Scale and the Law of Diminishing Returns


Republished from

The most common rationale for credit union growth is to achieve new scale. Larger size is meant to bring more efficiency, productivity and market clout. And hopefully member value.

In a situation where everything or everyone else stays constant, growing larger might produce this outcome. But even in the most hospitable circumstances, the law of diminishing returns sets in.

Learning from another industry serving consumers

Last year, I had the opportunity to speak with a mining engineer from Houston, Texas. We talked about the largest and deepest mines in the world including a mile-deep open pit copper mine run by Kennecott in Utah.

Productivity is measured by the ounces of ore (1-3 oz) per ton of rock extracted. The constant challenge for geological engineers is to try to find veins so mining is still economically feasible. But, sooner or later, ore recovery is not worth the additional cost.

Our discussion then turned to Houston’s then recent floods in part exacerbated by the city’s paving over much of its surface area by concrete. As an example, he mentioned that Houston had the widest highway system anywhere in the world.

I returned home and found this was no Texas exaggeration. The Katy Freeway covers 26 lanes of freeways, toll lanes, frontage and emergency roads. At Beltway 8 it is in fact the largest according to the Houston Chronicle.

The result of becoming the biggest highway

So did this investment from 2008 help traffic flow faster? At first, for a short time, it did. But now, traffic engineers call it a Monument to Futility.

For as capacity is increased, so does “induced demand.” In fact, the same journey now takes longer on this highway mammoth than before the expansion.

The engineer told me one result of this new congestion is that companies the highway was meant to serve are now moving to less crowded areas of the Houston metroplex. Not just the head office, but also tens of thousands of employees’ jobs are relocating for more open spaces.

The moral is that scale changes things, some unanticipated or even unintended. Consumers’ loyalty is rarely based on size or scale. Rather, satisfaction comes from service and personal responsiveness.

Many factors cause each credit union to be the size they are today. It may take some analogous struggles for an understanding that legacy may be more valuable than yearning for bigger scale, wherein existing comparative and competitive advantages are significantly lessened in exchange for unproven future benefits.


  • Chip Filson

    A nationally recognized leader in the credit union industry, Filson is an astute author, frequent speaker, and consultant for the credit union movement. He has more than 40 years of experience in government, financial institutions, and business. Chip co-founded Callahan and Associates. Filson has held concurrent positions at the NCUA as president of the Central Liquidity Facility and Director of the Office of Programs, which includes the NCUSIF and the examination process. He holds a magna cum laude undergraduate degree in government from Harvard University. After being awarded a Rhodes Scholarship, he earned a master’s degree in politics, philosophy, and economics from Oxford University in England. He also holds an MBA in management from Northwestern University’s Kellogg School in Chicago.

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