Wednesday, May 21, 2008

Credit Unions in 2020 (or Will We Have Flying Cars?)

I read this article on CUNA’s web site a couple of days ago detailing how Dennis Dollar (how cool is that name) thinks the credit union landscape will look in the year 2020 (thanks to Deb Trautman for passing the article along). Now, I’ve never been one to put much faith in forecasts that stretch for a period more than 5 days (even the weatherman can’t get THAT period of time right) because things never look like you think they will. Heck, we were supposed to have flying cars 8 years ago according to many “forecasters”.

Distrust of long term outlooks aside, some of the predictions don’t quite jive with me.

  • Credit union service organizations will exceed the number of credit unions;

My understanding of a CUSO (and please correct me if I’m wrong on this) is that they are cooperative organizations of credit unions designed to help them deal with regulatory issues and the like. They are like a credit union’s credit union. From Wikipedia:

A Credit Union Service Organization (CUSO) allows a credit union the ability to conduct business that they would otherwise be restricted from due to regulatory constraints. Most CUSOs are limited liability companies (LLC) which also provide a measure of protection to the credit union from the actions of their CUSO. CUSOs are usually wholly-owned subsidiaries of their corresponding credit union, and most if not all of the profits generated by a CUSO are returned to the credit union. CUSOs can also sell stock, usually to other credit unions, to help fund the creation and operation of the CUSO. In this situation, the profits are then converted to dividends and paid out to shareholders as specified by the CUSO's charter.

CUSO’s, like any other business, operate based on demand. I don’t see the demand for CUSO’s ever warranting more CUSO’s than actual credit unions. In fact; wouldn’t that be bad business?

  • Credit unions will face greater regulatory pressures, and this will drive mergers;

Credit Unions may face an increase in regulatory pressures in the coming years. Some of it can be avoided by staying true to the credit union mission, and beyond that, showing people that we stay true to that mission.

Beyond the fact that some of this regulatory pressure might be avoided, the first bullet point about CUSO’s seems to be contrary to this one. If CUSO’s are there to help groups of credit unions stay in compliance with regulations, and there are more CUSO’s than credit unions, shouldn’t all the bases be covered?

It would be a shame to see so many unique, small credit unions disappear due to being unable to stay within regulatory guidelines. There is much to be said for a small credit union, dedicated to staying small, and dedicated to its membership. A prime example is Mt. Lehman Credit Union. They have, with the guidance of their General Manager, Gene Blishen, positioned themselves perfectly to serve their members. They know what those members want, and offer it to them. Things like their TextUs product cater to the people they serve. It isn’t a giant marketing campaign, but a product that connects the credit union with its members in a way many CU’s struggle with. As Morriss Partee would put it, they are a microbrew of a credit union; unique and incredibly awesome.

  • Credit unions will market cooperatively nationwide

This is kind of a vague one. By “market cooperatively” does he mean a nationwide brand? If so, I think you already know my opinion. Credit Unions are a diverse animal. To brand something, it takes a common thread, product, or culture. By trying to put all credit unions under a single brand, it smothers so many cool, unique credit unions (like MT. Lehman) that have a brand that works for them and their field of membership.

Not only does it smother uniqueness, but branding credit unions under a single banner would be nearly impossible. There are so many different cultures, each credit union has it own way of doing things, and a brand requires a coherent culture throughout. When you walk into a Starbucks, you can pretty much tell what your experience will be. Credit unions are totally different. Walking into Boston Firefighters’ Credit Union is necessarily different than walking into Maine State Credit Union because the demographic served by each credit union requires a different approach.

In the first part of the article, Dollar is quoted stating that, “The megabanks will lead to a disconnect with local citizens.” If credit unions end up nationally branding/marketing how would we be able to connect with local citizens any better than a megabank? Our strength is in our diversity, not our size.

  • Shared branching will be a key credit union differentiator, with nearly all credit unions participating nationwide, thus reinforcing a national branding campaign.

