4 Merger Strategies Credit Union Directors Should Consider

Mergers are transforming the credit union landscape.  It is, therefore, ever more important for credit union leadership to be addressing the impact of mergers as part of their strategic planning.

The NCUA has clearly pronounced the duties of credit union directors including (1) responsibility for the overall direction of the credit union and (2) demonstrating good faith effort in acting in the best interests of the membership, and (3) administering the affairs of the credit union fairly and impartially.

We have found the mergers can be particularly challenging issue for credit union directors to address whether it be as an acquirer, merger of equals, or as the merged entity. Often issues arise because the board has not focused on this issue in a comprehensive manner from a strategy perspective.

Credit unions both large and small, strong and weak, will benefit their stakeholders by strategically and impartially addressing mergers.

Merger strategy can generally be classified into four categories:

1.      Defensive Posture

Credit unions across the nation have access to much of the same market data.  They are building out short and long term strategies for access to markets that provide them with the most strategic benefits.

Often there may be one or more credit unions in this market.  The market may not have a dominant competitor or have few strong competitors.

A strong credit unions may see it as an option to join forces through a merger with an existing credit union in the market.  The members gain in rates, products and technologies.

Through this merger they reinvest in the community to develop sufficient critical mass.

The strategic motivation is to effectively close other credit unions from entering the market in a substantial way.  They are essentially changing the economic equation for other credit union or bank entrants into the market.

2.      Market Growth

Credit unions pursue market growth for a variety of reasons.  Geographic diversification, market share growth, and new market entry have all historically been drivers of mergers.

As we move to an increasingly mobile world with less reliance on the branch the value of a broader field of membership takes on greater importance.  Mergers have allow credit unions to partner to offer access to credit union services across county and state lines.

For many resource constrained credit unions a fusion with a larger credit union allows them to collaborate to build long needed branches and provide access to the acquirer’s existing branch network.

3.      Service Growth

A merger allows credit unions to add much needed products and services to their offering.

Often credit unions do not have sufficient volume to invest in the expertise and technology required to offer unique services.  And, the cost of product development becomes very high on a per member basis.

And, although credit union can sometimes check the box that they offer a service, often the quality of the offering is dated and does not satisfy the requirements of current or prospective members.  A merger provides an immediate way for credit unions to offer access to some of the most advanced technologies that it would otherwise be impractical to offer.

Additionally an amalgamation is a way for credit unions to gain immediate competence and add scale to a product line.

4.      Operational Efficiencies

With shrinking margins and new entrants into the financial services market, including online only competitors, gaining increased economies of scale is essential to survival.

Analysis of credit union financials by asset size illustrate very clearly that larger credit unions have greater efficiency.   Consequently, on average, members enjoy better rates and more services at larger credit unions.  At the same time larger credit unions have stronger earnings allowing them to reinvest in credit union growth.

The strategic planning cycle is a great time for credit union leadership to reassess how mergers will impact their current and future strategies.  Directors will need to look not only at their current market situation but also assess how they would be impacted by other credit unions in their market merging and upsetting the competitive balance.  Additionally, wise credit unions will want to assess how they can shift the balance in their favor.  Will a combination of multiple $1 billion plus credit unions be a way for credit unions to disrupt a market area and provide significantly enhanced services to members?

Whether you are a director of a large or small credit union we encourage you to consider the impact mergers may have for your members, staff and credit union’s competitive position.