The traditional financial industry is facing a quiet, steady drain of its lifeblood. While the "unbanked" population is shrinking, the "loyalty" of the modern consumer is fragmenting. Millennials and Gen Z—the oldest of whom are now 45—are systematically moving their balances away from traditional institutions toward "cool" digital tools and high-yield platforms like Rocket or SoFi. Even loyal Gen X customers are increasingly treating their primary bank accounts as "paycheck motels", a term coined by Ron Shevlin, quickly routing funds to wherever they earn the most.
To survive this shift, banks don't just need better apps;
they need scale.
The Untapped Reservoir of Retail Funding
Many banks have pivoted toward business banking to find
higher balances and margins, but the foundation of a community bank’s funding
remains retail deposits. Interestingly, the most robust retail deposit bases
are currently locked inside credit unions—institutions that are struggling with
their own scale issues and merging at a similar clip to banks.
While credit unions buying banks have dominated the
headlines and trade group lobbying, it is time for the industry to flip the
script. Banks can—and should—buy credit unions.
Industry Interest
I recently sat on an ABA panel at the recent ABA Washington
Summit about this very issue. Joining me were industry experts on such
transactions from law firm Luse Gorman and the ABA, moderated by Dave Daraio of
Maspeth Federal Savings and Loan Association in Queens. The message: let’s
pivot from lobbying against CU-bank deals to executing our own. It can be done.
Debunking the Myths of the "Impossible" Deal
The industry has long viewed bank-on-CU acquisitions as a
regulatory and accounting nightmare. And recent history is no help. But the
landscape has shifted:
- The
Legal Path Exists: Federal law (12 U.S.C. §1785) and NCUA regulations
(12 CFR Part 708a, Subpart C) explicitly provide the roadmap for a bank to
acquire the net assets of a credit union.
- Regulatory
Winds are Changing: The NCUA is currently rewriting its rules to make
charter conversions to mutual banks easier, and is potentially
"defanging" the poison pills of the past that they have wielded
to thwart bank-CU deals.
- The
Efficiency Edge: Despite their tax-exempt status, credit unions are often
less efficient than banks. For similarly sized institutions,
banks have historically delivered better financial performance, even after
paying taxes.
Overcoming the Capital Hurdle
The primary challenge is accounting. These deals are
structured as asset purchases where the credit union’s value must be
distributed to its members. While this can strain a buyer’s capital, it creates
a unique opportunity for:
- Stock
Banks: Their ability to raise fresh capital gives them an advantage in
absorbing these assets.
- Larger
Banks Buying Smaller CUs: When a larger bank acquires a smaller credit
union, the capital contingencies become negligible, making the deal
"cleaner" and faster to execute.
- Member-to-Mutual
Deals: The NCUA would likely be friendlier toward deals where credit
union members gain depositor rights in a mutual bank.
Call to Action: Who Will Step Up?
We are currently in a favorable regulatory environment for
deal-making. And I will confess that my firm would welcome the opportunity to be at the forefront of this deal-making. More important to readers, we cannot continue to ignore the fact that our retail funding base
needs a massive infusion of scale to compete with non-traditional providers while doing so profitably.
Credit unions have the deposits banks need, and many are
looking for an exit due to scale or succession issues or a way to provide more
flexibility to their members.
The tools are in the manual. The law is on the books. The
market demand is clear.
It is time for bank leadership to stop complaining about
credit union expansion and start executing their own. Who is going to step
up and lead the first major "reverse" merger of this new era?
~ Jeff
