The title character in the Pogo comic strip once uttered the now famous line, “We have met the enemy and it is us.” He could have been talking about credit unions. There are many external threats to the industry (e.g., threat of taxation, diminishing margin spreads, excessive regulation) but the real threat is our inability to respond to the external threats. The credit union model is in deep trouble but the response of most of the industry is to ignore the warning signs and continue to drift toward becoming a marginal industry.
Alarmist you say? How do you ignore the fact that we are losing almost one credit union per day or that membership growth is flat? Yes there are strategic mergers but most mergers are due to credit unions that are in dire financial straits or have lost the energy to fight the good fight. With average net interest margins that are now less than 1% and many credit union operating expenses exceeding their income, we must conclude that the traditional credit union model is in serious trouble.
What is the answer? The simple answer is to make the margin larger, more net income. Find new lending opportunities, more sustainable non-interest income and reduce operational costs. There are examples of collaborations that are very successful in generating more income and reducing costs, but most credit unions remain stuck and not willing to make the effort to find solutions to their precarious financial position.
Some of the most forward thinking and strategic people I know work for credit unions and CUSOs but the majority of the industry is made up of very risk adverse people. Change comes very slowly if at all. “If it worked for fifty years, there is no reason to change things.” “Change is fine but not that much and not that fast.” “In my situation, I don’t want to rock the boat.” We tell ourselves that we must change to meet the changing competition and expectations of our members but secretly we just want to be left alone to do the job we know, not the one we have to learn. Change disrupts our lives. Most credit union board and staff do not have any experience with risk management outside of the traditional credit union model. Fear of failure, fear of losing control and a lack of time to plan keep credit unions frozen in the headlights like a frightened deer and just as vulnerable.
Yet even when credit unions act to collaborate, there is sometimes a lack of commitment that can lead to failure or gross underperformance. I have seen credit unions add non-traditional financial services such as investments and insurance and treat them as step-children. There is little or no employee education so that credit union employees can understand and promote the new products. Advertising and promotion is given lip service. The services are treated as an after-thought not as core products. Employee performance bonuses do not include the success of the non-traditional financial services. When the non-traditional financial services fail, the credit union wrings its hands and says we tried.
The management style in many credit unions is often a team or collaborative approach. This style has its benefits but is very resistant to change. I have seen too many instances where mid-level credit union employees have sabotaged a collaborative service approved by the CEO and board, because they are resistant to change, think they know better or have their own solution that they are pushing. If senior management believes a service or collaboration is critical to introduce, then senior management needs to have the gumption to compel the credit union staff to implement it. If everyone is a mini-CEO, then no one is the CEO. Most people do not embrace change without being lead by leaders with vision and the ability to communicate the reasons for change. Staff must have individual accountability for implementing a new service or the service will fail. Credit unions need strong leaders more than ever.
Some credit unions have lost their way due to the pressure of thin margins and employee performance goals predominantly tied to gross revenue. I have seen situations where third parties offer discounted prices or rebates to the members on non-traditional financial services but the credit union demands that the benefit be paid to the credit union and not the members. If credit unions cannot find solutions to their business model issues without taking it from their members, they might as well convert to a bank now. We do not have to sacrifice our focus on the members to create a sustainable business model.
We must be honest with ourselves. We have to be able to acknowledge our internal weaknesses and overcome them. We must be able to emotionally accept the need to alter the traditional credit union model with the benefits of collaboration or know that we will suffer the consequences. There will be credit unions that are forced to merge and claim that external forces drove them out of business when, if the truth be known, they acted not at all or too late to effectively use the collaborative tools they had available to them.
There are many examples of credit unions embracing change, managing risk, stepping out of their traditional comfort zone and using collaborations to make real differences. Some of these credit unions would not be in existence today if they did not use the tools of collaboration to increase their margins and their effectiveness to deliver valuable services to their members. These credit unions will survive and thrive.
The question each credit union has to answer is whether they have done everything they can to make their credit union stronger in today’s world. What will be the cause of a credit union’s survival or demise? The answer lies within each credit union. In the words of William Shakespeare, “Action is eloquence.”
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 firstname.lastname@example.org.