The banking industry is undergoing a seismic shift as credit unions rapidly emerge as formidable acquirers of community banks and branches. This trend has accelerated dramatically in recent years, with credit unions now accounting for over a quarter of all bank acquisitions in the United States – a staggering increase from just 5% between 2019 and 2021.
What are the ways credit unions are driving innovation?
This acquisition spree is transforming the competitive landscape, as credit unions leverage these deals to expand their geographic footprint, boost deposits, and offer a wider array of products and services. Traditionally known for their local focus and commitment to underserved communities, credit unions are now directly challenging traditional retail banks in ways that were unimaginable just a decade ago.
“Credit unions have a deep consumer focus,” explains Michael Bell, a prominent banking attorney at Honigman who has advised on the majority of these transactions. They use their branches in innovative ways – almost like billboards. I have clients with branches that don’t have any tellers in them at all.
The appeal of credit unions as acquirers is multifaceted. Unlike traditional banks, credit unions are not beholden to shareholders or the pressure to turn a profit. This allows them to prioritize member service and community impact over short-term financial gains. Additionally, as member-owned cooperatives, credit unions can often offer more favorable deposit and loan rates, as well as access to a broader array of products and services.
“Credit unions are kissing cousins to community banks,” Bell asserts. “This allows them to provide better service or better products, which creates real competition.”
However, the rapid rise of credit unions as acquirers has not come without its challenges. The post-merger integration process can be fraught with complexities, requiring careful attention to compliance, taxation, and the delicate task of fostering a unified culture.
“If you don’t integrate people, it’s highly likely that those entities will continue to operate as if they are separate entities,” warns Sanjay Sharma, the global head of private banking at SEI. “The key to a successful post-merger integration is ensuring that both organizations’ employees are communicating and interacting effectively.”
Sharma emphasizes the importance of a “buddy system” approach, where each employee is assigned a counterpart from the other organization to facilitate communication and collaboration. This, he says, can be the difference between a successful merger and one that falters.
The regulatory landscape also poses unique challenges for credit unions. As non-profit, member-owned institutions, credit unions are subject to a different set of rules and requirements than traditional banks, which are regulated by the Federal Deposit Insurance Corporation (FDIC). This can create complexities around compliance, taxation, and the transition of accounts from the acquired bank.
“Step one is purely from a governance standpoint of how you’re transitioning the business to your side,” Sharma explains. “Because credit unions are not taxed the same way as banks, the tax implications in any given year are not always clear cut.”
The rapid rise of credit unions as acquirers has not gone unnoticed by traditional banks, who are increasingly pushing back against what they perceive as unfair competition. Several states have filed lawsuits or passed legislation to block or ban these transactions, arguing that credit unions’ tax-exempt status and lack of requirements to serve low-income communities give them an unfair advantage.
“They’re pushing back and some have even banned them altogether,” Sharma says. “Credit unions are in a position to offer better service or better products – and that creates real competition.”
The battle lines have been drawn, and the future of community banking hangs in the balance. As credit unions continue to expand their reach through strategic acquisitions, traditional banks are being forced to rethink their branch strategies and compete in new ways.
“The ‘Starbucks moment’ of having a branch on every corner is no longer viable,” says Peter Longo, the vice president of digital banking at Finastra. “Instead, the opportunity for banks is to place branches strategically, where they become community hubs or can help address specific needs of the area they serve.”
This shift in branch strategy, coupled with the growing presence of credit unions, is transforming the banking landscape in ways that will have far-reaching implications for consumers, communities, and the industry as a whole.
The credit union acquisition wave is a disruptive force that is challenging the status quo and redefining the boundaries of competition in the banking sector. As the battle intensifies, the outcome will shape the future of community banking for years to come, with the potential to create a more diverse, innovative, and customer-centric financial services landscape.
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