SCOTTSDALE, Ariz.—A new study reveals that many credit union CEOs increasingly see merger as a primary means to grow—and as a way to simply survive within the financial services industry that demands scale to compete.
In a recent Cornerstone Advisors survey of more than 220 community-based financial institution executives, four in 10 credit union CEOs cited mergers as a 2016 growth priority—the highest percentage seen in the study’s five-year history.
Not surprisingly, what is largely driving the merger focus is the growing costs of technology and compliance.
“It comes down to the admission and recognition among executives in the credit union space regarding the importance of scale in the market,” explained the study’s author, Ron Shevlin, Cornerstone’s director of research. “To grow and thrive in this industry now requires a certain level of scale.”
Shevlin pointed out that technology—while adding to member convenience, CU reach, and streamlining processes—adds another delivery channel to those already in place.
“Most financial institutions have learned that you can’t survive without a strong digital presence, which means more than online,” said Shevlin. “It means mobile, and not just mobile banking, but mobile marketing as well as mobile tools to support your members.”
Shevlin emphasized that while consumer interest in mobile has continued to grow, the credit union can’t shut down other delivery channels. He noted that this is particularly challenging for credit unions, which are seeking to expand their physical presence to improve their position against banks that are shutting down offices.
“And branches, particularly for credit unions, are needed,” said Shevlin. “Yes, digital capabilities are great, but people still come to branches more to open accounts. Then you have your call centers and online and mobile, and the channels are adding up.”
IT Staff An Issue
Not only are technology costs challenging for a smaller credit union, IT presents staffing issues, said Shevlin. Several experts have pointed out that it is difficult for smaller credit unions to afford to pay the skilled IT people needed to carry the credit union forward. Shevlin added that for those small CUs located in rural areas, simply finding good IT talent can be difficult.
Turning to compliance expenses, Shevlin stated what credit unions and their trade groups have pointed out for years—regulation coming down from Washington, resulting from the big banks’ problems, is disproportionately hurting small financial institutions.
“Regulatory compliance costs are just going through the roof,” said Shevlin. “Really, if I am a $100-million credit union, the level of technology investment and the regulatory compliance issues and costs are forcing a lot of credit union CEOs to say we are going to have to merge in order to grow and thrive.”
And if the credit union can manage these costs, competing against the deep pockets of the banks to promote the CU isn’t getting any easier, added Shevlin. He said research he conducted in recent years shows that financial institutions between $100 million and $500 million in assets have an average marketing budget of $400,000. While banks from $10 billion to $50 billion in assets spend on average $55 million to $56 million annually on marketing.
“And that does not include the really big banks,” said Shevlin. “The marketing budgets of the small financial institutions are rounding errors to the banks.”
Shevlin added that the marketing appeal of the big banks, as well as their ability to add the latest technology, is appealing to younger consumers. He further noted that Millennials care less about personal service and attention—long-time credit union strengths—and instead are more concerned with convenience and technology.
“So the younger consumer is gravitating now to the big banks,” he said.
Technology, too, is reducing the importance of the local community financial institution, said Shevlin. He stated that as technology is reducing the importance of the local branch for daily needs, that is changing the perception of community within the minds of consumers.
“Many credit unions are community based and believe that is an asset,” said Shevlin. “They say, ‘We know our community.’ But anymore, for many consumers, community is not about geography as much as it is attitude and personality.”
Hard To Grow Outside Current Boundaries
Shevlin noted that many credit unions realize they cannot grow within the boundaries of their current communities and that merger is the way for the CU to expand reach and compete.
“If you are a mid-size or small credit union where a population is not growing, you can’t survive unless you get beyond your current geographic boundaries,” said Shevlin.
Shevlin said that the increased attention to merger to grow is not resulting from aging CEOs tired of the fight or from CUs fearing what may lie ahead if they don’t get bigger faster.
“They are not afraid—fear is defensive,” said Shevlin. “If you sat down with a lot of these CEOs and boards you would see a strong desire to remain independent. And you would not hear them say, ‘We want to do this,’ but what you would see is resignation that ‘We have to do this.’”