I’m sorry, but shared branching is not a differentiator. Shared branching is a way for credit unions to compete with the nationwide banks, but that’s as far as it goes. With BoA having branches on every street corner, the fact that you can do business at many credit unions nationwide does not make us different, it makes us the same. It is something we certainly need to educate our members about more often, but to say it differentiates credit unions from banks is nearly outrageous.

My take on credit unions in 2020?

Credit Unions, in my opinion, will be the main provider of community banking. Not based on national branding, not based on shared branching, not based on mergers, but based on diversity. Our strength has always been, and will always be, our ability to listen to our members and provide them with the things they want. Credit Unions will collaborate, rather than merge, to deal with regulatory pressures. They will collaborate to form marketing efforts if it applies to a shared demographic. They will collaborate to pass innovative new products and services from one credit union to another, allowing each credit union to tailor the innovation to their members’ needs. What we need is not a national brand, but to work as a team of unique, individual credit unions. That is where the strength, differentiation, and innovation lie.


Christopher Morris said...

Great post!

My hope is that by then the average age of both credit union members and volunteers is much lower...otherwise the system will be in serious trouble.

Andy said...

Thanks Christopher,

I totally agree, the financial industry is in the perfect state for credit unions to rise up and show how we are different, but not without some changes within our own system of operation.

dean said...

Thought provoking, but while we continue to merge away about 300 CU's a year, our special niche isn't helping our movement grow at all. If you look nationally we have about 6% of banked assets, the same as 20 years ago. Staying the same is our death knell. Ignoring the fact that to 90% of the population the term credit union has both a negative connotation (credit) and limiting connotation (union). The leaders who founded the movement, allowed it to grow and change with the times and CUSO's may be the answers for some of us smaller players. A national identity or understanding of why we are the best deal in town would be incredibly helpful.

Anonymous said...

Andy: Great post. I wanted to get your thoughts on this topic as it important to how credit unions position themselves next year and 10 years from now. Having fresh perspectives is good for our industry. Thanks.

Debra Trautman

Jeffry Pilcher said...

Great post.

I don't think CUSOs were "designed to deal with regulatory issues" so much as they allow credit unions to invest/own businesses they otherwise wouldn't be able to participate in. Maybe they were initially designed to allow CUs to offer things like insurance and investments, but nowadays there are literally hundreds of different kinds of CUSOs. There are CUSOs offering B2B services to other CUs. There are CUs who own ad agencies, web companies, and marketing firms via the CUSO mechanism. The original intent of CUSOs may have been one thing, but they have evolved into a "loophole" of sorts that allows CUs to invest in all kinds of businesses -- both laterally and vertically.

It doesn't seem like there are really any limits to what kinds of businesses can be CUSOs. If a credit union wants to get into the dry cleaning business, I think they can set one up as a CUSO.

So my guess is that Dennis Dollar thinks CUs will pursue these "additional revenue streams" wherever they can be found. Is he suggesting they'll do this in lieu of traditional, organic growth? I dunno. But as far as pursuing new sources of growth, he is spot on: the number of CUSOs will blossom. (Key Question: Will these CUSOs be huge distractions? Or huge money-makers, however non-traditional they may seem?)

Your second point hinges on believing "CUSO’s are there to help groups of credit unions stay in compliance with regulations." CUSOs really help credit unions operate different kinds of businesses they aren't normally allowed to run. So yes, in that sense, sure, CUSOs keep CUs out of regulatory trouble. But the "purpose" and "outcome" might be confused here with respect to CUSOs and regulatory compliance.

I agree with Dennis Dollar in that there will be more mergers, fewer CUs and more CUSOs. I don't see what bearing regulations has on mergers though. From my perspective, it appears that mergers are primarily driven by competitive market conditions. I don't hear anyone saying, "Man, these regulations suck. We need to merge. That will make it easier."

The topic of a branding campaign for credit unions is a sore one. I am neither for nor against such a campaign. It's hard to form an opinion when there's so many varying interpretations of what a "branding campaign" is, what it should do, and what it would look like.

As others have suggested previously, a general awareness campaign wouldn't hurt anyone. There are thousands of CUs wasting millions of dollars every year as they try to communicate some very basic information about what credit unions are about:
+ Not-for-profit
+ Member owned
+ Local
+ Democratically controlled
+ No shareholders
+ Generally better rates, fees and service
+ Full range of financial services (loans, deposits, checking)
+ "You can join!"

