As we recently observed in our piece entitled “Of Credit Unions Big & Small”, the credit union industry is well into a period of consolidation that appears poised to continue unabated. Growth prospects for those credit unions lacking significant economies of scale or thoughtful strategies are quickly dwindling. As one credit union CEO recently commented to his local business journal: “In this marketplace, if you don't grow, you die.''[i]
In such an environment, ambitious credit unions intent on maintaining independent viability aggressively seek growth by a variety of means. In addition to acquisitions, we frequently encounter credit unions (1) seeking to expand charters to serve larger geographies and wider fields of membership, (2) pursuing branch expansions, (3) exploring digital marketing, and/or (4) securing secondary capital to support significant asset growth.
As credit unions consolidate and expand in these ways, growing credit unions are likely to confront each other in local markets as fields of membership overlap, physical expansion results in geographic encroachments and widespread adoption of digital marketing and remote banking eliminate traditional boundaries. In such scenarios, direct competition among credit unions may develop in ways not traditionally observed within the credit union movement.
As we contemplate whether an era of emerging competition among credit unions is ripening into form, we urge credit unions of all shapes and sizes to consider the consequences of direct competition with one another. In capitalist economies, competition is generally regarded as the engine of efficiency -- enhancing markets by expelling poorly operating participants while directing resources and opportunity to the stronger competition. However, when it comes to cooperative banking, research from developed economies abroad cautions that internal competition within the cooperative banking segment does not always generate the benefits typically associated with marketplace competition.
Research from Abroad
In Europe, where cooperative banking models generally enjoy a more substantial share of total deposits than in the U.S., academic studies have concluded that competition among cooperative banking institutions results in net negative or zero sum consequences for the cooperative banking segment and its individual participants.
In 2016, academics from the Università Cattolica del Sacro Cuore in Milan, Italy published a study of specific Italian banking markets during the period between 2000-2009 titled Intra-competitiveness and inter-competitiveness among mutual banks: the case of Trento. The study focused on the effects of ‘intra-competitiveness’ (i.e., competition among cooperative banks) and ‘inter-competitiveness’ (i.e., competition between the cooperative banks and non-cooperative banks) to analyze how those conditions have affected the strategic choices and economic performances of cooperative banks. The study’s findings indicate that the ability of cooperative banks to transform local savings into local loans and manage the credit risk are better achieved when the degree of inter-competition is high, but the degree of intra-competition remains low. The study also found that the ‘bad loans to total loans’ ratio was significantly lower for cooperative banks that compete with non-cooperative banks only.[ii]
More recently, a subsequent study of Italian cooperative banks prepared by academics at LUMSA Universitá in Rome, Italy took a closer look at the effects of intra-competition in the cooperative banking segment. The study titled, Is Competition Among Cooperative Banks a Negative Sum Game?, expanded the examination of performance measures for cooperative banks in intra-competitive scenarios to include return on assets and efficiency scores and tracked performance separately for aggressor institutions and incumbent institutions. The study indicated that performance suffered at both at incumbent and (even more) at aggressor cooperative banks when they compete directly. The study concluded that inner competition among cooperative banks is a negative sum game and, thus, limiting it would be desirable to preserve the stability of cooperative banking networks.[iii]
For Credit Unions, Cooperation is Still the Best Path to Success
As the pressure to grow and expand economies of scale mounts, we, at Olden Lane, urge credit unions to proceed with caution when encountering one another in the same marketplace. We suggest that credit unions are generally best served by concentrating efforts on promoting cooperative banking and the credit union movement rather than taking aim at one another.
[i] Gregory Seay, CT, Mass. credit unions eye each other’s turf for depositors, HartfordBusiness.com. May 13, 2019
[ii] Barbetta GP, Colombo L, Colombo S, Grillo M. Intra-competitiveness and intercompetitiveness among mutual banks: the case of Trento. International Review of Economics 63(3): 195–214 (2016)
[iii] Paolo Coccorese & Giovanni Ferri. Is Competition Among Cooperative Banks a Negative Sum Game? CERBE Working Papers wpC19, CERBE Center for Relationship Banking and Economics. (2017)