Popular Mythology Does Not Hold Up To Reality

Banks and credit unions operate in disparate systems, yet the providers of financial services have many traits in common.

 
 

Alliant Credit Union began in 1935 as the credit union for United Airlines. With more than $8 billion in assets and 275,000 members, it is now the sixth-largest credit union in the country. It is headquartered in Chicago and chartered by the state of Illinois. CEO David Mooney’s banking career has spanned 25 years, and he counts JP Morgan Chase as well as predecessors Chase and Chemical in New York and Texas among his former employers. For 15 years he oversaw branches and retail operations before joining Alliant in 2003 as CEO. Here, Mooney discusses how best practices and lessons learned from a lifetime of banking can translate to the cooperative world.

CU QUICK FACTS

  • Alliant Credit Union
  • HQ: Chicago, IL
  • Assets: $8.2B
  • Members: 278,065
  • 12-MO Share Growth: -2.03%
  • 12-MO Loan Growth: -0.14%
  • ROA: 0.46%

There is a great deal that is similar at banks and credit unions, especially methods, products, and systems capabilities. It is an unfortunate myth perpetuated somewhat by journalists that credit unions are behind — especially behind large banks — in products and services. I have not found this to be so. In fact, large banks can be encumbered by large legacy systems, patchworks from mergers, and acquisitions that don’t work well as a whole. This makes it hard for some large banks to get things done.

The obvious difference between banks and credit unions is the ownership structure, and I think this works in credit unions’ favor. Aligning owner and customer interest prevents split loyalties and is a model that should treat the members well. The cooperative ownership model thus has a financial advantage when everything works as intended. The tax exemption to my mind is a far smaller advantage than is the cooperative ownership model.

Outside Pressures

Another obvious difference between banks and credit unions is the credit union industry does not have outside investors and analysts, both of which apply pressure on banks to maximize profits. Credit unions can therefore concentrate on delivering long-term value to members and building institutional value.

But there is downside for credit unions as well. Institutional investors and analysts put pressure on bank boards and management to do things that can be painful. For example, tightening the operating efficiency ratio and submitting to strategically or financially motivated combinations or mergers. Because credit unions are not subjected to these same kinds of pressures, they might not be operating as efficiently as they could. In fact, at one time credit unions enjoyed an operating expense advantage but now it is banks that do.

Operating less efficiently means credit unions are not delivering all the value they could to members. And there tends to be fewer financially motivated combinations among credit unions. Moreover, even where there are combinations or mergers, the emphasis tends to be on saving everyone’s job. In my opinion, the overwhelming benefit of a merger is eliminating redundant costs, which unfortunately often means eliminating redundant jobs.

In the banking world, institutional investors and analysts can hold the boards and management of banks accountable; therefore, the market forces discipline on them. Members often have diverse interests and in my view do not apply the same pressure banks feel from investors and analysts. For credit unions, boards and management must hold their own feet to the fire, and this can be difficult. As a result, some credit union leadership seems to see their roles as merely staying in business and don’t have a good answer to the question of why people should do business at their institutions. Such credit unions might serve their members better by merging with a stronger credit union than by burning through capital.

Insular

I think as an industry we tend to be insular. We talk to ourselves and benchmark against ourselves rather than being open to and connected to other parts of the financial services industry, particularly banks. Bankers are not so insular.

We talk to ourselves and benchmark against ourselves rather than being open to and connected to other parts of the financial services industry, particularly banks. 

Collaboration

A large difference between banks and credit unions is the credit union tradition of collaboration. Banks tend to be very proprietary even to the point of protecting elements that provide no competitive advantage. But credit unions collaborate by sharing R&D, through the Filene Institute, through joint ventures, or very notably through shared branching. This allows small institutions to operate as if they were far larger. This is a real credit union advantage.

Employees

Most people in both industries want to do a good job and want to serve. I don’t see a big difference there, but the credit union structure and mission that puts a premium on serving member interest probably attracts more service-oriented employees. So perhaps over time, credit union employees are more committed, which results in more engagement. There is less conflict in terms of messaging.

Credit unions may also be a little kinder toward employees. There might be somewhat more loyalty, less volatility, and lower turnover in credit unions. This works in credit unions’ favor.

Leadership

In my estimation, there is no gap between the sophistication of bank leadership and that of credit union leadership. Popular mythology might be that credit unions are mom and pop outfits with unsophisticated management, but I do not see this at all. I believe credit union leadership is highly sophisticated and can be held favorably to bank leadership. Banks don’t have a corner on talent.

In fact, there is likely a higher level of commitment among credit union leaders to their industry’s cause and mission. And I believe there are fewer turnovers in executive positions in credit unions, which I note as a positive for credit unions. At the large banks in particular, there is a fair amount of churn. This makes it difficult to get traction or any kind of strategic constancy. People move out of executive positions every couple of years, and it’s like starting over in some departments. This is another reason I believe the prowess and reputation of some of the larger institutions are overrated — they can have trouble getting out of their own way. They tend to be highly siloed, making it hard to coordinate and synchronize across those organizations.

— As told to Brooke C. Stoddard