Mergers have always been part of the financial industry, but the reasons for mergers may not all be bad. Can a merger bring value to the membership? The answer should theoretically always be yes, but in practice it may not be.
Historically, credit unions that experienced a merger into another credit union typically had negative reasons for doing so: regulatory requirement, retirement of the CEO, inability to compete with their products and services, or the field of membership company went out of business.
But today, mergers can be beneficial for both credit unions involved. They can provide a wider variety of products and services to handle increasing consumer demands, and deliver lower loan rates, higher dividends, and lower or no fees.
In a recent report from the Filene Research Institute, they found that mergers can have a place in the credit union’s business plan, particularly for smaller credit unions merging in with a larger credit union. They provide economies of scale (per employee, per asset, or per income, etc.), and have “more credit union” under a highly efficient and experienced management team.
However, Filene also acknowledged that a merger may not be a good option: “There are many reasons why credit unions—both larger and smaller institutions—may not benefit from a merger. One of the most important determinants of merger success is the level of cultural due diligence the different parties undertake in advance of the merger.”
Size does matter
There are also significant differences in the merger process based on the size of the credit unions. From 2010 – 2017, there were 1,840 unassisted mergers (no regulatory intervention), with around 1,700 of these with “small” credit unions involved. Of course, there can be all mixtures of sizes that may develop a business plan together.
While it may make sense for a smaller credit union to merge into a larger one to provide greater access to services for its members, many of the complaints today regarding an overactive merger community stem from equally-sized and successful credit unions merging seemingly purely for scale.
The question a credit union needs to ask itself should always be, “is this really in the best interest of our members, or is the merger serving some other purpose?”
Recommendations for a successful merger
A credit union considering a merger, whether inbound or outbound, and in the interest of its members, should incorporate a strategy into its business plan. If that’s the route you’ve chosen, consider being proactive and not waiting for a merger opportunity to present itself. Find one that will be best suited to your own credit union strategy. Communication is key when following your merger plan. Don’t have a plan? Develop one first.
Avoid being emotional in making decisions. Each management team and board of directors may have a long history with their credit union. While experience and intuition are important parts of the decision-making process, they may lead you blindly down the wrong path. First establish criteria with measurable objectives to keep you on track.
Data processing – how do they stack up?
Data processing for your core system and other vendor interfaces can sometimes lead to cost-saving decisions that may not be the best long-term solution. Investigate each data processors’ support for mergers. Do they have a proposed handbook? Do they provide lower cost for the merging credit union or an introductory period for the data processing expenses? Do they have experienced staff who know how to handle the data? Can they provide ideas for marketing the merger? These services can be invaluable – especially if they are provided at no cost.
Mergers can provide an environment for growth and provide a marketplace perspective that will meet the ever-changing members/owners needs in the financial world of technology enhancements, changing regulatory requirements and economic standards. Credit unions should consider mergers as a business tactic, rather than simply providing a helpful hand.