May 02 2011

Credit Union Financial Sustainability: A Colloquium at Harvard University

Report  
Number  
232

This report documents the presentations and discussions of Filene's latest colloquium, which combined insights from academia and business to make a stark assessment of how sustainable the credit union business model appears. 

Peter Tufano, PhD
Sylvan C. Coleman Professor of Financial Management
Harvard University
John Lass
Senior Vice President
CUNA Mutual Group
Frances Frei, PhD
UPS Foundation Professor of Service Management
Harvard Business School
Dorian Stone
Partner
McKinsey & Company
Report Number 232

Executive Summary

A colloquium called held in Fall 2010 at Harvard University, addressed the variables that must be monitored and maintained in order for credit unions to both stay aloft and gain altitude. Flight dynamics are a useful metaphor for balance sheet dynamics, because small changes corrected in the middle of a long flight are not likely to have large effects. But when those changes come during takeoff or landing (a financial crisis) or when they continue uncorrected (years of declining growth), the results are as sad as they are predictable. This colloquium considered factors like net interest margins, operating expenses, asset turnover, and leverage.

What is the research about?

This report documents the presentations and discussions of the colloquium, which combined insights from academia and business to make a stark assessment of how sustainable the credit union business model appears—how well the system and individual credit unions are managing their pitch and roll. With the exception of some individual credit unions, the trends are sobering. But the problems are understandable and, therefore, manageable.

Colloquiums are designed for interaction, not just presentation, and this one didn’t disappoint. Perhaps the most intriguing part of the whole event was the panel discussion at the end, where the day’s presenters took on trenchant questions, like: “What kinds of collaboration should credit unions invest in?,” “How do you change strategy with an unreceptive board of directors?,” and “Should credit unions minimize operating expenses in exactly the same way as other firms?”

What are the credit union implications?

Some of the implications for credit unions from the presenters include:

  • Peter Tufano, a Harvard Business School professor and Filene Research Fellow, introduced a classic Harvard business case to show that growing profits and growing sales do not always a viable business make – especially when capital is constrained.
  • Building on Tufano’s sustainable growth theme, John Lass, senior vice president at CUNA Mutual Group, led a lengthy discussion of exactly what levers credit unions can pull to keep their own growth sustainable.
  • Harvard Business School Professor Frances Frei taught that you can fail even though nobody dislikes you. Credit unions have to be particularly careful about trying to be all things to all members, because a drive for across-the-board excellence is likely to lead to mediocre performance in all areas.
  • Outsized operating expense ratios are the bane of the majority of US credit unions, argues McKinsey & Company partner Dorian Stone. A straightforward comparison of operating expenses at the smallest US banks and credit unions shows credit unions lagging banks by 20% or more. Moreover, competitors aren’t likely to get less efficient, so it’s time for credit unions to do better