25 Years In The Forest, Still Seeing Trees

Twenty-five years ago, credit unions were in many ways still in the dark ages, taking their first wobbly steps up from their cigar box-and-file drawer roots toward becoming full-service financial institutions.

That was just four years after Ed Callahan left the NCUA Board, having led a fundamental transformation of our industry, successfully promoting legislation that created the NCUSIF and a new agency policy that allowed credit unions to expand beyond single-sponsor SEGs if they could prove a common bond.

About the same time, I entered the banking business, drafting comment letters to the FDIC and OCC on behalf of my employer as the banking industry itself was continuing to re-shape in the wake of deregulation and the resulting thrift crisis. Things haven’t slowed down any. Quite the contrary, the rate of change and challenge in financial services only continues to increase.

As part of that, there has been a shakeout in our movement, with thousands of credit unions vanishing. Either they couldn’t or wouldn’t move away from those days of primitive delivery, they succumbed to the financial misalignment between small size and the scope and cost of post-crisis regulatory burden, or they were overwhelmed by the revolution of technology and competition. But in years to come, that same revolution can play directly into the strengths of today’s credit unions if we choose to let it.

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Let’s view ourselves as a movement, a system of cooperatives with a mission of ensuring access to high-quality, high-value financial services for our owner-members in a not-for-profit setting. Our major drivers going forward are 1) responding to competitive threats, 2) capitalizing on the opportunity for service expansion created by new technologies and the concomitant expansion of consumer expectations, and 3) overcoming the difficulty that regulated financial services have in fully leveraging those opportunities.

To my mind, credit unions, as a movement, are exceptionally well-positioned to deal with this broad array of difficult, disruptive challenges. As cooperatives, credit unions can communicate and collaborate in ways that for-profit companies typically cannot and would not. In fact, if I still worked for banks, I’d be telling my employers that they should worry less about the credit unions’ tax exemption and more about their anti-trust exemption. For small institutions this can make all the difference and ALL credit unions are small in this brave new world, even the biggies.

Bear With Me

At a recent credit union conference on Big Data, I heard an old story with a new twist. Some hikers are being stalked by a bear. Run! one says. We can’t outrun a bear! someone replies. Don’t have to, the first hiker says. I only have to outrun you. It’s about knowing who your competition really is. For credit unions today, it’s the bear the power of data and technology to transform every little element of peoples’ lives and our business in the coming years.

For the most part, banks and other for-profits are running a lot faster than credit unions. Megabanks are investing hundreds of millions of dollars a year, each, in emerging technologies to streamline operations, delivery, and every other part of their business model, and hundreds of millions more in the data analytics that are critical to employing those technologies effectively. In contrast, the host of the aforementioned conference estimates a credit union could create a meaningful data analytics for about $2 million over two years, but that only a handful are doing so and only about 50 or so could realistically even consider so on their own.

If credit unions are to survive as a dynamic movement capable of changing the lives of their owner-members, they, too, will have to find a way to respond to the raft of new competitors using innovative technology, innovative processes, and even innovative business models to disrupt the traditional financial services space. Big banks aren’t going to help us. We must solve this problem as a movement. If we don’t, we risk being collateral damage, trampled by the bear as it chases Chase, Wells, and the rest of its lunch.

This is going to require scale, not just because of the economics and risk-sharing, but because the ability to pool — knowledge, experience, data, and insight is the secret to maximizing returns over time on this kind of investment. So the operative question really is, “How can credit unions quickly achieve the scale they need?

Credit unions and CUSOs talk a good game about the other hikers being banks. Often though, at least some of them seem to behave as if other credit unions or CUSOs are the ones to be outrun. Either way, the bear is the future. Collaboration is the only option and CUSOs should be a good place to start, but I’m routinely struck by how parochial and myopic many CUSOs and credit union partnerships are.

There are some very successful exceptions that do our movement proud, but too often I see leaders who are more concerned about making an extra buck or two for their own shop or preventing someone else from doing the same than about working together to ensure their mutual long-term sustainability.

At Callahan, we listen to credit unions every day. They understand these are tough questions and that resources are limited. Choices have to be made and the long-term interests of owner-members should be driving them. Regulators may define the space credit unions operate in, but it is consumers, with their constantly evolving needs and expectations, who define the space in which we compete.

That puts a premium on thinking strategically, for the long haul, leveraging the unique advantages credit unions enjoy over the next five to 20 years. This, too, creates challenges that credit unions must overcome if they even hope to keep competing effectively. Traditionally, most credit unions think in one-to-three year increments, a timeframe in which it’s tough to justify, or even to see the advantage in, long-term investments in collaboration or anything else. In a three-year arc, things need to pay off now.

What’s more, when conditions are tough and margins are tight, the first things cut are often those that don’t offer a clear, near-term return on investment. That’s not a recipe for long-term success. It’s times like today when credit union executive teams most need a strategic mindset and when the foundation for future success is laid.

Credit union leaders who put all their energy into gaining marginal, short-term advantage whether in their own shop or while working with other credit unions are not just missing the forest because of the trees. They’re not even seeing the trees.

This column originally appeared in the Dec. 16 edition of Credit Union Times.