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The CU2.0 Podcast
This podcast explores contemporary, critical thinking and issues impacting the nation's credit unions. What do they need to be doing to not just survive but prosper?
The CU2.0 Podcast
CU 2.0 Podcast Quantum Governance's Paul Dionne on a Board's Fiduciary Responsibility When Merging
On today’s show is Paul Dionne, chief strategy officer at Quantum Governance, L3C.
What’s an L3C? Good question: It’s a low profit limited liability company and, in the case of Quantum Governance, that means it “help[s] nonprofits, credit unions, associations and foundations realize the full potential of their missions.”
The company’s work with credit unions revolves around governance - especially issues involving the board and organizational leadership - and strategic planning.
That’s why a key focus of this discussion is a credit union board’s fiduciary responsibility especially in the case of a merger. When a merger is on the table, a board member’s responsibility is to make decisions that are in the best interest of the membership, said Dionne.
What’s that mean? How can a board member go off course?
In the show Dionne, who worked at Filene before joining Quantum Governance, tells the good, the bad and the ugly.
Listen up.
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Welcome to the CU2.0 podcast.
SPEAKER_00:Hi, and welcome to the CU2.0 podcast with big new ideas about credit unions and conversations about innovative technology with credit union and fintech leaders. This podcast is brought to you by Quillo, the real-time loan syndication network for credit unions, and by your host, longtime credit union and financial technology journalist, Robert McGarvey. And now, the CU2.0 podcast with Robert McGarvey.
SPEAKER_02:On today's show is Paul Dion, Chief Strategy Officer at Quantum Governance L3C. What's in L3C? That's a very good question. It's a low-profit, limited liability company, and in the case of quantum government, that means it, quote, helps nonprofits, credit unions, associations, and foundations realize the full potential of their missions, close quote. Thank you for joining us. That doesn't mean best interest of the board member, nor does it mean best interest of the executives of the credit union. It's the best interest of the membership. What's that really mean? How can a board member go off course? That's what we talk about in this show. And Dion, who worked at Filene before joining Quantum Governance, tells the good, the bad, and the ugly. Yep, the ugly. Listen up. Now, when you talk with credit unions, do most of them have something that actually looks like a strategy?
SPEAKER_01:Yes and no. A lot of credit unions have a strategy. They think quite hard about it and they have a plan. There's another group of credit unions that I wouldn't say they have a strategy. They call it their strategic plan, but it looks more like a business plan, which is like, hey, this is what we're gonna do next year. And here are the targets that we're gonna hit. And it's more like a business plan with objectives and metrics.
SPEAKER_03:When
SPEAKER_01:I work on strategic planning with clients, we do try to first come up with what I would call a strategy, which is about differentiation, which is about having a vision for bringing that to light, for fulfilling your mission, for really having a long-term plan to be successful and sustainable. And so... Yeah, that's a challenge, I would say, for credit unions is some of them are maybe not as strong at strategic planning as they could be. in part because I think one of the challenges for credit unions is actually it's a sector challenge, right? So if you are in another business, line of business, you can really focus on differentiation and have a vision. So take Apple, for example, right? They can come up with something like a new product, the iPhone, and hey, they're so fancy and special, and that's what makes them great. But for credit unions, it's a commodity market, right? So A loan is a loan. I mean, whether you get it from a credit union or a bank or Rocket Mortgage, it's very easy for a consumer to just focus on price, right? Like, hey, I'm going to go for the best rate and that's how I'm going to make my decision. So if you want to differentiate as a credit union, it's much more challenging than if you're Apple or if you're Ikea or, you know, right? Other sectors have a lot more opportunities for you to differentiate and have a strategic plan around that differentiation. For financial services providers and consumer finance, it's much more challenging because the products you're providing are kind of all the same, right? They're really commodities. And so I do find a lack of strategic thinking and strategic planning in some of our credit unions, but part of it is the challenge of the sector that they're in. It can be really hard to find a way to differentiate because A loan is a loan, right? A deposit is a checking account. I mean, they're all kind of the same, right? So how do you make them-
SPEAKER_02:Well, they're highly regulated, so they have to
SPEAKER_01:be- And
SPEAKER_02:that too. Right. Absolutely. Yeah. That's the other piece of it. Yeah. I can't start a credit union. This is a way you've never done checking before. Yeah. Yeah. The NCUA would- get very mad
SPEAKER_01:at me it would shut you right down right it's also
SPEAKER_02:particularly i was actually doing check checking in a way they'd never seen
SPEAKER_01:before yeah exactly exactly and so that and that's the other major uh restriction or inhibitor for credit unions to be truly strategic in the way that the strategy professors at all the fancy business schools would want you to be
SPEAKER_02:go back to jobs it's an interesting thing to ponder when he introduced the iphone I vividly remember this. His message was all about what this device will do for you.
SPEAKER_03:He
SPEAKER_02:wasn't talking technology. Microsoft always preferred to talk technology. This has X RAM, so much memory, blah, blah, blah, blah, blah, blah. Jobs never went there. He always talked about and did this very clearly with the iPhone. This is what this will do for you. This app will make sure you never get lost again. You. You heard that and you said, wow, I really want this thing.
