PYMNTS Intelligence: Why Credit Unions Are Merging to Sharpen Their Competitive Edge

The financial industry has become more competitive than ever as shifting economic conditions and the pandemic’s lingering effects make digital banking the primary means by which consumers interact with their financial institutions (FIs). More than three-quarters of customer experience leaders in a recent survey said that demand for personalized services intensifies in times of financial crisis, which the U.S. has been teetering toward since the start of the pandemic.

Credit unions (CUs) have traditionally relied on member relationships to compete with their larger cousins, but the shift to digital has made these relationships harder to maintain. This month’s PYMNTS Intelligence examines why CUs are turning to mergers to pool their resources and survive in this rapidly changing environment.

Credit union mergers have been on the upswing in recent years in response to weak financial situations.

Q1 of 2023 alone saw 33 CU mergers approved by the National Credit Union Administration (NCUA), continuing a trend that has been growing ever since the pandemic began. Q3 2022 saw 58 mergers, for example, a significant growth compared to the 43 consolidations in the same quarter of 2021 and 34 during this time period in 2020.

The reasons for these mergers have varied by case, but a clear pattern of financial distress has emerged. Four of the Q3 2022 mergers were motivated by CUs’ inability to obtain officials, three by poor financial conditions, two by unsustainable lack of growth, and one each by poor management and lack of sponsor support. All of these can be traced back to financial hardship of some degree.

It is not just small community credit unions facing this hardship: Multistate organizations with billions of dollars in assets are also struggling. Q1 2023, for example, saw the $1.8 billion Northwest Community Credit Union in Oregon merge with the $2.2 billion Twinstar Credit Union in Washington state, as well as the merger of the $1 billion RTN Federal Credit Union and the $1.3 billion Merrimack Valley Federal Credit Union, both in Massachusetts. These institutions cited a need for expanded member services as their motive for joining forces.

CUs’ efforts to compete through mergers are working well.

Federal Reserve Governor Michelle Bowman noted that regulators will need to reevaluate how they oversee CUs, as their traditional role as banking service providers for select groups of consumers is being blurred by the expansion of their member bases.

“Credit unions today are much more likely to compete directly with traditional banks offering the full ‘cluster’ of banking products and services than they did in 1995, which supports the argument that our analysis needs to give more weight to competition from credit unions,” Bowman said at the 2022 Community Banking Research Conference in St. Louis.

This concern from regulators highlights just how successful these CU mergers have been at meeting banks and FinTechs on a competitive level. If traditional FIs and regulators feel they have underestimated the competitive threat from CUs, then the CUs’ efforts are definitely working.

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