Financial Squeeze, Mergers and Fintech: Key Talking Points from ABCUL Conference

Thursday 25 January 2024

Over 200 ABCUL member credit union professionals met up in Manchester, last week for the Association’s annual conference event. Delegates attended wide range of workshop sessions aimed at sharing best practice and raising awareness of key issues impacting credit unions and their members including dealing with the increased cost of living for members, Strategic Mergers and working with FinTechs.

A session titled “Can the US Community Development Credit Union Model Translate to GB?”, explored whether GB credit unions could adopt the community development credit union (CDCU) model, championed in the States by apex body Inclusiv.

Speaking at the session, Rene Vargas Martinez, Director of Inclusiv’s Puerto Rican Network, said CDCUs operate in underserved and underbanked communities, working with people excluded from the financial system – usually because they are immigrants, or have a bad credit score.

With a commitment to financial inclusion and community development, the 456 CDCUs serve 17 million people, offering “affordable financial services at good rates to people with no credit scores, no credit scores, who have not taken part in financial system“.

It also offers trusted deposit banking to people who have been suspicious of traditional banks and were used to storing their money “under the bed”: and if you win these people’s trust, they will bring others in their community along, said Mr Martinez.

This market has seen huge growth because there is no competition apart from predatory lenders – and although members have poor credit score, they pay their loans back.

“All the research we have of underserved people or people on lower tiers show us they are loyal and they will pay their loans,” added Mr Martinez. “There is some delinquency but if you offer people used to 50% interest a cheap rate, they will come back and build their credit.”

Scott Butterfield, from US service organisation Your Credit Union Partner, said: “In a working class or minority area never been a better time to be a credit union or CDCU”. And as inflation bites into living standards, these communities will need help.

He advised credit unions thinking of adopting the model to “go out into community and tell a story”, and appoint a “community-focused board” and design products to help local social needs; for instance, US CDCUs offer finance for survivors of domestic abuse.

Financial Inclusion Officer at Bradford District Credit Union, Ian Brewer discussed his efforts to put this idea into practice in the Bradford’s communities.

The conference saw a lengthy panel debate on how mergers can save struggling credit unions as well as enable growth in the movement.

Consolidation is an ongoing trend in the movement, leading to fewer, bigger credit unions. Eric Broome, from Georgia’s Own Credit Union in the US, said since May 2009 , Georgia’s Own had carried out nine mergers – as well as acquiring a single site bank, another growing strategy for the US sector. This has brought in $455m in assets and 69,000 people – with more on the way.

Mergers and acquisitions are “quicker than organic growth”, he said. “Organic growth is critically important,” he added, “it’s where you make your hay, but it can be tough.”

Mr Broome said there is a lot of work involved in getting a merger right, and choosing the right merger. That means considering the compatibility of systems, doing due diligence and retaining employees – which he sees as “the most important asset … with mergers, every employee comes over and we try to move them to a matched role”.

From GB, there was a different perspective on mergers from Kathryn Fogg of Pennine Credit Union, which has carried out several mergers – most recently last year, with Affinity Credit Union.  Affinity was a rescue mission, she said, and although it delivered little in the way of acquisition growth – a half million loan book and 1,000 members – it brought the potential for organic growth. “Since then we’ve lent a million in new cash, and added 2,000 members to the 1,000 brought over.”

The merger was hard work, she added, which involved building relationships with stakeholders, including the local authorities supporting Affinity. “It took us six months to show us what we’d achieved,” she added, but said members are happy with their service.

Ms Fogg warned that in GB, credit unions are smaller, bringing more potential for personality clashes than with US mergers; and she warned there are risks in giving leadership roles to those brought over from failing credit unions. Above all, she stressed the importance of due diligence. “Your members will want to know what you are getting into.”

Failing credit unions can be turned around, however. Jonathan Moore, a building society professional who joined Stockport Credit Union as CEO in 2019, held a side session on how the struggling credit union saw off the existential crisis of the Covid-19 pandemic.

The credit union’s initial response to the pandemic – a savings drive – was a mistake; the capital outflow it had feared the pandemic would provoke from members never materialised, and it was left with an expensive savings book to run.

Its next step was to launch two emergency loan schemes, including one with Stockport Council which brought some grant income, publicity, and a good relationship with the authority, which led to further projects and grants.

Covid-19 and the cost-of-living crisis only add to challenges already facing the sector. In a panel session on future proofing, Eric Broome and Nickolas Kitchens from Georgia’s Own Credit Union looked at ways to adapt business models.

Again, mergers and acquisitions are important; and mean the US now has fewer than 5,000 federally insured CUs; “Scale is important. you can offer more products,” said Mr Broome.

Mergers and bank acquisitions can also give credit unions more scale to deal with its biggest challenge – the rise of fintech. “Since 2010 there have 3,5000 deals in the US for over $1tn – and the credit union share of this is low,” warned Mr Broome.

In seven years fintechs have taken 40% of auto loan marketing in the US by offering quick decisions and low rates, said Mr Kitchens – and the credit union share of the market, an important one for the sector, is falling.

No credit union can see off this challenge alone, said Mr Broome. “We have got to collaborate as a movement.”

He said credit union service organisations are an important tool, offering services such as payments and digital, while trade bodies such as CUNA offer vital advocacy. Credit unions should also work together on community engagement.

And they should also work with fintechs themselves. “They are competition and can invest in tech more quickly. We can either let them pass us by or find a way to work with them, and buy a stake in them.”

ABCUL would like to thank CMutual for its continued support and sponsorship at the ABCUL Annual Conference 2022.

Source – Coop News