By Ray Birch
HARRISBURG, Penn.—The $4.5-billion Pennsylvania State Employees CU believes the time has come for the “network credit union model” in the United States.
PSECU is reporting it has already seen interest from more than a half-dozen Pennsylvania credit unions in the model that allows CUs to combine into one “network” CU, which is at the top of the organizational structure. Credit unions that merge in are considered divisions of the network credit union, and all of their financials roll up to the network CU.
Each credit union retains its name. However, all communications and signage note that the CU is a division of the network CU.
“So for PSECU, to our members we’d be PSECU, a division of …” explained PSECU CEO Greg Smith, who added the name for the network credit union has not been chosen.
Network Model Used Outside U.S.
The network credit union model, a recent research project of the Filene Research Institute and CUNA, has been proposed for many years. The model is in place in the U.S. in a number of different variations, including at The Partnership FCU in Washington. It’s an approach that has also been used for years outside the U.S. in countries that include Canada, Brazil and Poland.
Smith insists the time is right for the network CU stateside as credit unions of all sizes face increasing revenue and cost pressures that are driving many to consolidate. Smith shared what many CU executives have concerns about: mounting regulatory burden and rising IT costs—both for new projects and to defend the credit union against cyber attacks—are getting too big for many CUs to manage on their own.
“While the credit union industry has been immensely successful, we need a solution to challenges that are unfortunately only going to get worse. That solution is the network credit union,” said Smith. “The network model will not only allow credit unions to continue to be successful, it will continue the credit union legacy.”
Smith expects credit unions will soon merge at an even faster pace and that as more traditional mergers happen much of the history of the credit union movement is lost. Smith said that if mergers continue with “winners and losers,” with the acquired credit union’s past eliminated in the consolidation, someday most credit unions will just seem like banks.
“The network CU model is a solution to modernizing our industry by allowing credit unions to partner with each other while still remaining true to their local identities,” said Smith.
CEOs Become Divisional Presidents
CEOs of credit unions that merge in would become divisional CU presidents. Smith anticipates that he would become president and CEO of the network CU, and if that were to happen, a president would be chosen to lead the PSECU division.
Current CU directors would remain on divisional advisory boards. A board for the network credit union would be chosen by members of the divisional credit union. Most of the employees would be retained, said Smith, who acknowledges there will be duplication of roles.
“But we will deal with those through natural attrition and by reassigning people,” he said.
Smith said that two basic merger types are happening among CUs now—those that are struggling and throwing in the towel, and then mergers of convenience, where maybe a CEO is retiring and the board does not feel they have a good candidate for a successor.
“But there needs to be more consolidation in the industry due to all the pressures we face, and this model is the best in terms of credit unions working together to succeed. This is really a collaboration story,” Smith said.
While retaining the credit union’s heritage will likely encourage CUs to consider the network concept, Smith emphasized that streamlining operations, greater efficiency and economies of scale, as well as sharing knowledge and resources are the true drivers of the model.
Issues Moving To Higher-Asset CUs
Smith said the problem of regulatory and compliance costs, as well as revenue pressure and mounting IT expenses will soon enough becom
e an issue even for credit unions in the $500-million asset range.
“That is a key reason why this network model is so important right now,” said Smith. “There are credit unions that are of a good size that are not struggling, but someday these problems that are driving the smaller CUs out of business will reach them, and that day may not be too far down the road. It is always better to partner when the credit union is strong, before trouble arrives.”
Smith said he is not sure why the network credit union model has not caught on in the U.S. as it has in other countries—possibly not enough operating pressures facing larger credit unions yet. But he emphasized again that the network model allows CUs to collaborate while they are strong, the best situation for any partnership, he said.
Eight CUs Invited
PSECU recently invited eight Pennsylvania credit unions to attend a meeting on the network project and seven accepted. Total assets of the CUs attending the meeting, outside of PSECU, is $5 billion. Smith doesn’t expect the project to reach beyond Pennsylvania’s borders.
“I am confident that we will launch this project within the next 12 to 18 months,” said Smith. “There is a great deal of interest.”
Smith believes the network model will begin to take hold in the U.S.
“One of the credit unions we just talked to about the network project celebrated a significant anniversary,” said Smith. “What do you think is more appealing to them, saying you guys have done a fantastic job, now we will take it from here? Or a merger where they keep their name and benefit from collaboration that addresses many of the pressures credit unions face today?”