Part I

CU Sustainability: Time for a Business Model Makeover?

It’s time to for CUs to re-invent or reposition themselves.

September 18, 2011

Does the health of the credit union business model keep you up at night?

I’ve had many sleepless nights pondering the fate of our fine industry. When you step back and look at the credit union landscape, you see an economic environment where operating expenses are higher than net interest margins, negative earnings are all to frequent, lost income due to regulations, industry consolidation, and the possible removal of our tax-exempt status.

Some proposed solutions to these ills involve access to alternative capital and raising the member business lending limit. I’m not certain these are the best solutions.

Anne Legg
Anne Legg

Fortunately, these thoughts arose while I worked on my MBA thesis. And really, what is a better vehicle to create a new industry business model than a thesis?

Where to start?

Let’s start at the beginning, the roots of the credit union industry. We were founded on seven cooperative principles:

  1. Voluntary and open membership;
  2. Democratic member control;
  3. Member economic participation;
  4. Autonomy and independence;
  5. Education, training, and information;
  6. Cooperation among cooperatives; and
  7. Concern for community.

Wow! Go back and read those again. They’re spectacular!

What other financial industry has roots like that? I dare say… only us.

This begs the questions, what are other cooperatives doing and what can we learn from them?

About 48,000 cooperatives operating in nearly every business sector serve 120 million members—roughly four of 10 Americans. The top three types of U.S. cooperatives ranked by revenue are agriculture ($58 billion), grocery ($26 billion), and finance ($10 billion).

What can we learn?

Let’s start with agriculture cooperatives, which are facing similar issues as the credit union industry. This industry created a new model of cooperative called the Wyoming model, which is a clear departure from how agricultural cooperatives have traditionally been defined.

This model—initiated in a statute in Wyoming in 2001—allows non-user ownership and non-user control to generate larger pools of capital. This is particularly interesting as it basically provides for alternative or secondary capital—a solution credit unions are exploring.

However, cooperative grocers took a different position. This industry has grown and declined in waves since the 1950s.

The most recent growth period occurred during the mid-2000s when food cooperatives once again experienced growth-driven, intense consumer interest in alternatives to a market system that didn’t always serve their needs. Sound familiar?

Cooperative grocers are successfully connecting the consumer to the producer, and in doing so are creating a better community. This is the seventh cooperative principle: concern for community.

The more outreach the cooperative grocery makes, the better the community becomes. Cooperative groceries have changed the relationship people have with their food when they engaged their members with the food and the food suppliers.

Next: How does this apply to CUs?

How does this apply to CUs?

If we take a page from the cooperative grocers, we need to connect our members to money. Does that seem odd?

Let’s hold that thought for a moment and look at a few business strategies:

Repositioning strategies. The life cycle of a business has four distinct stages: introduction, growth, maturity, and decline.

video CUNA Mutual Group's John Lass addresses CU sustainability. Watch now.

When a company reaches the decline phase, it has two options: Cease to exist or re-invent itself into a new company and start the lifecycle all over again.

Much debate surrounds which phase credit unions are currently in, but it seems to be either maturity or decline. Either way, credit unions will need to consider strategies to re-invent or re-position themselves.

• Innovation strategies. As repositioning strategies can help credit unions renew their competitive position, so are innovation strategies.

The Blue Ocean Strategy is the product of W. Chan Kim & Renee Mauborgne. It’s based on the study of 150 strategic moves spanning more than 100 years and 30 industries.

The primary contention of Blue Ocean Strategy is that value innovations will create value to both the firm and its customers, rendering rivals obsolete and creating uncontested market space.

Currently, credit unions complete in the same space as big banks. If the credit union industry doesn’t want to move into the space already occupied by large banks, where can it move?

Based on Blue Ocean Strategy, I propose we enter into a space that’s more cooperative and highlights the fact that credit unions:

  • Are not-for-profit;
  • Are locally owned and managed;
  • Are sustainable and don’t make risky investments—foregoing the need for government bailout funds;
  • Have shareholders, not stockholders;
  • Create a community out of depositors and borrowers;
  • Improve the communities they serve; and
  • Offer a holistic approach to personal finance to improve the consumer’s financial position.

Part II of this report will address how a shared-value business model would benefit credit unions.

ANNE LEGG is vice president of marketing at Cabrillo Credit Union in San Diego and former chair of the CUNA Marketing & Business Development Council. The recent MBA graduate explores credit union sustainability in her MBA-thesis/white paper, “Creating a New Credit Union Sustainability Business Model.”