By Henry Wirz Despite efforts by the Shapiro Group to raise money and award grants to credit unions with assets of less than $30 million, California Credit Union League Chairman Frank Michael just presented statistics confirming that smaller credit unions in the aggregate are underperforming on almost every measure of credit union financial performance. The Shapiro Group and others like it are not going to turn around the performance of small credit unions. Their problems run far deeper than anything The Shapiro Group can address. The small credit unions in our service area are very dependent on auto lending with about 40% of their assets in auto loans. The advent of indirect lending has shifted the playing field and made it difficult for the smaller credit unions to compete for auto loans. Auto dealers send their loans to a relatively few lenders and they prefer larger lenders that can handle many loans through an automated system. Smaller credit unions are also at a disadvantage in attracting members' checking accounts because they lack convenient branches. Checking accounts are the main source of non-interest income, a growing source of credit union revenues. Small credit unions have a smaller share of gross income from non-interest income. Finally small credit unions can't afford to promote themselves to their members nor are they able to establish a strong brand identity. The best long-term solution for small credit unions is to help them by creating regional or city- or county-wide cooperatives in which a group of credit unions share common management, common brand, common advertising, common back-office support and shared branching and ATMs. A similar type cooperative, ACE Hardware, helped the local hardware stores stay in business. Small credit unions will just prolong their decline unless they adopt a new business plan. An "ACE" type solution would allow them to leverage their "one on one" member focus with the resources of a larger organization. Small credit unions are failing because they are not meeting the needs for their members or their community. Lending, the life blood of credit unions, is converting to point of sale lending. That favors lenders who can reach out to both members and merchants/dealers. Small credit unions can't do that. Likewise the trend is away from sponsor-based credit unions to community-based credit unions. That favors credit unions that can support branches and all the other delivery channels that households use. Small credit unions can manage both point-of-sale lending and brick and mortar/multi-channel delivery systems if they aggregate. And together they can support a marketing program that helps them promote their brand. I think it would be an attractive proposition for the public. Small, member-focused credit unions with the support system of a larger institution. The alternative to aggregation through an "ACE" type model is merger. That is already happening. Unfortunately it removes a rich and diverse part of the credit union system. Who knows what will happen down the road? Maybe someday small institutions will be preferred by the public. If we preserve credit unions of all sizes, we will be ready for the next evolution in financial services. Henry Wirz President $1.1 billion SAFE Credit Union North Highlands, Calif.
