How much damage did disruptive financial services companiescause your credit union last year?

While CUNA Mutual Group Chief Economist Steve Rick did notquantify how much disruptive financial services startups hurtindividual credit unions in 2014, he told an October onlineconference audience they had certainly harmed credit unionsoverall.

Rick presented his research and perspectives on economicdisruption and credit unions to CUNA Mutual Group's onlineDiscovery Conference Oct. 21, 2015.

Rick pointed to credit unions' falling membership numbers overthe last five years as prima facie evidence of disruption.According to the NCUA's 5300 data, credit unions with assets of upto $5 billion saw member numbers decrease between 2011 and 2014,Rick said.

“Now, you would maybe expect this in this highly competitiveenvironment today,” Rick observed. “But with population growth ofabout 1% per year, we should expect credit unions to havemembership growth of at least 1% per year.”

Rick pointed out the phenomenon affected credit unions of allasset sizes. While 69% of credit unions with less than $20 millionin assets saw their numbers of members decline over the four-yearspan, 19% of credit unions with assets between $500 million and $1billion had the same experience, as did 14% of credit unions withassets between $1 billion and $5 billion.

“These credit unions are all losing memberships,” Rick said. “Ofcourse over the long term this is not sustainable. Just to keeppace with population, you should have grown 4% over this timeperiod. So we are seeing disruption taking place in ourindustry.”

But disruption is more of a slow motion disaster than animmediate crisis, Rick explained. Fintech startups are tocredit unions and banks what piranha are to water buffalo, he said– piranha (tiny fish) can attack and destroy water buffalo, whichare huge, vital animals.

“The piranha are chewing at our membership base, if you will,”Rick said. “Or eating into our revenue streams. They're hard to seebut they're there and they are slowing eroding some of the value weprovide our membership base.”

Rick offered the following six signs disrupters have causeddamage to a credit union:

1. Your average number ofproducts per member has declined.

“Now this is what we like to call an early warning sign ofdisruption,” Rick said. “When you go from four products per memberto three, to two and to one.”

He explained this metric's importance in terms of scope andwallet share. The goal is for the number of products credit unionmembers use to be high enough to generate greater income per assetdeployed than what was spent deploying those assets, he said.

“Now in economics you always want to look at not just theeconomies of scale of your operation, how many assets you have, butalso the economies of scope, how many of your products do yourmembers use. You want to get your products per member up, four,five or six products per member to achieve this economy of scaleand scope,” Rick said, adding that if products per member begin todrop, that drop will be the earliest sign of disruption.

“Fewer products per member first then, eventually, fewer membersdown the line,” he said. “It's like a slow bleed. It takes a while.It doesn't happen all at once.”

2. Your membership has beendeclining in recent years.

“If your membership is falling that is a clear sign you're beingdisrupted,” Rick said. “The value you provide your members is beingeroded away and your members are moving on to other areas.”

If you're not growing, you're dying, he added, arguing creditunions need to make drawing new members one of their highestpriorities.

In an interview with CU Times, Rick acknowledgedmembers could leave for other reasons, such as death, a move oranother life change, but he maintained a credit union needs to bevital enough to draw and hold enough members to replace those wholeave.

3. Your assets per branchhave been falling steadily.

Rick explained he used assets per branch as a metric fordetecting possible disruption because it ties into criticalinterest income numbers.

“If your assets per branch fall to below $50 million, you maynot be generating enough interest income to cover the operatingcosts of the institution,” Rick said.

Basically, it involves a credit union's capital and expendituresremaining tied up in its legacy branch instead of being redeployedinto new, innovative products and services, he explained, returningto his water buffalo analogy.

“This is kind of like the water buffalo that is stuck in themud,” Rick said. “You can't move when the other water buffalo startmoving and change direction, you're stuck because of those legacyassets.”

In the interview, Rick pointed to this metric again, noting morethan 5,000 credit unions – the majority of credit unions in theU.S. – had less than $50 million in assets per branch plus had thehigher expense ratios associated with the metric.

“In a highly competitive environment like credit unions have,you really want to keep working at keeping your costs low,” Ricksaid.

4. Your percentage ofmembers with draft accounts has been declining.

Rick observed many credit unions see the use of a checkingaccount as a signal members have made the credit union theirprimary financial institution. When a credit union is a member'sPFI, he said, many credit unions believe they have a better chanceof making future loans to those members.

But it works the same in reverse, he observed.

“If the numbers of your members who have checking accounts isbeing eroded away, you may be losing millennial members toalternative payment apps and services,” he said. “And if you losethose checking accounts, you may next lose opportunities for themortgage, the auto loan, etc.”

5. Your share of members 30and younger has dropped in recent years.

Rick described people between the ages of 14 and 32 as thefuture credit union borrowers and said no credit union can affordto lose them to disruptive fintech firms – even though those firmstarget them particularly.

Rick reminded attendees numbers of younger members are key tokeeping future loan to share ratios high and illustrated the ratioin terms of the different generations.

“I like to think of the loan to share ratio in terms of theloans being the millennial generation, those people coming ingetting the auto loans and mortgages, and the shares and savingsreally being the baby boomer generation,” he said. “So when you'relooking at the loan to share ratio, you're really looking at thepercentage of your members in the millennial generation and thepercentage of members in the baby boomer generation.”

If the number of members under 30 becomes too low, that willlead to a lower asset ratio and falling yield on assets, he said.That, in turn, causes a lower return on equity that over time leadsto a lower sustainable growth rate, he added.

6. Your members' outboundACH payees include disrupters such as Lending Club andProsper.

Rick urged credit unions to track their members' ACHtransactions to find out where they are doing business and discoverwhether disrupters have begun to creep onto your members'radar.

“If you track your members' outbound ACH payments and see a lotof names of disrupters in there, that's a good sign disrupters mayhave gotten a foothold among your members,” he said.

Rick added in the interview that the goal of his presentationwas to alert credit unions to what may be happening in time forthem to make strategic decisions and deployments to help keep themfrom losing more ground.