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Market consolidation is a natural, ongoing process in many industries which can occur across the entire supply chain – particularly in mature sectors. In recent years, we’ve seen a wave of M&A throughout the cash cycle, from carriers to financial institutions and hardware manufacturers to processing firms. For credit unions, consolidation can drive cost savings through inter-organizational synergies. Equally, if misaligned, this can create inefficiencies and drain the resource of the combined organization.
The motivation for consolidation varies by transaction. Some firms are pushed into it and conversely, others are pulled. For the purpose of this blog – the second edition of the three-part series ‘Cash Management Considerations for Credit Unions’ – we will not explore the motivations behind consolidation in detail, rather the direct implications on cash management for the newly-consolidated credit union.
In the past decade, the financial sector has experienced widespread consolidation. This is particularly evident for credit unions. The market has seen a decline in competition while simultaneously expanding its member base. The converging nature of these two metrics signals market consolidation.
Per the NCUA, in Q3 last year there were a total of 4,645 active credit unions across the US. Since 2010 this figure has decreased by 38% from circa 7,500. In the same period, the total number of members served by credit unions has surged 65% from 84m to 139m.
Consolidation is well suited to the cash industry due to its operational characteristics – e.g. cash is considered a cost of service rather than a revenue generating asset. Naturally, credit unions can leverage economies of scale by increasing their volumes to realize efficiency gains and re-invest. This makes consolidation in the credit union market unique as it is predominantly driven by this singular reason. In 2023, 3 in every 4 mergers were cited for ‘expanded services’. 10 years ago, this wasn’t the case, with ‘weak financial condition’ being the most common reason at 56%.
In 2023 the credit union market experienced around 150 instances of consolidation. These transactions usually constituted a large institution acquiring a smaller one. Throughout the year, on average the acquired credit union represented 3.4% of the asset size of the acquiring credit union. As the market matures further, this trend will reduce, and more mergers will take place between institutions of similar sizes.
For many firms, consolidation is necessary to ensure long-term survival. However, consolidation becomes a concern when institutions prioritize the potential efficiency gains and seek growth simply for the sake of scale rather than to improve member experience.
Through our 25 years of experience managing cash for credit unions, we’ve worked with institutions transitioning through periods of consolidation and organizations growing in scale organically. Below are the most common pitfalls for cash management we’ve found.
Firstly, the most common issue is internal systems being ill-equipped for the increase in volume. This applies both operationally with cash forecasting and ordering, and also at the back office with reconciliation.
Regardless of the institutions current strategy for growth, all credit unions should deploy an operational strategy which is unique to them based on the characteristics of their member base. Having similarities in network and asset size does not guarantee similarities in characteristics which affect demand. If there are misalignments in the demand profile of the member base, this will reduce the efficacy of the operational strategy and ultimately increase costs.
A common issue we see when institutions scale is overstating the initial increase in volume at their branches after rationalization of nearby locations. Often, branch staff will increase their balance limits and order more cash in preparation. This, in turn becomes unutilized, sitting dormant across the network, increasing the cost of cash for the credit union.
To maximize the benefits of consolidation and avoid the cash management pitfalls, here are the key conditions to optimize for. Firstly, get the foundations right. Leave legacy software solutions in the past to truly utilize the benefits of scalability. It is pivotal that your internal processes can adapt to the step-up in network size.
Once these areas are optimized, then, hone your operational strategy. As network size increases minute misalignments can stack up to create significant additional costs. This includes multi-denominational strategy, recycler deployment, ATM technology and deposit functionality.
In the final part of this blog series, we will present an action plan as to how credit unions can remain optimized throughout your cash operation during this time of economic uncertainty and market consolidation.
