By Steve Williams 2005 will be a year like no other for credit unions. Over the past 10 years, credit unions have seen a wide variety of new opportunities open up: community charters, business lending, new delivery channels, CUSOs and expanded wealth management services. While the industry has succeeded in opening up its business powers, it has also opened up new, more difficult responsibilities for CEOs. When opportunity is wide open for small financial services organizations, the key becomes strategic focus. In the excitement of new powers and capabilities, many credit unions are attempting to “fire on all pistons” at once. Grow indirect; add branches, new technology, business lending and insurance, and start a technology CUSO. In trying to be everything to everyone, they risk becoming mediocre, diluted … possibly irrelevant. In addition, even though credit unions are “non-for-profit” financial organizations, the financial realities that face CEOs in the future will become just as stark as those faced by a fast-growth publicly traded company. Fundamentally, credit union CEOs will need to ensure they are effectively balancing the three levers of growth, capital and profitability. Because credit unions live on their internally generated capital, optimizing this equation is crucial. We are starting to see pressure on this balance as we enter 2005:
• Some credit unions are simply finding more lending opportunity than their balance sheet capacity allows. Off-balance sheet strategies will grow in importance in the years ahead.
• Many credit unions investing heavily in new branches and electronic delivery channels are finding severe near-term profitability pinches. All credit unions must find the appropriate pace at which they can invest in new opportunities. In 2005, some credit unions will face severe budget pressures as they discover they have extended themselves too much in the name of growth.
• Funding dynamics are likely to change in an upturning interest rate cycle. The industry’s nice rate position vs. money market mutual funds could flip, and new asset/liability challenges may emerge.
• Through all these new growth opportunities, credit unions will continue to see hyper competition. Both large banks and community banks are also actively expanding their branch footprints today, and all players must be watchful of industry overcapacity in the years ahead.
While the credit union movement is healthy and profitable today, these gathering trends put noticeable pressure on leadership. Credit unions who move through 2005 and into the future will lead their organizations by making them focus. My favorite quote concerning strategic planning comes from Harvard guru Michael Porter: “The key to strategy is deciding what not to do.” In the years ahead, I believe credit unions will become more and more appreciative of the idea of identifying strategic niches and sticking with them. We will see a much more diverse group of successful credit unions in the next decade. Some will be “category killers” for certain loan products; some will target specific market segments with their community charters; some will emphasize their CUSO services to other credit unions, and others will get serious about untapped niches for the underserved financial consumer. As opposed to saying, “Damn the torpedoes, let’s do everything,” the best credit unions CEOs will be more humble and reflective going into 2005. They will start to engage their team in answering simple, yet uncomfortable questions:
• Why do we exist?
• Who do we want to serve?
• What can we provide them better than any of our competitors?
• What capabilities do we need to develop to have a competitive advantage?
• How well is our organization equipped to execute?
• What should we measure and how will we hold people accountable?
In a nation where most consumers pay excessive banking fees, save and invest too little, live under-insured and often extend their debt too far, the opportunity for credit unions is almost infinite. Our country needs financial players that sincerely want to get the health of the family household back in order. However, credit unions also must face the financial and competitive realities that go with this opportunity and stay focused on only the things they do very, very well. Steve Williams of Cornerstone Advisors
