The Evolution of the Credit Union Model – Why Collaboration is Necessary

Sometimes things are so clear that they are almost self-evident. For credit unions it is clear that the credit union business model is transforming in front of our eyes.

For most of the 20th Century consumer financial services were offered on a local scale by community banks and credit unions. There was a simple set of uncomplicated service offerings, i.e., savings accounts, checking accounts, consumer loans and mortgage loans. The people that worked in the banks and credit unions were smart and competent people but they were not paid high wages. The technology investment was the cost of an adding machine. The costs of operating financial institutions were relatively low, stable and predictable. The model was simple. You pay interest on the deposit accounts at X percent and earn interest on the loans at X plus two or three percent. Credit unions were able to live on the net interest margin for seventy plus years.

At the end of the 20th Century two things occurred that changed the credit union world forever, the widespread use of technology and the world’s adoption of the Internet as a method of commerce. Technology added the significant cost factors of people, equipment and software but technology also made the operational processes much more efficient. How much technology helped the credit union depended on how effectively the credit unions used the technology and the scale that the credit union was operating on, i.e. the bigger the better.

As the scale of an operation increases, there is little incremental increase in the cost of technology so the technology cost per transaction drops sharply. This is one reason why banks with larger scale are at a competitive advantage to credit unions. The technology adoption trend began in the seventies when the number of credit unions peaked at over 21,000. As of June 2012 less than 7,000 credit unions are left, decreasing at a rate of approximately 300 per year. With the imposition of the corporate credit union assessments, the astronomical increase in regulation led by the newly created Consumer Financial Protection Bureau and a lack-luster economy, the number of credit unions disappearing per year will likely increase.

The introduction of the Internet enabled the power of technology to be leveraged nationwide. As a consequence, national financial service providers have arisen to compete for your members’ business. In the good old days a credit union’s only effective competitor was the bank down the street. Now competitors include Internet providers such as ING Direct and Lending Tree with national scale and no branch costs. More competitors with much greater scale, lower transactional costs and, the convenience of the Internet have put a squeeze on the original credit union model that is permanent, and potentially fatal. The comfortable non-interest margin business model is a thing of the past. These Internet competitors are able to live with razor thin margins that are often more price competitive than those offered at most credit unions. The credit union’s non-profit advantage only helps to a point. Scale is king and will pick off the weaker credit unions left and right.

Without more scale, credit unions that rely on the traditional model risk running through their capital and disappearing through merger or liquidation. Having fewer and larger credit unions diminishes the political strength of credit unions to retain their non-profit status and their independent regulator.

The good news is credit unions can acquire scale through collaboration. Credit unions are organized on collaborative principals and structure. The evolution of the credit union model is to extend those collaborative principals among and between credit unions through CUSOs. Credit unions have already begun to use CUSOs to collectively provide operational services to each other. There are numerous examples where CUSOs are creating efficient and effective operational services while significantly reducing operational costs for their credit union owners and clients. The CUSOs save money not only on the reduced staffing costs but also on their ability to lower vendor costs. When you bring more business to vendors, they are more willing to bargain. I know of one CUSO that is saving about $2 million per year in vendor costs for each of its credit union owners.

CUSOs are also finding new non-interest revenue sources for credit unions by providing non-traditional financial services to members and operational services to other credit unions. I know of one credit union that has non-traditional revenue sources that generate about $5 million per year and has enabled the credit union to have positive net revenue through some difficult times.

Albert Einstein said, “Problems cannot be solved within the framework in which the problems were created.” CUSOs are the means to look outside the credit union industry to adopt and adapt innovative ideas and new solutions to old problems. Implementing collaborative relationships requires credit unions to construct a new business model. While the challenge is great, so is the reward. We cannot pretend any longer that everything is fine. Things are not fine. The risk of the status quo has now exceeded the risk of change. Ultimately, three things are needed to transform the industry: the commitment to collaboration, a sense of urgency and the will to make it happen.


Guy A. Messick is an attorney with Messick & Lauer P.C. in Media, PA and General Counsel to NACUSO. He can be contacted at 610-891-9000 or