Are newly hatched credit unions being cannibalized by the industry?
I was channel surfing during the holiday and happened upon one of those Nat Geo shows about survival in the wild. It was striking that among all the threats to newly hatched crocodiles the biggest killer of baby crocs was other crocs. Sound familiar? There’s no secret about it, a new credit union start-up has about as much chance of survival and a normal growth pattern in today’s marketplace as a newborn crocodile. Much like life in the wild the new credit union faces many challenges to its survival, and much like the young crocs the greatest threat may be viewed as coming from its own kind.
Now I don’t mean that other credit unions and credit union institutions purposely make survival difficult for a de novo, but I do think that as a network of shared values and commitment to cooperative principles, we should be doing much more to help to guarantee the success of all new start-ups, and we should fight for that survival with the same fervor that the investors in a de novo bank will fight to protect their investment.
While there are many among us that think that the continued decline and consolidation is in our collaborative best interests, please don’t count me among them. New start-ups are about new ideas, new people, new excitement and new blood in an industry overwrought with risk aversion that often overrides the best interests of our owners. It wouldn’t be too much to say that anything new—procedure, policy or product—is more often initially viewed with excessive skepticism.
Admittedly, my position is an anecdotal composite of my 45 years in credit union management and consulting and not a peer-reviewed academic study of the success ratios of new credit unions. We can agree that a network of fewer than 6,000 CUs that continues to contract in the asset ranges of its smallest institutions will logically bring us to the assumption that any ne devo credit union will be fighting the same battle for survival.
Here are some of the obvious threats to a de novo start-up and some collaborative solutions.
Much of what challenges any small credit union, but especially a de novo, is the limitation of a small capital position and the corresponding strategic and operations constrictions. ALM strategies, loan policies, costs of operations, new member acquisition strategies, identification of qualified staff and the human resource expenses related to that staff, all of these considerations and much more will squeeze start-up capital positions that will most likely be worst case between $3-5 million or best case between $5-10 million.
Remember the home-based credit union model that was the incubator of hundreds of credit unions since the Great Depression? (I’m talking about the 1930s, not 2008-2014.) The complexities and competitive pressures of today’s financial services market ensures that those days are unlikely to return. Even the volunteer nature and self-sacrifice of many credit unions’ founders is unlikely to play a significant role on the financial success of a de novo as it did in the first half of the 20th century.
What kind of services and products would it take for you to switch from one FI to another? Credit cards, mortgages, brokerage services, mobile services, small business loans, convenient hours? For the modern consumer today, it’s a fair guess that it would require this much and more in terms of a menu of financial solutions. How is any start-up supposed to succeed if you must tell prospective members that you only offer a few core services and you don’t really know when you’ll be offering others? That’s the regulatory box that de novo credit unions face.
Our own federal regulator/insurer automatically limits the chances of success because of financial risk aversion and a natural fear that the de novo lacks the expertise to manage modern financial products and delivery channels. Better for the small to disappear and the large to expand. It’s tough enough to survive with limited capital, but practically impossible without meeting the product and service needs of your potential members. Can today’s technology tools and a new de novo strategy overcome this barrier?
Leverage the network
Who’s responsible for the future health and success of our network of credit unions? We are! All of us, credit unions, CUSOs and affiliated partners should actively pursue those strategies that allow for a healthy de novo environment. We should act as collaborative partners in much the same way that private investors facilitate a de novo bank. We must lend our collaborative expertise, established delivery channels and the strength of our balance sheets to ensure the success of a de novo.
How does a de novo ever grow if it has to tell members that because of limited capital or liquidity it can’t accept a large deposit or has to ration loans? How does a de novo prove itself to new members if they don’t have access to full service debit and credit plastic programs? Why can’t that de novo find an established CU partner who will participate in any lending activity that can’t be met by the credit union? Why can’t a start-up make mortgage loans if it utilizes the expertise of a well-established mortgage CUSO for everything from application to closing to servicing? How about meeting the small business lending needs of a de novo member? Why not offer a robust brokerage services program for alternative deposit and investment options? Surely we can identify and gain the support of a CUSO or credit union to meet those needs, without the new credit union having to give up its branding rights.
