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The Effects of Scale on the Development of Credit Union Business Services

Credit unions across the United States have experienced rapid growth in assets and commercial lending in recent years. To accommodate a growing base of small business members, credit unions have also adopted business services to complement their commercial lending portfolios. The growth in business services is more closely linked to the size of the business lending portfolio than the overall asset size of a credit union.

Executive Summary

Since the 1980s, U.S. credit unions have seen significant increases in the size and number of loans made to member businesses. A direct result is that credit unions have become more responsive to the needs of small businesses through the adoption of business services. The ability to cater to small businesses has provided promising new avenues of growth and community integration for credit unions. But which credit unions stand to gain the most from these developments? Why do some credit unions develop business services and others do not?

What is the research about?

We distinguish the respective effects of various measures of scale on the development of business services using regression analysis. Our research aims to determine what characteristics of credit unions make them most likely to develop business services and to test whether asset size acts as the driving factor in service development. This report provides evidence that asset size is not the main determinant of higher levels of business service provision. Our models point to the volume of commercial lending activity as the strongest predictor of a higher level of business services.

Our models point to the volume of commercial lending activity as the strongest predictor of a higher level of business services.

Taking the volume of commercial loans as a proxy for the magnitude of a credit union’s network of business lending relationships, this result suggests that business service development depends primarily on the state of demand-pressure from business clientele. What translates to a higher lending volume with more or improved business services may be explained on the basis of routine interactions in which businesses share information about their specific operational needs and credit unions gain insight into the kinds of services that would be right for their membership. As the volume of these interactions increases, credit unions find new pockets of demand forming in their networks for additional business services or for improvements in service delivery. 

What are the credit union implications? 

Our main finding explains why many midsize credit unions can often provide a similar level of business services as the largest credit unions in the system. As a parallel, it may not be necessary for credit unions to approach the asset size of large national banks in order to offer a similar level of business services. Instead, the maturation of business services in the credit union system may rely more heavily on the continued acceleration of commercial lending growth. 

Since the kinds of business services that credit unions offer are a reflection of the kinds of businesses they serve, the further development of comprehensive-level business services will depend on the ability of credit unions to attract and serve more commercial clients. We suggest that this ability to attract more business members is developed alongside the gradual expansion of business lending operations. As credit unions develop their deposit-side business services to meet the demands of the businesses they lend to, they grow in both capacity and reputation for business banking.

Credit unions looking to develop their business services may begin by increasing commercial lending. Increased business lending leads to: 

  • Greater connectivity between credit unions, their business clients and members, and potential business clients within their areas of operation.
  • Increased trust and reputation.
  • Greater awareness of the service demands of member businesses.
  • Greater pressure to provide the services necessary to fulfill these needs.  

To further develop business services within the purview of their mission and strategy, credit unions should: 

  • Hire or train staff as business and marketing specialists.
  • Develop new lending products or exploratory business services to attract and retain more businesses.
  • Consider serving different types of businesses in terms of firm structure, industry, and size.

Filene thanks its members and Inner Circle sponsors for helping support this research from the Center for Performance & Operational Excellence.

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