Credit Union Mergers Can Make the World a Better Place

The conventional wisdom among credit union idealists is that mergers are always bad. Shrink the herd, they believe, and the survivors necessarily become weaker. I held this belief for well over a decade. That’s changed. Over the last two years my thinking has evolved, I now believe that mergers, when done right, can make the world a better place. Better for the credit union movement and better for members.

But not all mergers are done right, not all are for the greater good, not all are even remotely necessary. With many in credit union land now predicting a tsunami of mergers as competition toughens, compliance grows ever more difficult and executive talent recruitment, especially at small credit unions, is ever more challenging, it now is a matter of some urgency to seek the distinctions between good and bad mergers.

As self-avowed credit union idealists, the CUCollaborate team do what we do because credit unions make the world a better place. Like credit unions, we focus on solving problems that we are passionate about and that we can be the best in the world at solving. We believe that increasing credit union membership, increasing access to fairly priced financial solutions for lower income and minority populations, and helping credit unions increase the benefit that they provide their members make the world a better place. That is the kind of work we do.

However, I am also a pragmatist. I want to see my ideals realized in the world as much as possible, which means working within the world as it exists and trying to influence and change it.

This starts by accepting that some credit union mergers are indisputably necessary.

When Is a Merger Necessary?

I used to think that mergers were only necessary when a credit union is no longer financially viable.  That’s when the regulator knocked on doors of big, stable credit unions and implored them to absorb the failing institution before it imploded and putatively left a stain on all credit unions.

Now I recognize that mergers are also necessary when the people running credit unions have lost interest in running them (this is why I am very happy that the NCUA requires credit unions to have succession plans now).

Even with succession plans in place, sometimes the powers that be in a credit union just want to hang up the “Gone Fishing” sign on the front door and turn off the lights. This malaise can become deadly when it is at the board level.

The major turning point for me was when I was brought in to help a small HBCU credit union avoid being merged away. The credit union had a mission that resonated with me and effectively lent to low tiers of credit. It made the world a better place. I met with the interim CEO and board and walked them through a comprehensive plan for how CUCollaborate could not only solve the credit union’s current problems but ultimately help them thrive. It included a net worth restoration plan, CDRLF grant application support, CDFI certification, CDFI grant application support, etc. All the pieces necessary to solve their current issues and obtain the financial resources necessary to recruit excellent staff and sustainably grow the credit union.  How could anyone turn this down?

I was met with blank stares. I offered to do the project pro bono. Still nothing. I walked out of the meeting bewildered. I had presented a coherent survival plan and nothing.

After my presentation, one of the board members called me and explained that everyone involved in running the credit union was exhausted and wanted out. They had given up.

I thought about how to solve that problem and save the credit union. I generally think I am a very good problem solver, but I couldn’t come up with a solution.

The experience led me to conclude that when the people running a credit union are exhausted and unable or unwilling to recruit new blood and energy into the credit union - a merger is necessary. Consultants can guide and encourage, but we can’t force our clients to act.

Will the new NCUA succession planning requirements prevent such situations from occurring? I doubt it.  First of all the rule does not take effect until January 1, 2026. Todd Harper, the then NCUA chair, in his remarks on the rule noted, “Some commenters argued the rule will have the unintended consequence of increasing the number of consolidations as smaller credit unions do not have the time and resources to comply with the rule. This in turn could lead to mergers with larger institutions.”  Harper disputes that. But the worries remain for me.

I have been down this sad road before.

At the time of my discussions with the HBCU credit union, following the conventional credit union idealist school of thought, I believed that a merger was morally wrong and I did not want to help them merge. Months later I found out that they had merged into a large local community credit union. The acquirer did not have a specialized mission and did not extend credit to lower tiers of credit or income. A credit union that embodied my idealistic vision of what a credit union could be had disappeared. Their members were absorbed into a credit union with a business model that would likely not solve the financial needs of their members. I was upset and continued to think about what I could have done differently over the following months and years.

I have finally come up with a solution that will work.

Making Mergers Work for the Members

I have accepted that voluntary mergers of financially viable credit unions are sometimes necessary. Perhaps more pragmatically - they are going to happen. So, I set out to determine how I could ensure that when credit union mergers happen, they are genuinely in members’ best interest and make the world a better place.

I started by researching what the most common reasons were that credit unions gave for why a merger happened.  There is plentiful research into this.  For instance, Filene research argues that the main reasons for mergers are to expand services, address growth prospects, and deal with succession planning.  Add in grave financial difficulties and those four causes probably sum up the reasons for most credit union mergers.  

Are the reasons good enough to justify mergers?

