Are Credit Unions Achieving Economies of Scale?

The net interest margin reached a new low in the first quarter, and credit unions must focus on the area that is under their control – managing operating expenses.


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.




July 16, 2007


  • You are using the wrong measurment. It''s not cu''s vs banks... it''s small cu''s not having the economies of scale of the larger ones that is making a difference in cu-land. Those cu''s that have achieved large size, have a marked advantage over the smaller cu''s in economies of operation. They don''t need to be controling costs as much as managing the cost/ benefit / strategic plan models. You are focusing on the wrong area for a fix... it''s not expenses.
    Gregg Stockdale
  • Credit unions nationwide with assets over $1 billion have an average operating expense under 3% of assets... cu''s under $100 million have expenses that range from 4% to 4.5% of assets. That''s a 150bp advantage for the larger cu''s. That makes for economies of scale in my book. My point was that the author lumped all cu''s in the same bucket. His chart does not tell the whole story. Size does matter when it comes to credit unions. (source of my data - Callahan''s)
    Gregg Stockdale
  • It''s about time somebody challenged the presumption that large size delivers economies of operation. A few years ago I analyzed all Connecticut credit unions and found that there is no correlation between asset size and operating expense ratio.
    Rick Quinn