SPEAKER_01:Absolutely. Yeah, no, the value proposition was really well thought out and it gets you on an emotional level. Do you know what I mean? I mean, obviously there's some people that are gearheads that care about the bells and whistles, but most of us, it's emotional, right? It's like, oh my gosh, this is this game-changing device that I know where my kids are, and I know I have a map on here, and I can take pictures with it. He spoke to the emotion, and I think that was very,
SPEAKER_02:obviously, groundbreaking. We've become so attached to our phones. I was reading an article today, oh, you're going overseas, maybe you should take a burner phone. And I am going overseas this summer. I think, should I have a burner phone? And that struck me as about as comfortable as going naked through the airport.
SPEAKER_01:Yeah, yeah. I don't know if I would do that
SPEAKER_02:either. Every financial transaction, I get a text message about, yeah, I get all this stuff on the
SPEAKER_01:phone. Yeah, yeah, absolutely. Absolutely.
SPEAKER_02:Really, it would be like going naked. And TSA would be a little puzzled when I showed up naked. So we do get involved in these things. I come back to so many credit unions. And when I talk to them, I ask, so who do you compete with? And they could tell me answers. And almost always, I think the answer is wrong. It's often the community bank down the street, blah, blah, blah. I say, no, actually, it's Chase Manhattan, a bunch of fintechs. That's about it, really.
SPEAKER_01:Actually, Robert, I take it a step further. I say the same thing as you, and then I take it a step further. Here's what I do. Let me know what you think. I also say you're competing with Amazon. Yeah. And what I mean by that is, obviously, Amazon's not providing financial services anymore. yet. You're competing with them in the sense that when people open up their banking app or their credit union app, they're expecting Amazon level quality and service, right? They're expecting Apple level quality and service when they open the app. It's got to be functional. It's got to be easy. It's got to be fast. And that's why you're competing with them because people are looking for that when they open up your app.
SPEAKER_02:Yeah. Many credit unions really alter at that. I'm I remember I was trying to open up an account with a credit union in Phoenix when I moved here. And I couldn't do it online. And I called them up and said, they said, oh, just got to come in and finalize a few things. Now, some years before that, I'd opened an account with Chase online. Never said put in a branch.
SPEAKER_01:And
SPEAKER_02:that
SPEAKER_01:was years before. But of course, as you know, Chase probably spends more on their online digital offerings. They spend more on the first minute of the new year than credit unions spend in a year, right? Most credit unions. Oh, I
SPEAKER_02:understand that. Years ago, I talked to the guy who was in charge of the project to create the first mobile app for Chase. And although he didn't put it quite this way, the way I interpreted it, he had an unlimited budget to go out and hire app developers, which he did. Yeah,
SPEAKER_01:but that's the challenge for credit unions on the digital front, right, is they have to keep up with expectations. I mean, the Apple card is the one I use as an example, you know, and I think they're actually using it in their marketing now. You can have your iPhone and be in line at Starbucks or the coffee shop and apply for the card and get approved and use it when you get to the front of the line to pay for your cup of coffee. You know, it's that fast to get approved, right?
SPEAKER_02:Well, that's that fast for years. So many credit unions don't get it. So why would I apply for a credit card at a credit union? It's like it's back to 1960. We're going to mull on this for a month or so. Why, man? You don't have to do it that way anymore.
SPEAKER_01:That's the challenge.
SPEAKER_02:So let's talk now about mergers. Now, why are credit unions merging? Number one. Number two, why? When do you think it's a good thing? Number three, when do you think it's an awful idea?
SPEAKER_01:First question, why are credit unions merging? There's no simple answer. It depends on the context and what's going on. Some credit unions are merging to grow. They call it inorganic growth, right? So you can grow your credit union through taking deposits and making loans in the traditional way, the sort of organic way. if you want to get much larger, much more quickly, you can merge, right? You can acquire.
SPEAKER_02:But both state employees and maybe federal do not have policies of merging to grow. They both grow organically. Organically, yeah. And Pentagon Federal has merged with anything that was loose on the game board. Right, right. And it is not kept up at the same pace
SPEAKER_01:of growth. Exactly. And I think that's kind of the point that I'm trying to make, which is, It depends on the context, right? So some credit unions say, Hey, this is the way we're going to grow. Others are like, we're going to focus on organic growth. Some have a mixed approach. And so that's one of the potential reasons why credit unions are looking to merge, right? They want to grow. They want to get scale that you hear that a lot. I'm a little skeptical about that one, but that's one of the arguments that people make. Sometimes it's valid. Sometimes it's not like the reason I I'm skeptical is because I work with small credit unions and filing has done research on this. There are a lot of small credit unions on there that are beating the big credit unions on their performance, obviously by by percentage and with their ratios. But they're being large credit unions on performance and they're thriving and they don't have, quote unquote, scale, but they are able to make it all work. And so, you know, that's that's the scale argument is is It is what it is. Credit unions are looking to merge and acquire because they want to grow. Another reason is the sort of distressed credit union that maybe is struggling with leadership succession and transitions at the board level or at the C-suite level. So that's another factor. It's like, oh my gosh, we can't do this anymore. Or we're struggling financially or some sort of distress at the credit union where they're, hey, it's time for us to find a partner. and relieve ourselves of our burdens, I guess, for lack of a better word. So that's another reason we see mergers. Sometimes it's a different strategic play, and we're seeing this more often, which is credit unions are buying, or sorry, they're merging or acquiring others, and this includes banks, in order to expand their field of membership, right? In order to expand their market. So you merge with a credit union across state lines, and then all of a sudden, hey, you can do business in that new state, right? So that's another thing that we see. Those are the big three that come to mind. I don't know if I missed any, Robert. Are there others that people talk about? I may have missed other reasons.
