Where the Map Ends, the Adventure Begins

Where the Map Ends, the Adventure Begins


Although the worldwide fireworks and celebrations for the new millennium were spectacular, few people came to work on January 1st or 3rd feeling we were in a new era. But credit unions are. The journey did not begin on January 1, 2000. But there is no doubt that -- borrowing the thought above from Meriweather Lewis of the Lewis and Clark Expedition -- the future of credit unions lies in uncharted territory. To succeed in this journey will require leaders of unparalleled vision.

Using Old Maps
Not everyone wants to go into new territory. Many will want to cling to the traditional ways of doing business. If it worked okay so far, why go off somewhere new?

The first reason is that even using the old "map" to measure progress, we are falling behind. Let's look at one area of competitive comparisons. The third quarter numbers for both banks and credit unions were released in December. Regulators and analysts rightly called both sets of trends outstanding. But there the similarity ends.

Banks reported the highest quarterly earnings ever at $19.2 billion and the highest rate of earnings ever with an ROA of 1.42%. Credit union net income was up as well, so the total could correctly be called the highest net ever in dollars. But whereas banks earnings increased by 29%, credit unions' were up only one third as much at 10.9%. Credit unions' ROA was 1% or 42% lower than the banking industry's.

Moreover, the return on capital for credit unions was only 10% compared to a 16.6% growth rate for banks. One reason for banks' superior financial performance was that they were able to grow non-interest revenue in 1999 at a rate of 24.5%, almost double the credit union rate of 13.2%.

To the extent credit unions rely on some of the same products and strategies as banking organizations, the numbers suggest that we are producing results about 50% less productive as measured by earnings. To the extent that earnings remain the only source of capital for credit unions and capital is the currency to build the future, credit unions are at a significant disadvantage in the familiar territory. Something new is needed.

Permission to enter New Territory

The most notable event making the old business maps less useful was the passage in late 1999 of the Financial Modernization Act, HR 10. This bill represented a decade-long effort by the banking lobbies to change the rules of the game. The Depression era separation of banking from insurance and securities brokerage has been officially ended. The convergence of financial services into a true supermarket of opportunities replaces the separate industry specialties that dominated the 20th century.

So the era of banking is over, and the age of financial services has arrived... except for credit unions, which are trying to work through rules from their 1998 law (HR 1151) that has made federal credit unions' field of membership changes a quagmire of bureaucratic indecision and artificial constraints. Moreover, the new prompt corrective action (PCA) rules in the same legislation impose a capital model based on organizations that have access to capital markets, unlike the credit union retained earnings model. One outcome of this credit union regulation could be to stifle the most innovative and successful credit union strategies.

By contrast, the result of HR 10 for the banking and thrift charters is that vast new territories are now open to financial firms with imagination and capital to better serve their local communities and chosen markets.

A Whole New Vision
Given the legal and financial constraints that credit unions are under compared to other providers, success depends on a new vision of what it means to be a credit union.

Some of the elements of this vision are already being worked on. First is a vastly expanded product and service range. Insured products are a relic of the 20th century. Members want to use more direct market-based products to manage their financial assets.

Second, the Internet in conjunction with branches--the "clicks and mortar" strategy-- will characterize the need for hybrid service models. Some members will want the choice and self-service convenience of the Internet; other members will want to have a local contact. Moreover, the Internet will be more than another channel, it will be a portal through which members can access services beyond those built by the credit union but which still provide trusted credit union value.

Third, there will be new and varied groupings of credit unions centered on innovative attempts to find and deliver new value. Sometimes these initiatives will be attempts to achieve economies of scale, at other times new solutions will be sought to common problems, and in other situations new partnerships will be started with firms bringing superior value to member needs.

The Key Success Factor
The thread to bring these visions to fruition will be leadership, from the executive level with two or three credit unions cooperating to make something worthwhile happen for their memberships. These leaders will be ones who will dare to go into uncharted business territory. They will have the courage to break away from the safe places that now exist. Their strongest attributes will be the strength of conviction to follow their vision and the willingness to partner with other adventurers. Implementation, not ideas, will be the critical skill.

Why will credit unions be able to succeed in this adventure, especially given some of the advantages of their well-heeled competitors? The sustaining factor will be singleness of purpose, the drive to improve their members' lives. That's the motivation that few of the other firms have. Which organizations will shape and thrive in the 21st century -- the adventurers looking for new riches or those trying to find ways to better serve their fellow human beings?




May 8, 2000



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