I was in California last week meeting with a few clients, catching up with friends, etc. One of the more fascinating discussions I had while on my trip covered the topic of credit union cooperation. It seems that there is a school of thought running throughout the industry that credit union cooperation is truly a thing of the past. We no longer really cooperate, and the cooperatives that were created to serve the industry in the past are really now more capitalistic than cooperative.
In any case, the discussion went from the concern over our lack of cooperation to ways in which cooperation really could return us to a pricing advantage over our competition. What if, my partner in conversation said, we took all non-member related functions and turned them over to a true credit union cooperative? What if, for example, we hired one compliance team to serve a handful of credit unions rather than a team for each? What if we hired one outstanding HR team rather than each investing in our own HR department?
The argument went on - and it was really hard to argue back. Let's take a look at the cost of compliance to see why I was at a loss to find any reason to disagree. A BusinessWeek clip from last week shed light on the cost of compliance for large banks. According to Mara Der Hovanesian, the Finance and Banking Department Editor at BusinessWeek, compliance spending grew 159% on average for the five years through 2006 at America's 50 biggest banks. The number is not really a surprise, as we've all had to deal with a near-crushing compliance burden for some time. In fact, I wonder if the percentage cost increase for credit unions hasn't been greater than the bank number. In any case, the breakdown of the increase shows that roughly 60% of the increased fees went to staff compensation.
Taking that very real situation as a starting point for discussion, suppose you could, by cooperating with three other credit unions on a staff member, reduce your compliance-related staff costs by 66%. Would that not be a great driver to really cooperate on compliance staffing? If that staff member cost $100,000 annually in salary and benefits is the effort not worth the $65,000 in reduced expenses?
Even at those credit unions where direct competition exists, cooperation of this nature makes perfect sense because there is very little direct competitive advantage to be had by keeping compliance in-house. Similar arguments can be made for other non-core functions.
Of course, options to "outsource" HR, compliance, IT, and similar functions exist - but not in the cooperative sense. The companies providing these options are most decidedly in it for the money, and that is not a bad thing. However, if the industry can come together and find cooperative solutions for support functions and run them at a true break-even, then the savings can be passed directly on to members in terms of better pricing.
There is a call to action here. My friend, whose credit union is north of $300M in assets, is looking for two or three credit unions who share his cooperative spirit to test out this concept. The initial foray would be solely focused on compliance costs. If you are interested in at least discussing the opportunity, give us a call at Glatt Consulting and we will provide you with the appropriate contact information.