SPEAKER_02:Well, there's what had been historically the most common reason, which is, and this is kind of an elaboration on your second point, just drastic. The most common reason for merger 20 years ago was NCUA called up a big credit union CEO and said, we're about to conserve this damn little credit union. Would you please merge with it so we don't have to do that completely? conservative thing.
SPEAKER_03:Right. Right.
SPEAKER_02:And the CEO of the big credit union, Navy federal, I believe has done this. I know state employees did it a few times. I'll pay fine. Right. No problem. No problem. Yep. Yep. So that those will continue those kinds of mergers. I call them shotgun marriages.
SPEAKER_01:Exactly. Exactly.
SPEAKER_02:The scale one. I've never, I, you know, as I say to people, I hear this thing, I hear it, but you know, no matter how often you merge, You're never going to come on the radar screen of Jamie Dimon at JPMorgan Chase. You're not going to get big enough. There are not enough credit unions. If you merged with Bank of America, then he'd notice you. Exactly.
SPEAKER_01:Yeah. And the way things work now with the ecosystem of partners, you know, CUSOs and other providers that partner with credit unions, all the vendors, right? So I'm in addition to working at Quantum Governance, I should share this. I serve on the board of a small credit union in Illinois called Rock Valley Credit Union, 165 million in assets. I've been on the board for just over a year now. And we have a lot of vendors who are partners of the credit union that allow us to have an app that allow us to have Lots of online provisions for members. And so even at the asset, this, what by most accounts would be, hey, this is a really tiny credit union, 165 million assets. We're doing fine, right? Financially, we're doing great. And we're able to provide quite a bit of digital offerings that you would expect only happens at the very large asset size credit unions. But no, now with the vendor ecosystem we have, even small credit unions can be pretty competitive.
SPEAKER_02:And once I realized what QZOs were, It occurred to me, I see CUSOs as really the secret weapon of
SPEAKER_03:credit
SPEAKER_02:unions. I see it as dramatically more important than tax exemption because CUSOs do enable credit unions to get technology that's much better than they would get if they were just operating on their own.
SPEAKER_01:No doubt. No doubt. Yeah, I agree. I think they're a fantastic resource for credit unions. It's part of the cooperative principles, cooperation amongst cooperatives. And so it's one of our strengths, right? It's one of our powers.
SPEAKER_02:And now that going public is ever more difficult for small fintechs, more of them are looking at QZones. That will not be a permanent fixture. Going public will come back in vogue at some point. But right now, it's a great time to be looking at QZones because all kinds of fintechs want to have a QZone.
SPEAKER_01:Yeah, I think it makes sense. It's a smart move for them to get access to capital. And it's part of the, you know, if you think historically of that sector, that industry, the fintechs, it's still relatively young-ish. And so this is still the moment where you have the sort of Cambrian explosion of lots of startups, lots of small new companies. And so, you know, this is part of the cycle, right? At some point, I don't know when it is, 5, 10, 20 years from now, they're going to start to consolidate, right? And this is what we've seen historically in most business sectors. You have this early Cambrian explosion, lots of fintechs, right? And then over time, consolidation, consolidation, consolidation. So that's when you'll see the public come back.
SPEAKER_02:I remember in circa 1983, 85, there were probably a dozen or more makers of personal computers running MS-DOS. Right, right. And over time, that number of manufacturers really got chipped down. And we will see similar, I think.
SPEAKER_01:It's part of the history of pretty much every business sector. So very likely, we'll see the same.
SPEAKER_02:One area where I differ from some people, including the regulators, But then again, you know, I've spent a lot of time talking with Jim Blaine, so I'm used to differing with the regulator. Yeah, it's a week without a difference with NCUA is important. Yeah, NCUA is implementing this new, you must file succession plans. You're probably doing that with that small credit union that we've got in the process. Yes. One in Illinois. Yes. And I said, I've said, I've gone on the record, if I run the board of a small credit union, For a succession plan for CEO, I'd say we're going to merge out. That's my succession plan. Interesting. I can't get the answer from the regulator. I've asked experts in that field. Would NCOA disallow that as an answer? Their answer seems to be, we don't know. Yeah, that's what that would be. This all is new. So there's not a lot of track record here. But I would write, go merge out of existence. That's the plan.
