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Small credit unions disappearing, but it may not be cause for alarm

Duringa recent discussion about the NCUA's strategicplan, board member J. Mark McWatters singled out for praise anaspect of the plan that urges the regulator to support the success of smallcredit unions through training, loans and other resources. He said the U.S. islosing on average about one small credit union per day and that the NCUA has todo what it can to stop that.

Ifonly "work" days are counted, McWatters' charge is right on the money.The credit union industry lost a net 276 institutions nationally since thesecond quarter of 2015. The average asset size of those that disappeared was$23.1 million, a study by S&P Global Market Intelligence found.

It is widely accepted in many circles within the industrythat mergers willcontinue for the foreseeable future, said Matt Wrye, manager of media relationsfor the California and Nevada Credit Union Leagues. He said the phenomenon is anatural outcome of the greater financial services consolidation picture ingeneral, which has been increasingly gaining steam since the early 1990s. Wryealso pointed out that although the number of credit unions continues to shrink,the number of members continuesto grow.

But BeckyLandis, CEO of Columbus, Ohio-based StateHighway Patrol Federal Credit Union, said in an interview thatstaying afloat and independent remains a constant struggle for many smallcredit unions. She said the culprit is mainly the cost of regulatory burden anda lack of resources to enable those institutions to provide some products andservices. In addition, small and even many midsized credit unions struggle tostay current in technology due to the costs. "The only fix is tocollaborate on any opportunity," she said. "We are currently lookingat an outside consultant to review and analyze the costs of our current vendorssuch as credit and debit cards. We do not have that kind of expertise with astaff of 10 operating a $62 million credit union."

Pennsylvaniahas the second most operating credit unions in the country, with 418. OnlyTexas with 475 has more. But Pennsylvania lost a net of 30 credit unions sincethe second quarter of 2015 and 191 since the second quarter of 2007. PatrickConway, president and CEO of the Pennsylvania Credit Union Association, said inan interview that consolidation in the credit union space has been occurringfor the past three decades. There are many causes, he said, including increasedconsumer demands, rising business costs and tighter margins, just to name a few.

"Morerecently, over the past five years, the pace of consolidation has increased inlarge part due to new compliance burdens placed on credit unions by thousandsof pages of rules and regulations coming out of Washington," Conway said. "Intoday's competitive marketplace, all credit unions — but particularly those ofless than $100 million in assets — are finding compliance burdens verydifficult to keep up with."

ButWrye said that whether the merger of smaller credit unions into largerinstitutions is a problem is open to debate. He said there are many within theindustry who point out that the cooperative philosophy behind credit unions isstill alive and well in a larger, merged institution. "Some would say theend result of a merger helps the resulting credit union do a better job atthriving and surviving together as one rather than separate," he said. "Individualbrand names might be decreasing, but many of our leaders feel that credit unionmembers as a whole are stronger together."

And the reasons behind those mergers are many and varied.Wrye said increased service and value to members can oftentimes be achievedbecause a larger institution can gain better economies of scale, thus providingopportunities to combine back-office operations while saving time and money.That in turn increases service and value at no cost to members, he said. Also,cost savings can often be a catalyst for improvements in online and mobiletechnology.

Wrye said sometimes mergers are necessary because ofchanging employer/employee demographics. Some small credit unions servingdistinct employee groups must evolve when the industry changes or individualcompanies change course. Many SEG-based credit unions have been around fordecades and subsisted off of a special business model tailored to the workersthey serve. But as corporate America changes, many of those credit unions haveto follow the trend to survive and best serve members, Wrye said.

Sometimes a smaller credit union's board of directors'vision for its members is such a good fit with a larger credit union's visionthat having a conversation about a potential merger is valuable and can't beignored. "When this niche business model and philosophy is aligned with alarger credit union's a merger is logical," Wrye said.

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For a template showing credit union changes over time for all 50 states, Washington, D.C., and Puerto Rico, click .