Beyond financial stability and leadership gaps, the most common reasons credit unions provide to justify voluntary mergers just don’t hold water. Arguments supporting mergers because the acquired credit union members will receive access to expanded products and services or better technology hold exactly no weight for me. Credit union members have agency. If they cared about those things they would not be a member of a financial institution that does not offer them. Furthermore, almost all of us now bank with multiple providers.  Javelin Strategy & Research pegs the number of accounts a typical consumer has at 5.53.  As we need services and when our existing financial relationships don’t satisfy those needs, we add another relationship. The era of financial monogamy is long passed and the “additional services” justification for a merger simply lacks credibility.

Greater economies of scale is a more complicated subject because there is support for this argument but ultimately I don’t think the benefits outweigh the value of the credit union’s unique charter, but that is my own personal view and one that is likely not shared by many actual credit union executives and board members. It is fact however: the money center banks enjoy substantial advantages  in economies of scale and no credit union can compete with a Chase mano a mano in any fight Chase chooses to enter.  But it is also fact that Chase rarely, perhaps never, battles with a credit union.  Its preoccupation is with other global money center banks.

And whatever economies of scale big banks may enjoy probably are more than cancelled out by the benefits of the credit union income tax exemption which in fact provides significant benefits to larger credit unions.

Just the Facts

Too many credit union mergers happen without a full understanding of all the facts of the matter at hand. For good reason in many cases: it hasn’t been easy to assemble all the facts.

But that lack of hard facts can lead to mergers that miss the mark.

Back of the envelope calculations aren’t what are needed to assess whether a potential merger partner will benefit a credit union’s members. That’s where CUCollaborate’s Merger Member Benefit (MMB) Analysis comes into play.  This is entirely data driven.  MMB delivers a detailed analysis that reveals how members would fare with various acquirers.  MMB digs deep into loans, interest rates, credit score ranges, deposit types and more at the institutions under consideration.  This takes the guesswork out of assessments of potential merger partners.  

With this information at hand board members and executives bring knowledge to the merger discussion

An Informed Member Is A Better Member

There is another reason I generally still oppose credit union mergers and that is their customary lack of transparency. Most members have no idea what is under discussion and how they might personally be impacted.

And yet: merger is their decision to make. But without sufficient information they can’t possibly make informed decisions.

Granted, there is a complication.  Experts tell me that over 90% of potential credit union mergers that rise to the board level never are consummated.  There’s a lot more kicking of tires than signing on the line that is dotted.

I understand that. But I also know that in many, many cases members do not even know that “their” credit union is actively pursuing a merger and they accordingly have no idea what impacts such a merger will have on them. Credit unions need to do a much better at communicating across multiple channels.

Why do credit unions often do a woeful job at this communication? All I can assume is that they don’t want to do better. Who doesn’t remember the 2022 vote by First Federal Credit Union members that resoundingly rejected merger into Arlington Community Federal Credit Union in Virginia. Some credit union leaders seem to believe that keeping members in the dark will silence most of them. Even when that doesn’t always work.

To me, what a credit union approaching a merger needs to do is to communicate fully and often to members, give them the facts and let the proverbial chips fall where they may.  Just don’t be surprised when the members disagree with the board’s decisions.  That is what “member owned” means, isn’t it?

More broadly, I think almost all credit unions need to work much harder at  truly being a democratic institution that is member owned.  I often ask credit union members, when was the last time you voted in an election for board members?  Almost always the answer is never, “I didn’t know we had a vote.”  

That needs to change in 2025 when we have 24/7 online communication tools that will give new life to the “member owned” mantra.

Replace The Charter

The one thing that is really lost if credit unions merge is the loss of a credit union charter. A credit union charter has tangible value. Unfortunately, it takes a huge amount of time and money to charter new credit unions, that is, to create a new charter.

It is as easy as buying a Mega Millions ticket to merge a credit  union out of existence and thus lose the charter and it as hard as winning the Mega Millions jackpot to get a new charter.

In 2024 the NCUA chartered exactly three new credit unions.

Three.

That just is not adequate.  

We need to work, hard and energetically, to enable more new credit unions.  One step I advocate is forming a new charity with the aim of providing financial support to new credit unions.

Another step is to support any or all of the several efforts to create shared back office support - everything from core systems through compliance tools.  There is no good technical reason that a single shared back office could not power hundreds of small credit unions - and that would remove a stumbling black that has hindered creation and survival of new credit unions for decades.

Bottomline: I continue to think that many - most- mergers are unnecessary. Some are. Many can be avoided.

But, critically, we also need to be thinking and working hard to nurture new credit union births.  

Fewer deaths, more births is a prescription for a healthy movement that can and will well serve many, many millions of us for generations to come.