SPEAKER_01:Yeah, so I don't know either because they haven't, you know, it goes into effect next January. If it in fact does, it sounds like it might be in question again. Yeah, we don't know how they're going to enforce it or interpret it. So that remains to be seen. I don't know why. Who's
SPEAKER_02:opposed to this, really? It's harmless. It's a little time consuming. But it's not binding. So in other words, you file this plan and the NCUA doesn't put a gun to your head saying, hey, wait, wait, wait, wait. When you filled out this plan, you said your plan for filling the CIO job was X, Y, Z, and now you're not doing that. So they're not going to do that.
SPEAKER_03:It's
SPEAKER_02:a harmless exercise. All public companies of any size do this.
SPEAKER_01:Yeah. Yeah, I think that, yeah, the idea from the NCUA is, hey, let's, you know, they see the distressed credit unions, they see the mergers as a result of not doing the succession planning, right, or not really having an opportunity to either a board or a C-suite or both that just are not, are tired and ready to move on. And so they're thinking like, hey, let's have this succession planning sort of requirement as a way to nudge people to go through the motions, right? And I think a lot of credit unions might check the box, right? They'll just go through the exercise and feel like it's non-binding. A number of the clients that we work with who are doing it take it seriously, right? And we found it's been beneficial for them, which is to say, hey, let's really give us some thought. And sometimes the board kind of goes, hey, CEO, you know, maybe you need to spend more time training, you know, developing the people on your team, right? Thinking about your C-suite, not just for what they're doing today, but what they're going to do in the future for the credit union or for others. And so sometimes the exercise can be productive, right? It can help you identify some gaps or some opportunities to really improve the way the team's being developed and how people are thinking about their futures. Well,
SPEAKER_02:at a sizable publicly held company, A big part of the CEO's job is succession planning.
SPEAKER_03:Yeah. Oh, yeah.
SPEAKER_02:Yeah. He or she is supposed to have two or four or pick a number. Right. Candidates that are being nurtured, developed, candidates that the board could look at and make their own decisions about. Right. Because the board will make that decision. The CEO, of course, won't. Yes. But it's the CEO's job to do that nurturing of the successor.
SPEAKER_01:Yeah.
UNKNOWN:Yeah.
SPEAKER_01:And if you think about the rule from a certain way, you can say this is an opportunity for the board to say, hey, CEO, tell us about what you're doing to nurture your team. Right? Exactly. And have that conversation. And that can be, you know, not everybody. I'll just be right. Some are probably already having that conversation and doing it, but some are not. And so this is a chance to kind of
SPEAKER_03:go, hmm,
SPEAKER_01:let's talk about that. Right. And see where things are.
SPEAKER_02:Well, that Illinois credit union. might because many institutions are in this position. A long time CEO retires or dies and they say, okay, let's put out a listing for the job. And no one seems to apply for this job that pays$75,000 a year and you can make more managing a local branch for Chase. No one wants it. There's too many hours, too much responsibility. And you got to work Saturdays often. You weren't planning on that. It's yeah. So yeah. And the, you know, they just didn't do any thinking about this. So I see the, the NCUA thing at least as prompting thinking.
SPEAKER_01:Yeah. That's, that's the way I see it too. It's a nudge to kind of go, Hey, go through the motions, do the exercise, have those conversations and, Figure out what you want to do, what's going to happen, because it's going to happen, right? Nobody's here forever. And as you pointed out, there are real challenges, especially for smaller credit unions, which is to say, look, if you're a billion plus credit union, you got a CEO opening, you go get a recruiter and you have a slate of very strong people. professional candidates who want to come work for you, right? But if you're a small credit union,$50 million in assets, and the salary's less than$100,000, and the hours are really onerous, and you have to live in, right, I'll use my hometown, you have to live in Beloit, Wisconsin, not everybody necessarily wants to do that. And so that's a tougher, that's a tougher road to hoe, right, to prepare for and to be able to be successful. And, you know, frankly, that's it doesn't always work out right for the best. And that's when we get back to the merger and acquisition conversation, right? And that's... I think
SPEAKER_02:some credit unions try because they're naive. They don't realize there'll be no interest. Yeah, yeah. And after six months of nobody with any qualifications to speak of applying for the job, then they say, okay, we got to just merge out of existence. This is just not working.
SPEAKER_03:Yeah, yeah.
