Why CUs Need to Find Ways to Cut Costs07.08.2019
The typical credit union’s business model is big, heavy and cumbersome—high operating expenses supported by hefty fee income—and it will no longer carry them forward as competition becomes much more nimble and efficient, warns one economist.
“CUs have a heavy frame of expenses—over 20% higher than their competition—yet offset these high costs with service charges on deposits more than twice banks,” explained Michael Moebs, economist and CEO of Moebs $ervices. “CUs have an outstanding brand. Yet, the costly operational expenses offset by service charges cannot go on forever. As the economy gets better, credit unions need to reduce both their expenses and fee prices. Anyone in deposit gathering needs a sharp strategic eye on expenses and fees, for this is the future.”
Warning in the Trend Line
According to Moebs, there’s a waving red flag to be found in one particular trendline. He noted that 2019 is the year in which the total number of banks will likely exceed the total number of credit unions. As of year-end 2018, there were 5,213 banks and 5,478 CUs.
That’s a big reduction from 1969, when the Moebs Expense and Fee Study shows there were 42,108 banks and credit unions, the peak for the total number depositories. By the end of 2018, that number was merely a quarter of that at 10,691. (The Moebs’ number excludes fintechs, corporate CUs, credit card banks, territorial FIs, trust companies, banker’s banks, and industrial banks.)
“In the past 50 years 74.6% of all depositories are gone,” said Moebs. “So, moving forward, you better have low expenses and appropriately priced fees, or have an exit plan.”
The Moebs study (see graph) shows that with an average 3.07% expense-to-assets ratio, credit unions are 19.5% above the average for all FIs, and 22.3% higher than their bank competition. Fintechs—with fewer branches and people and very modern IT systems—operate at less than 2% expense/assets.
Deposit Service Charges
Looking at service charges on deposits, the Moebs study show banks are at 24 basis points, while CUs are 254% higher at 61 BPs.
“To strike an even more growth-oriented strategy, CUs need to lower deposit fee price which will stimulate volume and make them more revenue at the same time pleasing their members with lower prices—and banks need to do the same,” Moebs said.
Moebs emphasized that if credit unions reduce expenses, they can reduce the price charged for loans and fees and raise rates on deposits.
“High expenses reduce net income. Less net income reduces the amount transferred to capital. Less capital means less growth,” said Moebs. “Ultimately, the marketplace—in the form of consumers and businesses—want the same or more service and a lower price. Users see technology reducing the cost of banking and they wonder why the price of a loan isn’t lower, or the price of a fee is so high, and rates on deposits are too low.”
A Target Number
Moebs urged credit unions to reduce expenses by 20% to have the capital for growth.
“This is survival for many depositories and success will go to those who become more efficient and pass the efficiency back to consumers and business users in the form of lower prices,” said Moebs.
Reprinted with permission from CUToday.info, a leading source of news and resources for credit union decision-makers.