You could even talk about shared branching and nationwide ATM networks. But as far as shared branching goes, you're absolutely right: It is not a differentiator. No where near it. It is simply playing catch-up with the ubiquity of nationwide megabanks.

I would be opposed to any campaign that tried to quash the unique color and flavor of any CU.

Anonymous said...


A few things...

"help them deal with regulatory issues and the like. They are like a credit union’s credit union."


"CUSO’s are there to help groups of credit unions stay in compliance with regulations"

CUSO's are not designed to deal with compliance issues. While a CUSO may be in the business of helping CU's with some of their compliance related issues, CUSO's exist so that credit unions can offer services to members and/or other credit unions that are not allow in their charter. For example, credit unions can't be in the credit card processing business, but a CUSO, such as PSCU, can. CU's in turn invest in said CUSO to reap the benefits of being able to offer each other CC processing without actually having to be a credit card processor.

I'm not sure I believe Dollar's statement that there will be more CUSO's than CU's, but in the next decade or so CUSO's will grow rapidly as more CU's realize their benefits while the number of CU's will continue to shrink. One of the important things in the CURIA bill was upping the limit of assets that CU's can invest in CUSO's. This is a vital piece of the bill as it will enable CU's to further their CUSO expansion.

I'm in total agreement with you about the small/unique credit unions. Small, niche CU's, I believe, will be the wave of the future. Nice cheesy quote, but isn't the saying, "What's old is new again." The problem with small credit unions is most of them cannot achieve the economies of scale that large institutions can. Gene rocks for having 20% of his workforce in programming and I'm jealous of the stuff he's pulled off, but most, scratch that, nearly all credit unions won't be able to replicate that. I believe that small CU's are the way to ensuring credit unions stay around and we need to find a way to make the $50M CU just as competitive in their market as a $500M CU with TV and radio ads.

I'm on the fence about the national marketing campaign. Every milk dairy is going to be different, but the national "Got Milk" campaign worked pretty well for them. But who knows if something like that would work for CU's.

I also agree that shared branching isn't a competitive advantage, it is expected from our members that they have access to their funds through our network. And therein lies the problem. Our network can't be everywhere like BofA. But through CUSO's, like CO-OP, PSCU, Credit Union Service Centers, etc we can join together and provide those services our members are looking for.

Anonymous said...

Credit unions are limited in what type of activities CUSO's an operate. In fact Jeff Russell at The Members Group can speak specifically to the pains of get the NCUA to allow certain types of activities. In addition, 51% of CUSO income must be derived from the credit union industry, either from CU members or CU's themselves.

In Jeff's example of a dry cleaning business, assuming the NCUA allowed it, it would only be able to serve 51% CU members. Someone actually tried the gas station CUSO a number of years ago and it didn't work for much the same reason a dry cleaner wouldn't work.

Andy said...

Wow, awesome comments! Thanks for clearing up the CUSO thing for me. Every definition I've come across has been really vague. Things make way more sense now. So, a CUSO is more of a business offshoot of a credit union, sometimes cooperatively formed by multiple CU's allowing them to do things a credit union itself couldn't.

That makes the point about there being more CUSO's than actual CU's more clear. I still think its a bit far fetched that there would be more CUSO's than credit unions. That would mean every credit union would have to form at least one CUSO...or some of the larger CU's would have to form many CUSO's. I think that would lead pretty quickly to a saturated business landscape for credit unions.

As long as the CUSO's are being formed/run with the members best interest in mind, I think its great to see CU's able to offer members more than just the standard services. As long as it doesn't become an engine of growth for growth's sake.

@Robbie Good point about the "Got Milk" campaign. If there were to be some sort of awareness campaign I would imagine it would look similar to "Got Milk". Though it would be hard to come up with something that exemplifies all credit unions without creating expectations as to what kind of service/structure/culture people will find at any given credit union. Not that it can't be done, it'd just take some serious creativity.


