By Henry Wirz
In Peter Duffy’s latest column for CUES, he suggests that regulatory restrictions are credit unions’ greatest hurdle. I disagree.
I returned from a trip yesterday to consider a merger opportunity with an under $100 million credit union with two branches and about 7,000 members. In preparing for the merger I analyzed all the other credit unions headquartered in their service area. While we were in the area we also scouted the local banks to see what the bank competition looked like. This experience and others like it have convinced me that credit unions are losing market share for reasons other than regulatory restrictions.
This credit union started out with a single sponsor but went community after the sponsor no longer wanted to continue the relationship. The costs of operation for this credit union are too high and the credit union has had low return on assets for the last three years with a net loss in the most recent year. The credit union has gone from 10,000 members to 7,000 in the last 10 years.
I think credit unions are losing market share and suffering from slow growth for the following reasons:
1. The public does not understand what a credit union is and they don't know if they can join. There is confusion about the terms "union" and "membership."
2. The average credit union does not have a clear value proposition. The value proposition is not clearly communicated to members, potential members or staff. There is no compelling reason to join the credit union.
3. The service provided by many credit unions is not meeting the needs of their members or potential members.
4. The democratic governance of credit unions is in decline or in some cases exists in name only. Board elections are rarely contested and members don't know much about their credit union's governance. Boards are not holding management accountable for results that benefit the members.
5. There is no effective "Darwinian" process to remove or improve weak credit unions. The five agents of change in credit unions are the board, the management, the regulator, the bond underwriter and the members. Boards are not holding management accountable; management is acting in their own best interest; the regulator appears more interested in saving small credit unions than in assuring that members are well served; CUMIS has a policy of not pulling bond coverage; and members are not engaged unless a "Columbia" type disaster strikes.
The first remark I hear from non-members is, "Who can join the credit union?" I never hear anyone wonder if they can open an account at any of the banks. Almost everyone knows that credit unions make auto loans, but there is less certainty about what other types of loans they make and what benefits there are for joining a credit union. We know from our mystery shops of the major banks in our area that credit union service is no longer vastly superior to that of the banks. Yes, we know that credit unions are a better value but service levels as we measure them are very similar in banks.
Convenience is clearly better for banks. First of all they have more branches all under the same brand name. Secondly they have Saturday hours, extended weekday hours, great call centers, great home banking and big ATM networks.
Credit unions, collectively, have similar convenience but individual credit unions do not have this level of convenience--unless they share with other credit unions in shared systems. Banks have far stronger marketing and lately they have been very innovative with new products and services that they widely promote.
The problems that have caused slow growth for credit unions are not related to regulations. Although better regulations would help, they are not a primary cause of the problem. The tax exemption is something credit unions need desperately. If we lose the tax exemption, it would end credit unions as we know them.
Credit unions have an important purpose. Most of Main Street America is either lost or in the process of being destroyed. The social connections that we once referred to as "community" will all be lost when downtown America becomes a big box center dominated by Wal-Mart, Bank of America, Home Depot, Office Max, Walgreen's and Target. Credit unions are still part of Main Street and they can help build more local businesses and a better community if they remain.
Credit Unions are at great risk. Almost half of all credit unions are self-liquidating. They exist only because of high capital and long-time members who are getting older and are not being replaced in sufficient numbers. Banks and other non-banks, such as Countrywide, Capital One, Vanguard Mutual Funds and American Express, are taking market share away from credit unions.
The old model of credit union success that was built on sponsor support, workplace convenience, and member involvement in governance is disappearing.
That model doesn't fit most credit unions today. In most cases, sponsor support has ended or is much diminished. The old model allowed credit unions to offer better rates and reasonable convenience, and it was easy to communicate with members in the workplace. The sponsor relationship also gave the credit union great brand recognition because of the "halo brand effect" of being associated with the employer.
The relevant success models for today are credit union alliances (shared branches, shared ATMs, joint ownership of CUSOs to provide indirect lending, brokerage and other key member services); credit union mergers that gain economies of scale; or credit union joint operations like bank holding companies that provide all the key services leaving only member service at the individual credit union level (The ACE Hardware Cooperative is a good example in the hardware industry.).
I think these models would provide solutions to help credit unions. However I most prefer the Ace Model. I think the ACE Hardware model would work very well with credit unions. ACE provides most of the back-office services such as purchasing, logistics, promotions, rewards program, branded products, standards of performance and a national identity under one brand name. ACE is a cooperative owned by the hardware stores. Each store focuses on serving its own customers. ACE provides each store with the strength of a Home Depot organization and the freedom to be a local business with local ownership.
An ACE Hardware model for credit unions doesn't require regulatory changes and it would allow credit unions to invest in a joint marketing program that would give new meaning to our "Credit Union" brand. It would allow credit unions to jointly develop a value proposition based on local service and ownership and global economies of scale. It would provide some of the "Darwinian" process to weed out or improve sub-par credit unions.
The Ace Hardware standards require stores to either meet standards of service or they cannot be part of the franchise. The ACE Hardware model would not fix the problem of member governance. But I think if we make credit unions vital and growing organizations, members will again want to be part of the governance and take more interest in their credit union.
Henry Wirz is president of $1.25 billion SAFE Credit Union, North Highlands, Calif.
Read more from Wirz on ACE Hardware.
Read all of Pete Duffy's columns.
