Credit unions have been investing in new products, technologies, and delivery channels to bring greater value to members throughout this decade. These investments have led to a higher expense structure at many credit unions due to larger operations and/or higher staffing levels. As a result, credit union operating expenses have averaged an increase of 8.7% annually since 2001.
While such investments are critical to ensuring credit unions are providing relevant services to members, they are also made with growth in mind. Many credit unions have added branches and product lines such as member business lending to reach new segments in the market. Reaching new segments and developing relationships with them takes time though, and credit unions’ average annual asset growth of 8.0% since 2001 lags their operating expense growth.
Because of the trends in these growth rates, the industry has not realized economies of scale that are to come with larger size. Although the average credit union asset size has risen from $54 million to $87 million since 2001, the industry’s operating expense ratio remains essentially unchanged at 3.34%. While it fell to 3.16% in the first quarter of 2003, the improvement was due to strong balance sheet growth from record mortgage lending as opposed to increased efficiency. As balance sheet growth has slowed, the ratio has moved back up.
Why It Matters
With the net interest margin reaching a new low of 3.09% in the first quarter, managing operating expenses becomes even more important. Since interest rates are driven by the market, credit unions must focus on the area that is under their control – expenses. Investments in member services are essential to long-term success, but the investments need to be weighed against the benefits. Questions to consider include:
- Is there a tangible return either in cost savings, revenue generation, or member demand that will come from this investment?
- What is the payback period for this investment including the ongoing maintenance costs?
- Have we examined a range of scenarios (below, at and above expectations) when measuring the return on this investment?
- Would leveraging the credit union network by partnering provide us similar capabilities at a lower cost?
With the average bank asset size nearly 20 times the average credit union size, credit unions will find it difficult to achieve the economies of scale that competitors have attained. However, it ultimately comes down to delivering value to members, and effective expense management provides credit unions with the greatest opportunity to provide exceptional value.