Consolidation: Fate or Destiny?

Credit unions must think beyond the merger paradigm to deliver superior member value. Creativity in organizational structures may be just as important as innovation in products and services.


There is no denying the trend of fewer and fewer financial institutions. Consolidation via mergers is continuing in banking with high profile mergers, not to mention local acquisitions. The number of credit unions is now below 9,000.

But the pace of consolidation is very different for credit unions. In 2004, the 331 credit union mergers totaled $3.1 billion in assets or roughly 0.5% of the industry's year-end total. In the banking industry, the 258 mergers involved $837 billion or 9.2% of year-end banking assets.

Not only is the credit union industry on a much slower pace, but also the size of the mergers is much smaller. Moreover unlike the banking industry, which has granted more than 1,200 new charters in the past ten years, the total of new credit union charters in the same period is under 100. New credit union charters are not replacing merged organizations.

Deregulation’s Continuing Impact

Mergers are occurring because the traditional legal boundaries and institutional practices protecting local bank franchises no longer exist. Deregulation has allowed the top tier of banks to plan national branching networks. The only limit on size is the legal cap of 10% of domestic deposits held by any one bank. Three banking conglomerates with assets over a trillion dollars are now nearing this limit, with Bank of America right next to the bar.

While the market forces of deregulation are reshaping the banking industry into fewer institutions with higher asset concentrations, similar pressures are affecting credit unions but at a much slower rate. Unlike the leading banks, most large credit unions are relying on organic growth, not mergers, as the primary driver of their size. Therefore the restructuring in terms of fewer organizations is not only slower, but also resulting in much less industry concentration.

The reason for the lower rate of credit union consolidation versus banks is that market forces are not as great on credit unions. Many boards are reluctant to give up their independent existence even if the result might be greater member value. Most credit union mergers are not a result of proactive strategy, but a last resort when circumstances overwhelm a credit union’s ability to survive.

Merge or Be Merged?

For most credit unions, the consolidation trends suggest their future options are limited to two: merge with a larger, stronger organization or merge to create a stronger organization.

Ironically merger per se does nothing to change the industry’s growth or presence. We are not bringing new assets or members to the cooperative model. Mergers just bring greater average size.

But the real opportunities may not be limited to the above two options. Different organizational models are being tried and consolidation may have a wholly different outcome than merger.

For example in Canada, the Caisse Populaire movement in Quebec has a single operational backbone but multiple local charters. One of the fastest growing credit unions for the past 10 years with assets of almost $600 million is North Carolina Local Government Employees, which has ''outsourced'' its entire operations to another credit union.

Other leaders have asked what a holding company model would look like for credit unions? Or a franchise approach? Or even a federation? Might new approaches be possible on a national, not just a local basis?

Innovation, Not Consolidation

For consolidation to deliver superior member value, credit unions must think beyond the merger paradigm. Creativity in organizational structures may be just as important as innovation in products, marketing or service cultures.

Will it be possible for credit unions to break away from a merger focus and use the local presence of thousands of smaller charters as end points for a new ways to deliver superior service? Such a result might have dramatic meaning not only for smaller credit unions, but also for a movement that creates possibilities for all institutions to be vital for their members. Because in an era of trillion dollar institutions, there are no large credit unions.