SPEAKER_02:And again, I could see the NCUA thing I would hope fewer institutions would find themselves in that place. Strangely, it's okay by me if you consciously say, our plan is to merge, period. I'm more irked by the accidental, we weren't planning to merge, but geez, that's our only real option now that we see the game board. Do you think there should be fewer mergers? More mergers? What do you think? It's
SPEAKER_01:an economic market, right? It's going to do what it's going to do. I do think that it's important for the credit union movement to have... a diverse collection of credit unions. And what I mean by diverse is like lots of different asset sizes, lots of different types of membership bases, lots of, you know, just I want to see a thriving, diverse credit union movement. And so that would make me want to see maybe fewer mergers. Part of the reason for that also is that there's the de novo challenge, right? There just aren't a lot of new credit unions born these days for various reasons. And so the mergers and the occasional closure by the NCUA means that the overall number of credit unions is shrinking. And so that's a concern that people have. It ties into advocacy questions, right? The question of like credit unions being able to maintain the tax exemption, which is a big topic this year. It's like if you don't have a diverse group, if you don't have a lot of small credit unions that really are demonstrating the mission overall, it can be more challenging to make that argument that, no, no, this is a different type of beast, this financial beast. offerings that credit unions do is really very different from what others are providing, and it's worth maintaining the tax exemption. So that's a reason to say, hey, maybe we should pull back. But at the end of the day, it's its own beast. I mean, credit unions are going to do what they're going to do. We're kind of on the sidelines. It doesn't matter so much what I think about where the mergers are going. It's a market. It's going to go.
SPEAKER_02:I agree. I also think a lot of mergers aren't particularly, they don't get the result people say they're going to get. And I think that's pretty well documented. So why are we eliminating this entire charter? And most small credit unions, I've said this many times, 90% of credit unions wouldn't pay a penny in federal income tax if they only hired a decent accountant. They just don't make enough money, period. They can go walk the hill all they want. God love them. I'm sure Pentagon Federal is happy to see them out there. It's wonderful that you're doing this for, quote, the movement, but close quote. But really, you don't have any skin in this game. Yeah. What do you think about credit unions take the name credit union out of their name? This is a little minor trend that's been going on for some time.
SPEAKER_01:Interesting. Yeah. You're right. I've noticed that. Those that are changing their names seem to be dropping the credit union. I'm not sure. I think I understand where they're coming from. Again, I don't even know that. I haven't had conversations with folks about it, but... my guess would be that the word union gets misunderstood. You know, people think maybe this is some kind of labor union or that I have to be...
SPEAKER_02:And historically, many of them were.
SPEAKER_01:Yeah. And so I wonder if that's part of the impulse is to move away from that misunderstanding. I think there is a sense, there's been research on this, that people have a kind of a preconceived notion that credit unions are like well that's they're sort of the first steps when i you know i'm part of the the school district and there's a credit union for our school district employees and so i'm a member of them but when i grow up i'm gonna i'm gonna join a real bank you know like that it's like a it's like a starter bank and then eventually you're going to grow up and become a bank with a big bank so that maybe they're trying to avoid that piece of it you know i leave that to the marketers there i think they i'm sure they've done their their market research on why they're looking to drop it out.
SPEAKER_02:Historically, credit unions and go back SNLs when we still had SNLs, had a limited repertory of services that they offered. Whereas the banks, the Chase Manhattans, the Citibanks, et cetera, had many more services they could offer legally. That's changed where$100 million credit unions can actually do international wire transfers if he wants to put that into place.
SPEAKER_01:It
SPEAKER_02:can do real-time payments if they want to do that.
SPEAKER_01:Exactly. It goes back to our earlier conversation with all the vendors out there in the QSOs. You can do wealth management. You can provide insurance services through TrueStage. There's all kinds of stuff that you can do with a small credit union now that was not the case in the past. And I think the public perception hasn't caught up with that?
SPEAKER_02:I know CUNA has run these projects off and on over the years, trying to educate the public about credit unions with no apparent success that I can see. I don't know why it's that hard, to be honest. I mean, it is a different kind of banking. It's banking for the people rather than the shareholders. Right,
SPEAKER_01:right. Yeah, no, and I think it's compelling. I think it's... actually, you know, this is one of the challenges I would point out, which is the younger generations and having them become more aware of the credit union difference. And I think it would be really compelling for the youngsters, right, to kind of go, hey, I'm not going to be part of this for-profit system. I can do something that benefits my community and benefits me. And, you know, I think the cooperative model is a sustainable one and a long-term, really powerful option for the younger generations. And we've We still have to figure out how to do that because we're not bringing them in yet. Still a lot of work to be done on that front.
SPEAKER_02:Well, I'm told that there's some people are seeing signs that the younger generation is moving away from the money center banks, which they had historically flocked to because the money center banks were very, very good at recruiting them as customers. Yeah. Blanketing colleges like Beloit College with credit card offers. Boom. Right. You want a credit card? It's a terrible thing to give an 18-year-old. Here's this$5,000 credit limit. God, I would have caused so much damage.
SPEAKER_01:Oh, yeah. Well, I've seen it. I worked at Belay College as a staff person, and I saw the damage. It's rough.
SPEAKER_02:And I wouldn't have done it thinking criminally. I just would have been stupid. Oh, you got to pay this back someday? Oh, jeez. Oh, and there's this 18% or 22% interest? Oh, my heavens, what's that?
SPEAKER_01:Yeah, yeah. I don't even know what that means, but I'll figure it out. later.
SPEAKER_02:So, but my understanding is the kids are now gravitating more towards FinTechs.
SPEAKER_03:Yeah.
