Since the global financial crisis and worldwide recession, credit unions everywhere face similar issues.
We operate locally, but our markets have been globalized. Credit unions struggle to generate income in an environment characterized by low interest rates and controlled fees.
Post-crisis costs for bad debt provisions dramatically increased everywhere before stabilizing in 2011. The fastest-growing costs are for compliance.
Credit unions are challenged with decreased margins. From the early 1990s through 2007, return on assets (ROA) among U.S. credit unions averaged 90 basis points (bp). But average ROA fell to only 18 bp in 2009 after stabilization assessments before rising to 68 bp in 2011, according to CUNA’s economics and statistics department.
Small credit unions’ average ROA is a fraction of larger credit unions’ ROA.
Slim margins are not just a U.S. phenomenon. In Ireland, credit union interest income has decreased since 2007 due to falling interest rates and decreasing loan-to-asset ratios as members take on less debt.
Credit unions’ costs have doubled due to bad debt provisions and charge-offs. These cost increases have hit the smallest credit unions hardest. In response, they have reduced dividends to adjust for lower income.
Systemwide, capital reserves have held steady at 13% through this period, as credit unions reduced dividends and stabilization efforts bolstered reserves.
Ireland’s credit unions will continue to suffer from adverse economic conditions. But a systemwide stabilization, merger, and new product adjustment program there should strengthen the credit union business model.
In the United Kingdom, credit unions have served low-income—and high-cost—consumers for years.
Membership has grown at an annual average of 13% since 2007 as credit unions targeted more profitable upper- and middle-income members.
Credit unions are the only financial institutions in the United Kingdom whose interest-rate increases on loans are capped (at 2% per month).
But even at their highest interest rates, credit unions are much less expensive than many other lenders.
Credit union income has remained stable as loan and asset growth have offset falling interest rates. Costs, however, have risen for credit unions in England as they have elsewhere.
In response, English credit unions set out to reduce their operating costs by 30% to 40% though centralized data processing and common information technology (IT) platforms.
The influx of new members everywhere has heightened the demand for more payment and mobile services. Credit unions need to invest significant funds in IT infrastructure to be able to meet member-service demands.
This is a daunting prospect for credit unions in most countries.
We see the need for credit unions to pool their funds to invest in a common platform, negotiate with vendors as a group, and offer a wider network of shared points of service to members.
The products credit unions offer around the world differ according to what their members want. But the desire for convenience is a constant worldwide.
Today, that means access through multiple channels. Certain members favor particular access channels. Older generations may still want to walk into a branch and talk to a teller.
Today’s working professionals often prefer to do business online, and younger consumers conduct transactions on cell phones.
No matter where you are in the world, it’s all about access, convenience, and member service.
BRIAN BRANCH is president/CEO of the World Council of Credit Unions.