Deregulation Turns Credit Unions from Delicatessens to Supermarkets: Mergers Shrink Numbers but Increase Size and Services
ST. PAUL -- Credit unions have been described as financial delicatessens: small neighborhood shops with a limited selection and a friendly, personable staff.
But recent changes in the financial industry have increased competition while allowing credit unions to become financial supermarkets. In fact, credit unions were the first group in the financial services industry to be deregulated, and they are still feeling the effects.
Says Allyn Long, nonbank supervisor in the Minnesota state banking department: "They had to grow and get profesional management. Things have become much more complex, and volunteers who run credit unions didn't have the expertise to handle that."
Yet some credit unions continue to be staffed by volunteers and offer a limited range of services.
Credit unions are much like savings and loan associations in that they are mutual associations, essentially not-for-profit, owned by their depositors. The crucial difference is that, unlike S&Ls, credit unions are not burdened with heavy mortgage portfolios and have not had to suffer the fallout from the interest rate crunch of recent years.
Deregulation has had a paradoxical effect on credit unions in Minnesota, as well as in the rest of the country: They have grown in size while they have shrunk in number. Credit unions that couldn't cope with the changes were merged or liquidated. Those that could cope have grown substantially.
Mergers and liquidations have cut the number of credit unions in Minnesota by 118 since 1970, from 415 to 297.
In the last three and a half years, there have been 36 mergers, three liquidations, and three new charters, reducing the total by 10%. National Total Down 10%
Nationally, there were 1,831 mergers, 866 liquidations, and 771 new charters in the same period, also reducing the number of credit unions in the nation by 10%, to about 16,500. Mergers and liquidations are common among credit unions, while new charters are rate.
"I think we'll continue to merge with small credit unions that are having difficulties," said Rod Lydon, head of the Minnesota Central Credit Union, which has absorbed many struggling credit unions in the Twin Cities.
Although no minimum standards for capital adequacy have been set by federal regulators, as have been set for banks and S&Ls, some credit union analysts believe the ratio of net worth to assets should be between 8% and 12%.
One expert, Joseph Lents, a partner in Nearman and Lents, a certified public accounting firm specializing in credit union auditing and management services, believes that 12% is the minimum ratio that directors should accept.
In fact, a recent public survey by the National Credit Union Association, a trade association for credit unions, showed a great deal of concern about the safety of financial institutions. Those respondents' had less faith in credit unions than other savings institutions, such as banks, S&Ls, and money market mutual funds.
As for Minnesota's top 50 credit unions, just 18 -- a little more than a third -- had net worth-to-asset ratios of 8% or more, including six that were at 12% or more. The total net worth for the 50 credit unions was $75.4 million, a net worth-to-assets ratio of 6.6%. Eleven of the credit unions lost money in 1982. Deregulation Offers Chance to Grow
Yet deregulation continues to provide credit unions with opportunities for growth. Assets of the state's credit u nions total $1.52 billion, having nearly tripled over the last eight years. (But in total, they still hold less than a fourth of the asset total held by First Bank Minneapolis, the largest bank in the state.)
This rapid growth owes much to the fact that credit unions were first in offering several new financial services. Indeed, they still can offer some services that banks and S&Ls cannot. And now, that deregulation has prompted many banks and S&Ls to emphasize retail banking for the elite, small consumers may increasingly rely on credit unions to provide their credit and savings needs.
Credit unions could pay any interest rate they wanted for deposit account long before money market mutual funds arrived. At least a year before the first NOW accounts, they could pay interest on their version of checking accounts. And while S&Ls and banks still have minimum balance requirements, credit unions have no such restrictions.
Statewide and interstate branching is not an issue among credit unions -- they are not bound by state lines, and some of them have branch offices all over the world.
Perhaps the most stringent restrictions on credit unions are either inherent or self-imposed. Associations are restricted in their customer base because they are organized around a common bond, such as employment or community. This common bond restricts their size, and smallness curbs the aggressiveness and professionalism with which many of them have been able to pursue their financial activities. Definition Being Broadened
But even that's changing: The common bond rule is being stretched so that "common" is beginning to mean "general public" rather than "specific group." And credit unions are growing into sophisticated financial institutions that may soon be able to sell all the retail services that banks offer.
The common bond, however, can be a two-edged sword. It links the success of a credit union to that of the sponsoring organization, even though the sponsor does not own, manage, or control it.
