Three Pathways for Credit Unions to Achieve Scale

Scale is one of the hottest topics in credit union operations these days. With the rising cost of technology, operations, talent acquisition, and other business functions, the need for credit unions to become simultaneously bigger and more efficient has become a top priority.

Most experts will point to three viable pathways for achieving scale: organic growth, mergers, and strategic partnerships. Let’s look at each one individually.

Organic Growth

Organic growth means the credit union grows primarily through its own internal business decisions. Credit unions can achieve organic growth by aggressively pursuing new members, new geographic markets, and new lines of business (such as commercial lending). Gaining greater share of wallet from existing members is also an important organic growth strategy, which can be achieved by investing in technology that heightens member convenience and access to financial services.

The high cost of such technology intensifies the need for scale. “If I were running a smaller credit union, that’s where I would be hyper-focused,” says Jeff Cardone, attorney/partner with Luse Gorman, Washington, D.C., the most prolific mergers and acquisitions law firm for banks and credit unions. “Technology enhances the member experience and is vital for credit unions to reach a broader customer base and ultimately to attract new members.”

The need to attain scale as a prerequisite for growth has required many credit unions to explore other pathways beyond organic growth, such as mergers and strategic partnerships.

Mergers

Mergers in the credit union industry have been continuing at a steady rate of about 3% for the past several decades. In 1970, the number of credit unions peaked at nearly 24,000. At the end of 2022, there were just under 4,900 credit unions.

“Many of the credit union mergers we see involve credit unions below $200 million in assets that are looking at their future,” Cardone says. “How are they going to grow? How are they going to gain scale? They feel it’s more efficient to do so by merging than trying to grow organically.”

Teresa Freeborn has been involved in several credit union mergers in her four-decade career in the international credit union movement. She was most recently president/CEO of the federally chartered Xceed Financial Credit Union (formerly Xerox Federal Credit Union) before orchestrating Xceed’s 2021 merger with Kinecta Federal Credit Union and serving as the continuing credit union’s president.

“With every acquisition, our credit union was able to expand our footprint, bolster our balance sheet, and cost-effectively grow our membership,” reports Freeborn, who segued from her credit union career to become an author, speaker, and consultant. “That always delivered a huge win for both existing members and the new members, who were able to continue their credit union relationships but enjoy more and more affordable products and services as a result of merger economies of scale.”

Strategic Partnerships

As an alternative to mergers, credit unions can form partnerships with one another to achieve scale. “We’re seeing a lot of credit unions cultivating partnerships with fintechs and outside organizations,” says John Moreno, managing partner for Newcleus, a leader in compensation, retirement, and financial advisory services based in Newtown, Pennsylvania. “These new partners are designed to enhance parts of the business cycle that credit unions either don’t have the money or the knowledge to streamline.”

There are several ways that credit unions could combine resources to achieve scale and cut cost. For instance, they could work together to build technology platforms or combine backroom operations covering such functions as ACH, card operations, accounting, servicing of loans, and more. Sharing a contact center also can be a cost-effective collaboration.

“Credit unions’ super-power is collaboration, sharing information and working together,” says Kirk Kordeleski, executive benefit consultant for PARC Street Partners, a financial consultancy firm specializing in credit unions. “If you can collaborate on the necessary backroom activities of the credit union to lower costs, then I think you’ve created a very similar aspect to a merger.”

Choosing the Right Path

Many credit unions have found that there is no single pathway to achieving growth and pursue a strategy that combines all three options. The key is to be open to opportunities for enhancing scale that will ultimately allow you to better serve your members.

Succession planning is an important process to help credit unions access future growth opportunities. Click the link to read CEO Advisory Group’s latest white paper that discusses succession planning strategies and addresses growth strategies for achieving scale.