I don't see how regulations would force credit unions to merge either. More likely in my mind is a credit union being unable to keep up technologically due to the expense of implementing/maintaining the tech they need to stay competitive.


I think it is less that there is a negative/limiting connotation in the term "Credit Union" and more that people just don't know that there is a difference between a CU and a bank. Nearly every person I've told about the structure/mission of the credit union movement has been amazed. I feel like that should be our identity and the reason we are the best deal in town. We need to educate people about what we are, and what we stand for. Whether that is through local efforts by individual CU's or through some sort of national campaign, I can't say.

Anthony Demangone said...

Just a few thoughts: there are already credit unions out there with more than 10 CUSOs. If anyone wants a good overview of what they are and what they can do, check out Chapter 21 of NCUA's examination manual. (I think I have that number right.) It provides a nice overview of their role and what NCUA requires of FCUs that invest in CUSOs. Regarding regulatory complexity driving mergers - it has already happened. Compliance burden is a huge issue, and if credit unions can share the cost of attorneys and compliance officers, it really helps the bottom line.

Jeff Hardin said...

Andy - great, thought-provoking post! A couple of thoughts come to mind as I read this ...

Shared branching can be a differentiator, depending on how it's positioned. If services that people need when they're on the road can be provided free-of-charge (or at greatly reduced rates vs. banks), the value becomes the talking point in favor of the credit union movement.

The SB platform can also reinforce the "boutique" CU by taking care of the convenience issue (you get the comfort of small and the scale of nationwide - or even worldwide).

Shared Branching leads me to my second point - a national branding campaign is going to be very hard to pull off, unless there's a unifying theme such as Shared Branching that brings small and large CUs together.

In addition to your point about struggling to find a common thread for messaging among CUs, who ultimately is going to drive the bus on what this campaign would look like?

In my opinion, the CUs that commit hundreds of thousands (or millions) of dollars are going to have the inside track on shaping the tone of the campaign relative to the smaller CUs that have fewer dollars on a relative basis to pony up.

Beyond a common interest item like Shared Branching, like you, I just don't see the building blocks for a campaign.

Gene Blishen said...

Good stuff Andy!

CUSO's have a valid position in the system. But CU's provide the reason for their existence. Due to the vast number of CU's and the variety of voices for products and services CUSO's can carve out their business based on those numbers. But if mergers continue CUs in their larger size may need CUSO's in a different fashion. So the evolution of the system dictates much of what we will look like.

Larger co-operatives have evolved to companies or co-operative banks due to their need for capital. It is just the nature of the beast. Look at the Canadian wheat pools, dairy farmer co-operatives, etc. They are now something different than what they started.

I don't see CUs heading for that type of change but I do see the larger CU's influencing CUSO's and Centrals to a greater degree. And that is the problem for smaller CUs. What is built or developed for a larger institution will not necessarily work or be efficient for a smaller one. Sometimes a piece of paper and pencil can do the job faster and better than a computer and database i.e. shopping lists. But just the nature of a larger CU will dictate the need for a different process than the smaller CU.

I believe it is a CUs dormant behaviour that is creating problems. Lack of foresight, lack of R&D in products and services, lack of their ability to listen to the membership, and the list goes on. Are we truly accountable to the owners, the members, when we have allowed our CUs to become complacent to so much? We have some wonderful opportunities, IT tools, staff and board personal, and a history that can provide ample growth and a positive future for a CU. It is there if we want to work for it. I see the energy and passion of those past founders being renewed with so many in our CU system today. Sure there are obstacles but whoever said there wouldn't be.

james said...

"Credit unions will market cooperatively nationwide"

We tried this in Australia a few years ago, with a campgain called "A different type of banking".

Guess what.

It didn't work, and has been pretty much abandoned...

Anonymous said...

I agree with Jeffry, our "brand" (depending on how you define the word) is the thing that we all have in common. We are 'people helping people', our focus is on the improvement of the community as a whole and it's about bringing people together.

Credit unions have a HUGE opportunity to really make a difference and to stand out. In these harsh economic times we need to bring people together, open up communication and solve problems.

