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
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
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
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
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?