Approximately once each day, U.S. credit unions lose one of their peers through merger and consolidation. The pace of consolidation has reached an average of 300 credit unions per year, driven largely by the need to access economies of scale. Researcher Steven C. Michael from University of Illinois at Urbana-Champaign, looked into strategic options other than mergers through which credit unions can fulfill the need for such economies.
A Filene report by Bob Hoel and Bill Kelly in 1999 first examined the characteristics of thriving small credit unions. That report proposed a number of strategic recommendations and options for small credit unions, among them a franchising system through which certain operations could be standardized. Small credit unions could collaborate on routine back-office activities to gain economies of scale and focus their energies on activities involving member contact. Smaller credit unions are overwhelmingly the target of consolidation, due to demands from consumers and regulators for a greater range of financial products and services. It is often difficult for smaller credit unions to offer the same level of service as larger institutions. Franchising or “strategic outsourcing” may be a way for smaller credit unions to alleviate staff resources expended on routine, time-consuming functions. The researcher conducted in-depth interviews with five CEOs of smaller credit unions, using the term outsourcing rather than franchising. Participating credit unions were full-service, well-capitalized financial institutions with multiple delivery channels, including online banking. The activities identified as having the most potential in the Michael report are:- Compliance and internal audit.
- Consumer lending/Marketing.
- Human resources.
- Accounting/Information technology/Security.
- Facilities management and planning.
Professor Michael concluded that despite the identification of these activities, a credit union franchising system may be premature until a unified credit union information technology system is developed. For a franchising system to work, he says, credit unions first need to consolidate their IT systems onto a common platform.
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Bravo for Filene! While most of us are generating arguments and counter-arguments about CU mergers and conversions, Filene has stepped ahead and offered a credible strategy for positive outcomes.
How about a follow up study on “Best Practices in CU Mergers”? Here are a few ideas to start the thinking: - Form a local Advisory Board - Make one appointment from merged CU to continuing board (until next election) - Retain name of merged CU as a brand, as in “Merged CU, a branch of Continuing CU.” - Retain staff, No layoffs for one year - Agreement to keep branch open for at least one year - Agreement to retain similar or improved suite of services - Distribute (excess) equity to Merged CU members
Bill Myers
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Thanks Bill.
We actually have a variety of studies related CU mergers in the works. One deals with the level of board involvement in the merger decision. The next we are contemplating is along the same lines of what you’ve just described. Thanks for being so engaged in this important topic.
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Thanks to Filene for providing the empirical evidence of the benefits of collaboration. As a flare project to prove the concept of the benefits of collaboration among small credit unions, NACUSO helped small credit unions in Michigan form a CUSO. The CUSO has brought significant reductions in the credit unions’ operating costs and increased lending opportunities. The benefits of collaboration are not limited to small credit unions. In my practice, I have helped very large credit unions achieve significant savings by combining selected operational functions. While the empirical case can be easily made for collaboration, it is the human factor that drives the decision whether to collaborate. The effects of fear and ego must be overcome before credit union executives and boards are willing to take the perceived business and personal risks to trust core functions to a collaborative enterprise. I find that I spend a great deal of time in my practice helping people overcome the emotional barriers to collaboration. This would be a great follow up topic for a white paper.
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Bill and Guy -
Economies of scale is a critical issue facing credit unions. As many CUs are re-defining their value propositions – they are finding they need resources to execute… this is difficult in an environment that has tight margins and limited access to capital. We at Filene look forward to further exploring this topic. Thanks for your terrific support. Cheers, Mark
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