SPEAKER_02:But that does offer credit unions an opportunity to get in there because supposedly a lot of kids are responding to social messaging. If you go to any of the demonstrations, political demonstrations that are happening across the country right now, there's two groups out there. There's kids and then there's old people.
SPEAKER_01:Yeah.
UNKNOWN:Yeah.
SPEAKER_01:Yeah. Some of us working stiffs got to be in the office. Right. So even when it's Saturday, even when it's a Saturday. Yeah. Yeah.
SPEAKER_02:Still has two groups.
SPEAKER_01:Well, two things that come to mind from that, Robert, is like the marketing looks different. Right. You got to you got to talk to them where they are, which is it's not even Facebook anymore. It's tick tock. And, you know, you've got to be where they are, where they are on their screens. And it's a different marketing approach. So that's one of the challenges.
SPEAKER_02:Yeah, but most credit unions of any size, probably not the one you work with in Illinois, but most of them do have a social media expert on staff. And it's usually a kid. Usually, oh, hey, you're the youngest person in the room. Hey, you're our social media expert. Right, that's right. Yeah, even if the kid majored in the languages of antiquity in college. No, you're the social media expert. I think too many credit unions just don't try hard when it comes to that young population. They all talk about doing it, but they don't do it that hard, I don't think. So will there be a credit union movement 20 years from now? A theory I've been hearing, and I'm not putting this forth as the commonly held theory, is that what we're going to see is a world where there will be small credit unions, the inclusive type of small credit unions, And then they're going to be monster credit unions and there ain't going to be much in the middle.
SPEAKER_01:Interesting.
SPEAKER_02:Yeah. So middle is like a billion to 300 million. It's where most credit unions are today.
SPEAKER_01:Yeah. Yeah. Yeah. I suppose. I think that's
SPEAKER_02:possible. Yeah. At first I heard it and I said, that's ridiculous. That's where most credit unions are. And I thought, huh. The big credit unions will cherry-pick mergers with these ones in that group. It'll be Darwinian.
SPEAKER_01:And the small ones that are running a good shop, that are thriving, are not going to see the need, and they'll just keep doing their thing.
SPEAKER_02:You look at the staffing and the payroll, the small ones don't spend a lot of money that they don't have to spend. So they can compete on pricing better than you might think.
SPEAKER_01:Oh, yeah. Oh, yeah. And the other thing that this is not, this is very common for smaller ones. It does exist for big ones, but less so, is they have less competitors because they're lending B and C and D paper. You know what I mean? They're going deeper down. They're lending to people who got turned away by Wells Fargo, who got turned away maybe by the bigger credit union because they don't have a great credit score. And then the small credit union is like, hey, we'll work with you. Tell us what your situation is. What are you trying to do? So they have a little niche that they're exploiting, that they're working, not exploiting, that's not the right word, but they have their niche that has fewer competitors so they can do really well in there. And then, of course, if you help somebody, somebody who doesn't have a good credit score, and you're the only one in town that's going to give them that auto loan, you have a very loyal member for a very long time, right? If you say, hey, we'll work with you, we'll make this happen, they're much more likely to stick around with you for a long time. So that's where the small ones can, I think, be successful and continue.
SPEAKER_02:I knew CEO of a small credit union in California's Central Valley, which is very agricultural.
SPEAKER_03:Mm-hmm.
SPEAKER_02:When he had time, he'd stand in the lobby, talk to people, often steer the conversation to their car, ask them where they financed it, how much, what their rate was. They had often gotten it at used car lots
SPEAKER_03:and
SPEAKER_02:were paying astronomical rates because the business plan for those used car lots is making high interest rate loans. It's not moving cars. Cars are just the thing that the loan happens to be attached to. Right, right. And he would say, oh, you're paying 20%. Come in here. I think I can get you down to 14. And that'll save you 60 bucks a month. Does that sound good to you? For many of these people, 60 bucks a month was worth spending a half hour going over this paperwork.
SPEAKER_01:Yep, exactly.
SPEAKER_02:But that guy was also living, in my mind, the credit union mission. That's right.
UNKNOWN:Okay.
SPEAKER_02:you're getting screwed on this auto loan for that used car dealer. Let me see if I can help you out. Exactly.
SPEAKER_01:Yeah. And I'll remind you of the example you gave earlier from Navy Fed, right? So it's not only small credit unions that can do that, right? Right. Any credit union can do that. Well,
SPEAKER_02:I don't see the CEO of Navy Federal standing in front of me. And if he or she is doing that, I hope they get in touch with me. I want video.
SPEAKER_03:That's fair.
SPEAKER_02:Yeah, true. But I'm not sure I really see that as a terribly great use of their time either. Yeah, yeah. It's, you know, when you're running$100 million cutting, you got some time you can kill talking to people in the lobby.