If the spnsor grows, the credit union is likely to grow. If the sponsor is having trouble, that difficulty is likely to be reflected in the credit union.
Take, for instance, the Rochester, Minn.-based IBM Mid America Federal Employees Credit Union (which provides services for IBM's employees in nine midwestern states, including Minnesota, and is the largest credit union in the state and 82d largest in the country at the end of last year). Its growth is clearly linked to the huge success of IBM itself. All of the IBM credit unions have undergone substantial growth, and three others are also among the nation's largest 100 credit unions.
On the other hand, sponsoring companies that move out of state, suffer financial trouble, or experience strikes can pose problems for a credit union.
"The problem with credit unions is that many of them are occupational and can be subject to strikes and layoffs," Mr. Long said.
The Republic Airlines Employees Federal Credit Union is an example how a credit union's fortunes can be tied to a particular business. The credit union has grown as quickly as the airline itself, but recent difficulties of the airline industry in general, and Republic in particular, have caused some uneasiness. Adapting to Environment
But the Republic credit union has taken a number of steps to help it adapt to its environment.
By being able to define its airline-related customers as those who travel frequently and spent much of their time in airports, Republic has been able to develop services that fit those occupations. Republic was one of the first credit unions to set up its own automated teller machine system, and now has two machines, one at its headquarters and one in the Minneapolis-St. Paul International Airport.
The association also has correspondent relationship with several other airline credit unions in this country and abroad, enabling many employees to do their banking services where they work.
Some credit unions have tried to limit their risk by broadening their customer base through acquiring other credit unions, according to Gene Hilger, head of Republic's credit union. Although Mr. Hilger said his credit union has recently added employee groups of airline-related businesses, he is not going to attempt to break the tie with Republic through too much diversification.
"We think Republic is going to do just fine," he said.
Besides the economic link, common bonds can help or binder in building a customer base.
Advantages include the ability to develop products, services, and a marketing plan for a narrowly defined customer pool. The disadvantage is that this pool may be too narrow.
Common bonds help the IBM Mid America credit union. The consumer loan department has a special lending program for employees who want to purchase a personal computer. And IBM Mid America, which is one of a half-dozen regional IBM credit unions around the country, also has correspondent relationships with those other credit unions and allows customers of one IBM credit union to perform a number of transactions at other IBM associations.
IBM Mid America has 16 offices, and other IBM credit unions add another 60 offices to that network. Advantages in Communication
Credit unions also have the advantage of being able to use company bulletin boards, employee newsletters, and credit union newletters to market their products cheaply and efficiently. Sometimes direct-mail techniques are available, although some companies are restricted from disclosing employee mailing lists.
Yet few marketing techniques are effective in reaching a broader base of customers, such as the relatives of employees beyond the immediate family.
While radio, television, newspaper, magazine, or billboard advertising reaches many more people than have access to the credit union, it generally costs much more than the results could warrant.
A notable exception to this is the IBM credit union in Rochester. The IBM association is large enough and has a high enough potential membership in Rochester that it can use television and newspaper advertising with good results, according to David Pumper, the credit union's marketing manager.
Also, mass advertising techniques can be used by trade groups representing credit unions, such as the Minnesota League of Credit Unions. But such campaigns promote only the industry, not particular institutions.
Credit unions often benefit from free or inexpensive office space from sponsoring companies. Such arrangements not only help reduce costs but provide an ideal location to attract and retain new customers. STrikes Take a Toll
Of course, this can work against a credit union if employees strike. Picket lines could bar access to the credit union or force the association to set up temporary quarters outside the company building.
Credit unions also save expenses because members volunteer their services. In fact, many credit unions are run by volunteers.
One such credit union is the one at the Federal Reserve Bank of Minneapolis Considering the financial sophistication and complexity of the sponsoring institution, the fact that volunteers still run it is somewhat surprising.
While volunteers save salary expenses, nonprofessional management may deter a credit union from adding new services. For instance, the Federal Reserve's credit union does not offer money market funds or checking accounts.
But perhaps that reflects a choice by management not to compete overtly with banks and S&Ls.
"We have a rather long history of trying to keep a low profile," said Tom Supel, the credit union's volunteer president and an economist on the Federal Reserve staff.
"I think it's simply because we have competing financial institutions that are member banks."…