A thoughtful response to CU Management magazine’s March cover story.
Why don’t credit unions capture market share? It’s in their DNA not to. In the March 2018 issue of CU Management, the topic of credit union market share was addressed in the feature article titled “Same Size Slice.”
The author noted that while credit unions are growing, market share, as measured by asset size, has remained relatively unchanged. There is a reason credit unions are not capturing more market share —it’s in their genetic make-up not to. Let me explain.
Both banks and credit unions are regulated by a similar set of rules relative to capital. Capital must be maintained as a percent of assets. Where does capital come from? For credit unions, capital comes from the annual profit taken from members (i.e., return on assets or ROA).
How can credit unions capture more market share? They have to grow capital faster than banks. How do you grow capital faster than banks? You have to take more profit from your members than banks do from their customers. In other words, credit unions will have to make a higher ROA than banks in order to capture market share. Generally speaking, credit unions take only what is necessary from their members, which suppresses ROA, and inhibits their ability to capture market share, as measured by asset size.
Now, clearly, there are specific examples of credit unions taking market share from banks, but as an industry at large, significant market share gains won’t be made until the profits of credit unions exceed those of their banking counterparts by an equally significant amount; the current regulatory capital constraint won’t allow it to be any other way.
Mike Higgins is a partner in Mike Higgins & Associates Inc., Prairie Village, Kansas.