SPEAKER_01:I have more to add on the mergers. One of the things that we had, that I prepared for that we had as a topic was the sort of when it comes to considering a merger and acquisition from the perspective of the board, like the fiduciary obligations of the board members. And I think that's worth noting just because sometimes board members need to be reminded, right? when it comes down to making a any decision frankly that a board makes they have to be acting and this is written in the statute right they have to be acting in the best interest of the membership right so that it's not the shareholders right it's a member-owned cooperative and so board members have a fiduciary obligation to make decisions in the best interest of the members not in their own self-interest not in the interest of the the CEO or anybody else. It needs to be what's going to be best for the members. And so it is important for them to do their due diligence and ask important questions and make sure that they're voting in the interest of the members. And so that kind of addresses one of those challenges with mergers and acquisitions where we see sometimes so-called bad mergers where people are kind of like, wait a minute, was that really good for your membership to do that? And sometimes we see the outcomes are not positive. So I think it's important to remind board members of that obligation. The other thing I wanted to talk about that folks don't often consider when they're thinking about mergers and acquisitions is having a plan for continuity of governance, right? So oftentimes when you're doing a merger and acquisition, there's an exchange that takes place, right? There's a new board that gets composed for the new credit union, and sometimes it's a mixture of folks from the two previous entities, right? People usually take that for granted and they take it as a, oh, well, you know, send us, you know, it's part of the negotiation. We'll take two of your board members and we'll add them on. And it's not something that gets carefully thought through. It's kind of like the succession planning conversation we had earlier, right? And so I like to remind people that you want to be intentional about your board composition. You want to be intentional about who you're going to bring on from the other side and why and and make sure that you're aligned when it comes to mission, when it comes to strategy. when it comes to your approach to governance. And so there is a merging of the cultures of a sort, and people don't always consider that. A lot of times they're just focused on the numbers and focused on what's on the other side in terms of the new credit union. But the governance piece is important, and I would want to remind people to pay attention to that as well.
SPEAKER_02:I know more about mergers in the publicly held company sector for various reasons. And in the publicly held company sector, I learned this years and years ago, everybody says this is a merger of equals. It never is. Never. Never. There's always one company driving the bus, and the other company gets a few seats on the bus, and that's about it. Don't ask for more, because you ain't going to get them anyway.
SPEAKER_01:I agree. I agree. And the counterfactual is... if it was a true merger, would you ever have any chance of being successful, right? I mean, you got to have one driver. You got to have one vision, one strategic plan, one culture. And so it's got to be more of an acquisition than a merger, let's be honest.
SPEAKER_02:And I think to some extent, we see that with credit unions too, where they talk a good game of merger of equals. But if Rarely is.
SPEAKER_01:At the end of the day, it's an acquisition. I think merger sounds nice, and it's a good game. I agree with you. But you're not going to have two CEOs. You're going to have one CEO. You're going to have one board, right? And so, of course, most of the time, there's some level of blending, right, of the groups. But there's going to be one credit union on the back end.
SPEAKER_02:Oh, I know Fortune 500 mergers that occurred. because it was a talent acquisition where the big company looked and said, man, there's some really talented people. We want to get them working for us. And they would get signed employment contracts before they signed the merger papers.
SPEAKER_01:Yeah,
SPEAKER_02:sure. And so it happens. It definitely does happen. Now, go back to your first point, fiduciary responsibility board member. I'm a board member. Now, I have a show I'm posting with Frank Diekmann. Well, he was founder of CU Today. He's been covering, as a journalist, credit unions for, I don't know, 30 years, 40 years, a long time. And he told me there were many cases, documented cases, where there had been essentially payoffs to credit union board members.
SPEAKER_03:Yeah.
SPEAKER_02:Is that a violation of my fiduciary responsibility? And in many cases, I don't think technically it's a legal violation. We could argue that it's a moral violation, but if it's done right, i.e. correctly, I don't know that there are particular legal problems with it. So I'm not going to be on the board, but you're going to give me this nice little consulting contract for 12 grand for the next three years, 12 grand a year. And also guarantee me a Q's trip once a year to Hawaii. Okay, I'm on board. I don't need to have my board seat. I'll vote for this merger.
SPEAKER_01:So it's shaky ground, and I'm not an attorney, but I think there are ways in which it can be illegal. It can be legal and above board, but there's... It's shaky. There's smoke, right? And it makes people wonder. And there's an optics question there. Deakman
SPEAKER_02:says it has to be in a disclosure document filed with the NCUA if it's legal. But as he said, and he's right, no one reads disclosure documents. Right. Yeah, yeah. He made the claim that he's sure he's read more disclosure documents than anybody else on this planet. And I think he has.
SPEAKER_01:Very likely. I think very likely. And I think the implied, you know, the implication is that like, well, the regulator needs to really be reading these carefully and asking difficult questions because there's smoke. And the last thing you want is a board member saying, voting in favor of a merger because of an incentive, some financial or other type of incentive that's personal, that's not about what's best for the membership. And so that would be very concerning, right? And yeah, I think he's got a point, right? I mean, sometimes you see the types of deals that go down and there's smoke there. It makes me concerned for sure. He
SPEAKER_02:wasn't necessarily arguing that they were illegal, but there's something stinky about them nonetheless.
