The Continuing Evolution of the Credit Union Model

Sometimes things are so clear that they are almost self-evident. For credit unions it is clear the credit union model is evolving in front of our eyes.




For most of the 20th Century, consumer financial services were offered on a local scale by many community banks and credit unions. The costs of operating financial institutions were relatively reasonable, stable and predictable. Credit unions were able to live on the net interest margin for years, operated almost exclusively by their own employees, with very little outsourcing.

At the end of the 20th Century, two things occurred that changed the credit union world forever: the widespread use of technology and the world’s adoption of the Internet as a method of commerce. Although adding the significant cost factors of people, equipment, and software, technology also made the operational processes much more efficient. How much technology helped the credit union depended on how effectively the credit unions used the technology and the scale that the credit union was operating on, i.e. how big was the credit union?

As the scale of an operation increases, there is little incremental increase in the cost of technology, so technology cost per transaction is greatly reduced. Banks were at a competitive advantage to credit unions, given their larger scale, resulting in lesser technology costs per member/customer. The more vulnerable smaller credit unions, becoming less economically viable, merged into larger credit unions where the scale was better but still not competitive in the greater financial marketplace. The technology adoption trend began in the seventies when the number of credit unions peaked at over 21,000. As of March 2009 less than 8,000 credit unions are left, decreasing at a rate of about 300 per year. With the imposition of the share insurance fund assessment in 2009, the number of credit unions disappearing per year inevitably will increase.

With the Internet enabling the power of technology to be leveraged nationwide, national financial service providers have arisen to compete for your members' business. The bank down the street is a regional bank with much lower transaction costs due to its relative scale. A credit union's competitors now include Internet providers such as ING Direct and Lending Tree that have much more scale than any regional bank. More competitors with much greater scale, lower transactional costs and, the convenience of the Internet have put a squeeze on the original credit union model that is permanent and potentially fatal. The scale of these Internet competitors enables them to live with razor-thin margins earned with interest rates that are often more competitive than interest rates offered at most credit unions. The credit union’s non-profit advantage only helps to a point. Scale is king.

Without more scale, credit unions relying on the traditional model will run through their capital and disappear through merger or liquidation. With the downturn in the economy and the NCUA assessment, that process has accelerated. Mergers mean that the unique identity of the merged credit union with its members is lost. Even if the continuing credit union does a great job, special connections to the members and the community are diminished by the loss of the merged credit union, which then diminishes the political strength of credit unions.

The good news is credit unions can acquire scale without sacrificing the existence of the credit unions through collaboration. Credit unions have already begun to use CUSOs to collectively provide operational services to each other. CU*Answers (IT core processing), Xtend (phone center and bookkeeping services), Ongoing Operations (disaster recovery/business continuity), CU Business Partners (business lending services), CUMAnet (mortgage lending), Open Technologies Solutions (IT support), PSCU Financial Services (credit card processing and phone center), CU Student Loan Choice (student lending), COOP (shared branching), TMG Financial (credit card lending) and CUDL (indirect lending) are a few of the examples where credit unions are creating scale to bring less expensive and more effective and efficient operations to their credit union owners and clients.

These CUSOs are a big step in the right direction but it is just the first step in the evolutionary process. All these services help solve the scale issue for one or more portions of the operations but it is not an integrated systemic solution. The next step of systematic collaboration is being taken by a few credit unions. CU*Answers is assembling a more comprehensive model for its 100 plus small and mid-sized credit unions that enables a five million dollar credit union to serve its members with the same degree of effectiveness as a credit union many times its size. The four credit union owners of Open Technologies Solutions, now saving millions of dollars on IT support, are in the process of building a back office model that will combine all operational services. This integrated systematic model will address governance and due diligence issues to insure that the credit unions are able to define the service and performance standards, monitor the standards, and compel compliance if there are deficiencies.

To reap the full benefits of scale, one has to address both process and people issues. Through natural attrition or terminations, there have to be less people involved in the operation of the collective credit unions or benefits will not be realized. I acknowledge that credit unions are uncomfortable with making these types of decisions but, we cannot pretend any longer that everything is fine. There is an urgency that must be recognized.

Because credit unions are based on collaborative principals and structure, the evolution of the credit union model is to fully extend those principals among credit unions to obtain sufficient scale, so the credit union industry can retain as many viable credit unions as possible.

Implementing an integrated systematic collaboration requires substantial change and the trust of your fellow collaborators. It takes courage to champion the change. While the challenge is great, so is the reward. For the sake of your credit union and its members, please find a way to walk down the only path that will preserve the future of a viable credit union industry.



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April 6, 2009


  • Great info which helps to understand why the push for CU growth. Thanks!
    Larry Culver