#1 Threat To Credit Unions? Cannibalization, Not Conversion Or Banks

By Christian Mullins

When the credit union world looks inward at some of their shortcomings, they often focus on conversions, a CU buzzword meaning the conversion of a credit union into a for-profit financial institution, usually a Mutual Savings Bank. While few credit unions contemplate conversion, and even fewer follow through, a single conversion is viewed as a disaster. By the same token, the CU community should be horrified by the 200+ mergers that happen each year, but they aren’t. Each action results in one fewer credit union, but mergers are viewed as an acceptable business practice. What they almost always are, however, is one credit union cannibalizing another.

Currently, there are just over 8,000 credit unions in the United States, and about 200 will merge with another credit union this year, a net loss of 2.5% of credit unions nationally. While 2.5% is a small number, the credit union movement peaked in 1969 with 23,876 credit unions (Source: Credit Union National Association). With 8,125 federally insured credit unions according to the search feature at the NCUA website, this represents an average yearly loss of 2.8% of credit unions since 1969. If this trend continues, the number of credit unions will dip below 8,000 in 2008, 7,000 in 2013, 6,000 in 2018, and 5,000 in 2025. In early 2032, a mere 24 years from now, there will be half the number of credit unions as there are today.

Of these lost credit unions, some will convert into for-profit financial institutions, and a few will probably fail and/or disband. The overwhelming majority, however, will merge into another credit union.

Once you’ve read one credit union merger announcement in the newspaper or online, you’ve pretty much read them all. The smaller credit union’s members will now be able to access services that weren’t available to them before, generally meaning that their new (larger) credit union has additional products and/or locations. In some cases, this is a valid reason to merge. In others, it is the long term inability of that credit union’s leadership (CEO/President/Manager and Board of Directors) to adapt to an ever changing financial landscape.

For the larger credit union, a merger is a benefit for three reasons: Gain of assets, less competition, and expanded charter. An easy way for credit unions to grow larger is to merge with another credit union, which not only increases assets but also increases overall market share.

A side benefit of the merger is, assuming the two credit union’s were competing in the same market, there is now one less player on the scene. In a larger market, with dozens of choices, one fewer won’t make much of a difference, but going from five competitors to four is significant.

Ever wonder why a $500 million dollar credit union absorbs one with $6 million in assets? It’s a lot of work without much in return. Officially, it’s the explanation three paragraphs up. Unofficially, the larger credit union coveted the smaller credit union’s charter (which defines the common bond of credit union members). Since credit unions can’t simply decide to enter new markets on a whim, they cannibalize small credit unions chartered in an area they feel they can grow. Credit unions have found this to be the easiest method to enter new markets.

Small credit unions (less than $50 million in assets), especially those with older management, are most vulnerable to mergers. However, with the existence of credit union ATM networks, national shared branching, and increasingly affordable “extras”, the playing field for small credit unions has never been more even. If management and the Board of Directors can’t keep your credit union competitive, it’s time to bring in people who will.

Poinsettia Bowl Naming Rights Analyzed

By Christian Mullins

In April 2005, it was announced that the inaugural Poinsettia Bowl would be held at Qualcomm Stadium in San Diego.  It had all the markings of another 3rd tier college bowl game, with one exception: It was sponsored by San Diego County Credit Union (SDCCU).  Credit unions have a history of attaching their names to various ballparks, charities, or events.  Never before, however, had a credit union sponsored a national sporting event.  Proponents felt that the industry had burst into a market controlled by large banks, energy companies, and other billion dollar corporations.  Opponents thought this was additional ammunition for the banking industry in their continued attempts to remove the tax exempt status of credit unions.  For everyone that wasn’t sold on the merits of this move, the question remained - Why would a credit union market themselves nationally?  I could think of four good reasons:

1. With the increased presence of shared branching, national marketing is necessary

Today, there are almost 3,000 shared branching locations in the United States, as well as locations in Puerto Rico, Italy, Germany, Japan, and South Korea.  With the increased tendency of job hoppers changing states along with their companies, it makes sense to keep your credit union’s name on the tips of those members that no longer live in San Diego or Riverside Counties (SDCCU’s field of membership).  This would make a great deal of sense if SDCCU participated in shared branching, but they don’t.

2. Maximizing their reach to Naval personnel

There is a large contingent of Navy personnel in the San Diego area, the Midshipmen have played in two of the first three Poinsettia Bowls, and Navy has agreed to play in the 2008, 2009, or 2010 bowl, if they’re eligible.  With cadets and personnel aplenty in San Diego, attaching themselves to this bowl game seems like a no brainer, right?  Well, no.  Unfortunately for SDCCU, going after potential members with Naval backgrounds means going up against Navy Federal Credit Union, the largest credit union (by far) in the United States.  While SDCCU has more local branches, Navy Federal offers locations on both the East and West Coasts, and a few spots in between.

3. Name recognition

Until they purchased naming rights for a stadium and college bowl game, respectively, I had no idea what Qualcomm and Chick-Fil-A were (apparently, I should be happy never having tried the latter).  San Diego is one of the fastest growing cities in the United States, and it isn’t due to a high birth rate.  People from all over the country are relocating to Southern California, and San Diego is about as SoCal as you can get.  The bowl game brings name recognition to SDCCU, and with 25 branches, a location near new arrivals.  However, once all the other reasons have been exhausted, they paid six figures to get the naming rights….

4. Because they can

There’s something to be said for being the first at anything.  While naming rights have been around in the sports world for at least 40 years, this is the first time a credit union has entered the fray.  Again, the Poinsettia Bowl is a 3rd tier bowl, but it’s their San Diego’s (and SDCCU’s) bowl game, and that means something.  To SDCCU’s Board and Executive Management it means going where no credit union has gone before.  To their members, it’s name recognition in the city of San Diego.  To people like me, it’s either an exciting new way to market credit unions, or a culmination of greed and excess, forcing small credit unions to absorb any punishment brought on by the largest.  On that last one, it depends on which side of the isle you stand.

Good or bad, brilliant or foolish, it has people talking all over the nation.  While a lot of that talk is with a snicker (like this blog at mentalfloss.com), people still know their name, and that’s something that any credit union would covet.