SPEAKER_01:Maybe it's more of a moral question than a legal question.
SPEAKER_02:Now, last topic. When the membership votes down a merger, what's happened?
SPEAKER_01:Again, my understanding is that it varies, right? It depends on the case. It very much depends on the case. It can come down to marketing. And the reason I say that is because, again, Frank is the only one who's read all of those disclosures in the same way that members, by and large, credit union members, are not going to sit down and spend 30 minutes reading financial statements and projections, and they're not going to make an informed business decision on whether or not to merge. Most members are not going to vote at all or pay any attention. Those that will vote, they're swayed by the messaging and the story that they're hearing from the credit union, whether or not this is a good idea. And obviously, they're usually saying, this is a good idea and here's why. But the marketing can be a question. There are credit union members who are maybe like you and me, who don't want to change, who like their credit union the way it is and don't necessarily want to merge with this large multi-state credit union where they think they're going to get lost in the system and not get the same type of customer service that they're used to at the branch, right? So there's those types of reasons. But yeah, it's rarely, I think, one where they're sitting down digging into financial statements and saying, well, this isn't necessarily going to be good. It's more about What's the messaging they're receiving? Where are they in terms of their understanding of what they like about their credit union? What do they want to preserve? I think that's where the vote comes from.
SPEAKER_02:Yeah, I have this curiosity. I wonder as we see more mergers, if we'll see more memberships voting down the merger.
SPEAKER_01:It's possible. Yeah, if they start to catch wind... of, look, you and I are insiders in the sense that we're paying attention to mergers all over the country. The typical credit union member is not, right? They're not aware of that. But if at some point it becomes part of the general awareness, that may become an issue, right? Where people are like, wait a minute, I don't want this to happen. I don't want to lose my I go to my branch every Saturday morning and I have a wonderful chat with Joanne, who knows me, has known me for years, and that kind of stuff. So people will resist that for sure.
SPEAKER_02:One more thought. I said that would be the last one, but one more. This is a conversation I've had with Jim Blaine many times. I think the specter of credit union democracy is nonsensical. I have never voted in a credit union board election. I don't even know when they are. I don't know who the candidates are. That said, every year from Fortune 500 companies that I own some stock in, I get these little board voting packets every year with complete biographical information about the candidates, et cetera, et cetera, enough to make an informed choice in many cases. And all I have to do is check a few boxes, sign my signature. It's a self-addressed stamped envelope. So I don't even have to just put it in the envelope. Off it goes. Right. Yeah. I've never voted in it. And yet you tell me I'm a member owner.
SPEAKER_03:Yeah.
SPEAKER_02:That's interesting.
SPEAKER_01:Yeah. I think that's a big challenge. I think it's, again, let's go back to the history, right? There was a time when the annual meeting was... On the shop floor, right? You were there and you cared. And it was more of an easily perceived democracy, right? Because people were in the room and everybody knew who was running for the board and who they wanted. And so as credit unions have gotten larger and more diffuse and multi-state, right? It just gets more complicated. And I think good governance, good democracy would push for credit unions to communicate when the annual meeting is. Here's how you vote online. Here's the slate of candidates for you to select from. Here's their biographies, right? And really have an opportunity to bring members in to take part in the process. And again, with the online world we live in, people can get all this stuff on their phone. They can vote on their phones, right? There's ways to do it as you described with the publicly traded companies. And so I think that's an opportunity for credit unions to kind of get back to their democratic roots and do better. It's
SPEAKER_02:a way to differentiate from
SPEAKER_01:banks. Yes, exactly. And if you're smart about it, you can use it to grow your brand, grow the awareness of what people are actually a part of.
SPEAKER_02:One thing Blaine is kind of proud of is that in the most recent state employees election, something like 100,000 people voted.
SPEAKER_03:Yeah.
SPEAKER_02:And it's because he stirred up this controversy about the board's composition and policies. And he's actually kind of happy. I don't think his side succeeded or won in this most recent vote. But he's happy that 100,000 people voted. That's terrific.
SPEAKER_03:Yeah.
UNKNOWN:Yeah.
SPEAKER_02:And it is terrific. I just wish more credit unions would have that level of democracy where you say, wow, this is different than belonging to a bank.
SPEAKER_01:Right. Yeah, I agree. I agree. I think it's a great opportunity to level up and to get better as a movement and to really make sure that that democratic principle is alive and well.
SPEAKER_02:Before we go, think hard. about how you can help support this podcast so we can do more interviews with more thoughtful leaders in the credit union world. What we're trying to figure out here in these podcasts is what's next for credit unions. What can they do to really, really, really make a difference in the financial scene? Can't all be mega banks, can it? It's my hope it won't all be medical banks. It'll always be a place for credit unions. That's what we're discussing here. So figure out how you can help. Get in touch with me. This is rjmcgarvey at gmail.com. Robert McGarvey again. That's rjmcgarvey at gmail.com. Get in touch. We'll figure out a way that you can help. We need your support. We want your support. We thank you for your support. The CU 2.0 Podcast.