Credit: IRStone/Adobe Stock
For as long as I’ve been around the industry, I’ve heard concerns about the demise of the small credit union. But I’ve come to realize it’s a lot like the weather: Everyone talks about it, but no one does anything about it. This is unfortunate. We need credit unions of all shapes and sizes to survive, and if we don’t take action soon, it will be too late.
Fortunately, there are steps the industry can take to potentially decrease the rate at which small credit unions are disappearing by making it viable for credit unions to survive by getting larger credit unions interested in making the necessary investments to keep the small ones alive.
First, does it matter if the industry is increasingly dominated by larger institutions? From a purely economic standpoint, the answer is no. Consolidation within an industry is an inevitable consequence of its growth. The largest and healthiest credit unions are growing and taking their share of members interested in investing in the movement. There are few industries that operate on margins as thin as the financial service industry does. Scale provides opportunities for growth that simply cannot be replicated any other way.
But there is more than pure economics at stake here. Small credit unions, which I generally define as any institution with $100 million or less in assets, play a vital role in making the industry unique. No doubt that larger credit unions can, should, and do continue to provide a wide range of services, including assisting those persons of modest means, but there is something intrinsic to the small credit union’s story that is vital to keeping the credit union tax exemption, and indeed the whole rationale for not-for-profit financial institutions alive in the first place.
As Jason Stverak, the chief advocacy officer for the Defense Credit Union Council, recently noted, “They prove that financial services can put mission over profit, day in and day out. And importantly, they demonstrate to lawmakers and the public that credit unions exist to serve people of modest means, not to build empires. Every time one of these small credit unions vanishes, our industry’s narrative loses a bit of its authenticity and moral high ground. If the current wave of consolidation continues unchecked, we risk a future where only a few massive credit unions remain and the core values and community-driven principles that built this industry become little more than a memory.”
One approach that I have talked about previously is to encourage multiple credit unions to merge, but maintaining to the fullest extent possible the separate identity of each institution. This could include the boards of directors of the merging credit union active in advising and running their institution. Think of it as a bank holding company model for credit unions. Many local community banks are today owned by larger financial institutions, but at least they have not completely lost their identity or any connection they have to their membership.
After I wrote that article, I had a conversation with the CEO of a small credit union. While he was intrigued by this model, he pointed out that, as the CEO of a small credit union, he can only offer his top executives slightly more than a branch manager would make at a larger credit union. In other words, changing the structure of credit unions might help, but what are we going to do to attract and retain the type of talent needed to sustain and grow a small credit union?
A solution might be for multiple credit unions to share the costs of hiring and employing a CEO by making greater use of fractional leadership agreements, pursuant to which a single person could be the CEO of multiple smaller credit unions. To take full advantage of this approach, the NCUA would have to adopt an expansive view of interlocking agreements, which have traditionally been used as stop gaps while smaller credit unions search for a permanent CEO. Instead, the multiple credit union CEO could be a viable and effective career path for the young and aggressive executives of the future who are looking for a leadership position in a consolidating industry.
For example, a small credit union in upstate New York could pool its resources together with another small credit union in Pennsylvania to put together a package of benefits and salary that make the job more attractive. In addition, both credit unions would get the benefit of a highly motivated CEO who becomes intimately familiar with the unique challenges of growing a small credit union. This approach is generally one of the ideas being touted by Credit Union Shared Services (CUSS), which has worked with both small and large credit unions over the last year on creating a series of recommendations for helping sustain smaller institutions.
To be clear, this approach can only work with a little flexibility from the NCUA and some creative thinking on the part of boards, but if the approach takes hold, no credit union will have to disappear simply because it can’t find a qualified replacement for its erstwhile CEO.
A second problem identified by CUSS is that small credit unions lack the resources to provide higher-end retirement packages that larger institutions use to attract and retain the best talent. Specifically, Select Employee Retirement Plans are a way of providing your top executives with benefits that cannot be offered to the rank and file employees. The administrative and back-office costs of administering these programs could be dramatically reduced if the plans are executed by a single CUSO that handles the compliance and legal complications of one of these programs.
These plans are not without their risks, however, and they can be expensive. But with a little regulatory flexibility and in pooling their money to make these packages more cost-effective, small credit unions would have far more means of attracting and retaining the most qualified people to grow and run their institutions.
Encouraging greater collaboration in the employment of top executives is not a panacea. Technology costs are continuing to rise and larger institutions will always have an advantage when it comes to providing the cheapest products and services. But the idealist in me says that there still are some credit unions with viable business plans that could survive and grow, along with the expertise of new leadership. It’s time for small credit unions to more creatively approach CEO searches, and for larger credit unions, to pool together their resources to make the CEO job for all credit unions more attractive.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.