We have barely touched the tip of the iceberg. Organization and communication are key. The implementation and continued improvement of our services (ALWAYS for the benefit of our members) will ensure a solid stake in our future and the future of our communities.

Dan Emery

Mike Templeton said...

Though a national brand for CUs may not be possible, I think a national awareness campaign could be successful. With the right people and energy behind it, I think it could make a difference.

As Dean mentioned, when you look at the actual term, "credit union," there are root perceptions that could be part of the problem of our stagnant growth. Developing an awareness campaign to help shift and change those perceptions may be a step in the right direction.

As for CUs becoming the center of community banking, I think this is a natural direction for the industry. Because we serve communities by and large and do have that local connection, I think that CUs will edge out banks when it comes to community banking.

Anonymous said...

This is a really good post. That being said, I still really don't see the big advantage of belonging to a credit union. In my many years of working for a credit union I still fail to see the DIFFERENCE or ADVANTAGE that we offer over the large nationwide or local small bank.

CUSO's allow for a less expensive way to compete, but they do not give us a competitive advantage.

Maybe the real focus should be on how we are really different from the local bank. How are we different? You tell me, because I still fail to see the difference. I think this is why we really have not grown in popularity with the general public.

Your thoughts?

Andy said...


Wow, thats a large request, but one I'd be happy to oblige. I'll put up just a few bullet points here, but look for a more in depth description as a post in the near future.

-Credit unions do not operate for the benefit of a select few stockholders, but the members themselves. They are there to help the members they are serving and benefit their financial stability.

-The board of directors is elected from the membership, by the membership, in order to advocate for the memberships best interests.

-Credit unions must keep within a certain profit margin, meaning that any profit above that margin after operating expenses is redistributed out to members in the form of dividends.

Mind you, all these things are reliant on a couple of things: The credit union MUST be willing to listen to the members, and the members MUST be willing to participate in the process. If those two things are practiced, a credit union is nimble enough, and philosophically required, to give its membership the things they would like to see (as long as it won't put the credit unions stability in jeopardy).

Anonymous said...

There are MANY differences between banks and credit unions. Unfortunately one big reason why people can’t tell the difference is a lack of understanding. To those who don’t know where to look, our appearance (both inward and outward) is very similar to banks. We offer loans, we take deposits, we have tellers, and we have member service reps just like every other financial institution and we offer many of the same services.

The difference lies in our attitude, our beliefs and our ACTUAL (not perceived) operation. Credit Unions are “People Helping People”, where Banks are more like “People Helping Themselves”.

Credit Unions should make decisions that improve the community and the lives of their members. They should offer education, higher savings rates and lower loan rates and fees. We are a large group of people using our collective abilities to improve each other’s lives and out community. Can banks say that? No, they cannot. They are a group of people who try to keep profit margins as high as possible to pay their boards and stock holders. This means low savings rates, high loan rates and high fees.

The bottom line is this: If you just want to be a number on a Financial Statement go to a Bank. If you want to be part of a community who has the goal of helping you improve your life, join a Credit Union. We want what’s best for YOU!

THAT’S the difference between Credit Unions and Banks!

Dan Emery


Jeff said...

Interesting comments about credit unions and banks....It really sort of depends upon which side of the fence you are "working",doesn't it? Credit unions were chartered for a specific purpose and I do believe that they help their members. However, Credit Unions like to "skirt" the rules...if you don't want to pay taxes, then stay within the boundaries of the environment within which you were created. If you'd like to expand your mission, then do like the rest of us and expect to be treated as such. It should be a level "playing field". You are not different, you are just guided by differenct rules....I take great pride in the time I spend volunteering in my community to hopefully make a difference. I also take great pride in helping my customers achieve their goals. For the one poster to indicate that credit union employees are DIFFERENT because they are "People Helping People" is preposterous and a bit arrogant. He's right, it is about people, but it doesn't matter whether you are a bank employee or a credit union employee..if you care about your community and the people in it.


Adrian jill said...

I agree on your point that credit unions will be the main provider of community banking. Not just because they are based on national branding, not based on shared branching, not based on mergers, but based on diversity. Their strength has always been, and will always be their ability to listen to the members and provide them with the things they want.

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