You might say that this strategy limits the revenue potential of the de novo. It becomes much more dependent on fee-based non-interest income than spread, so how does it pay the bills? It utilizes trusted network partners to the maximum of those solutions being available. For starters you can look to the CU*Answers Scholarship program which provides two years of free core processing for any de novo. What is no cost core processing and all of its electronic delivery capabilities worth? I’m told that you can calculate that being approximately $1.50/member/month.
What kind of savings would a de novo appreciate using networked outsourced back-room operations, like an in-bound and out-bound call center, accounting services, compliance services, credit decisioning, data analytics expertise, lock box services and many operational functions that often test both the financial capacity and skill sets of a de novo. I certainly believe that it is both a fiduciary responsibility and sound strategy for a de novo board of directors to oversee an operation that utilizes a strategy that lowers the cost of services to members, provides the highest level of professional operations and provides the flexibility to meet the changing needs of its owners/members.
Adoption of new delivery channels
Many of today’s credit unions continue to be plagued by the burden of legacy brick and mortar branch networks. It’s tough for many of today’s CEOs to tell members that one or many branch locations are the best use of credit union resources to meet the changing needs of members. Today’s de novo doesn’t have to deal with the fixed asset costs of a physical location for service delivery, not if you start from the position that all products and services will be provided through virtual services like home banking and mobile banking. That cash can be delivered through shared ATM locations, and that loan services can be delivered via any device plus a human call center or video services, then the de novo has only to support the physical location needs of management and those operations that are self-managed.
A support consortium for de novo opportunities
Organizing and starting up a new credit union was a relatively straight forward exercise in the 20th century—as we’ve seen, this is no longer the case. Fortunately, we have the resources within our national credit union network to support a healthy and vigorous de novo environment. First and foremost is the availability of credit union capital. The strategies for capital deployment among credit unions are atrocious and greatly mismanaged. Few credit unions have come anywhere near their regulatory limitations for investment in CUSOs or other allowed activities. Do we begin to walk the talk about being cooperatives with a shared vision and start to identify underutilized capital that can be leveraged to support de novo strategies? Can a consortium of committed CUs be identified that would have pools of capital investment available for supporting a healthy de novo environment?
Secondly, the consortium could support the need for de novo loan participations. In the start-up period loan demand often exceeds deposit growth. It sure doesn’t send a good vibe out to your potential new members that you may not have the capacity to meet their loan needs, either by dollar amount or loan type. A network solution that matches de novo loan demand with supportive participation partners is sure to increase the long term viability of a de novo.
A third function in a consortium of de novo supporters can be filled by CUSOs. Just about every daily operational activity can be supported by a CUSO whose business model is to provide an outsourced solution for the credit union who does not have the scale or expertise to offer or manage certain products, services or delivery channels. Supporting the de novo environment is another way to expand the market for any CUSO in any line of credit union business.
This same consortium of supportive credit unions and CUSOs can play a considerable role in educating the regulatory community of this realigned business model for new credit unions. The regulator needs to adapt to the new energy around the de novo that represents a network wide support system for new CUs and provides levels of expertise and financial support that have never been seen in the past.
Finally, we need to build a comprehensive marketing effort to build awareness among those who share a common bond that starting a credit union is an achievable goal and that there is a capable and well-resourced network of supporters available to help them. Those who have been around for a while can remember a time when this was one of, if not primary, functions of state leagues. Most leagues had a dedicated individual or group of advisors who traveled the state supporting the organization of new credit unions both pre and post chartering. It is a common theme that we have heard from those wishing to start-up a credit union today finds such resources lacking. They are most often directed to NCUA as their primary source of information and guidance. Let’s see… an agency dedicated to small credit union merger as a strategy acting as primary advisor and cheerleader for the de novo credit union. Sounds disastrous to me.
Meeting more aggressive goals
Much like the private investor in the local community bank, our credit union network needs to recognize the power and opportunity of co-operative ownership in new credit unions and the vitality that brings to all of us. Leveraging the co-operative business model not only acts as a force multiplier for our shared efforts to gain market and build our co-operative brand, but it puts all on notice, the general public, legislators, regulators and our competitors that we mean to fully exploit what we believe to be our social and economic advantages. It is the proof that we will not be satisfied to continue to see a contraction of the number of credit unions nor the minuscule position we hold today in the retail and commercial financial marketplaces.