Mar 16 2007

A Preliminary Study on Credit Union Franchising


Approximately once each day, U.S. credit unions lose one of their peers through merger and consolidation. The pace of consolidation has reached an average of 300 credit unions per year, driven largely by the need to access economies of scale. Researcher Steven C. Michael from University of Illinois at Urbana-Champaign, looked into strategic options other than mergers through which credit unions can fulfill the need for such economies.

A Filene report by Bob Hoel and Bill Kelly in 1999 first examined the characteristics of thriving small credit unions. That report proposed a number of strategic recommendations and options for small credit unions, among them a franchising system through which certain operations could be standardized. Small credit unions could collaborate on routine back-office activities to gain economies of scale and focus their energies on activities involving member contact. Smaller credit unions are overwhelmingly the target of consolidation, due to demands from consumers and regulators for a greater range of financial products and services. It is often difficult for smaller credit unions to offer the same level of service as larger institutions. Franchising or “strategic outsourcing” may be a way for smaller credit unions to alleviate staff resources expended on routine, time-consuming functions. The researcher conducted in-depth interviews with five CEOs of smaller credit unions, using the term outsourcing rather than franchising. Participating credit unions were full-service, well-capitalized financial institutions with multiple delivery channels, including online banking. The activities identified as having the most potential in the Michael report are:

  • Compliance and internal audit.
  • Consumer lending/Marketing.
  • Human resources.
  • Accounting/Information technology/Security.
  • Facilities management and planning.

Professor Michael concluded that despite the identification of these activities, a credit union franchising system may be premature until a unified credit union information technology system is developed. For a franchising system to work, he says, credit unions first need to consolidate their IT systems onto a common platform.

Report Number 131