn’t that much business out there. The small won’t survive,” predicted John Fiore, CEO of Motorola Employees Credit Union and a key figure in the recapitalizing of Members United as Alloya. “Within a couple years we may be down to a dozen corporates,” Fiore added.
Many eyes may be on the fate of Western Bridge and U.S. Central, with the NCUA set to announce what will happen to them as early as this month, but that may miss what is transforming the corporate credit union world. “We will see a lot more consolidation,” Fiore predicted.
Do the math. As of this writing there are 24 corporates standing, but many have announced plans to merge out of existence (Treasure State into Kansas, VACORP into Mid-Atlantic, Southeast into Corporate One, West Virginia into VolCorp and Louisiana into Corporate America). Western Bridge and U.S. Central are on short leashes as the regulator seeks to sell them off, in whole or part. Iowa Corporate has announced it will shutter by year end. Subtract them and the number of surviving corporates drops to 16.
That is a one-third attrition within a year, but, predict the experts, we have seen nothing yet.
Staying alive as a corporate simply is going to require huge volumes of payments and processing business, and there just is not enough of that to support a spread out network, said the experts.
“Volume and economics are the strategic reason for consolidation,” said SunCorp Executive Vice President Brandt Peterson in explaining why this trend toward merger is gaining steam.
Jim Zimmerman, a senior executive with CenCorp, agreed: “We do expect that there will be further consolidation of corporates,” he wrote in an email.
What is going on? Experts are scrambling to explain the shrinking corporate credit union population. Dennis Dollar, a Birmingham, Ala-based credit union consultant, elaborated. "I am convinced that we are only now seeing the beginning of the merger trend in corporate credit unions. It will accelerate as the new NCUA rules come into play and the need for increased capital grows under the regulations. Business plans will have to adjust in order to remain compliant with the new rules, and economies of scale will be required to make the business plans work. The result will be more corporate mergers in the next several years.”
Olympia, Wash.-based credit union consultant Marvin Umholtz elaborated on the why of mergers. “The payments system business is very volume sensitive with questionable margins. I find it hard to believe that under the new business model all of those corporates will be able to keep up with the new NCUA rule's 10-year escalation of capital requirements. The consolidation will likely occur at a moderate pace over time rather than in a big bang. That's just the way the NCUA would like it to happen. Twelve by 2015 might be too low, but by 2020 it would be too high.”
A huge factor is that, under increasingly restrictive NCUA regulations, corporates are limited in how they can make money, and the emphasis is now on low-risk, low-margin activities such as item processing. “Volume now is king,” said Fiore. High-risk, potentially high-reward lines of business, such as investments, are significantly downplayed under the new NCUA regime, but this means that corporate credit unions to survive have to compete against low-cost correspondent banks.
As those forces come together, Fiore offered this stark prediction. “I do not think the regional corporates can survive. Alloya is doing business coast to coast, and that is what the survivors will all do. There is no other way to attain the necessary volumes.”
Dollar said there is a way for regional corporates to survive, at least in the near term. “Some smaller, single-state corporates may be able to make it by raising the needed capital and then partnering with larger corporates for some services.” By that measure, these regionals may in effect become de facto branch offices of a larger, national corporate, but they would survive in name.
Another factor, said the experts, is that it is apparently less expensive in every way, monetarily as well as in terms of reputation costs for the industry, for weak corporates to merge into stronger partners than to be conserved by the NCUA. An upshot is that the indicators suggest continuing NCUA support for mergers. (Through its spokesperson David Small, NCUA declined to comment on corporate credit union mergers.)
Either way, a bottom line with corporates may be that less is more. That is how Dollar sees it. “The credit union industry would be better served with fewer strong corporates than with a larger number of corporates teetering on the brink of compliance with the new capital standards and struggling to maintain a business model from which they can bring value to their member credit unions.”