In the age of digital transformation, credit unions’ business models are being put to the test. To stay relevant and competitive with powerful, big bank competitors, credit unions are turning to mergers and acquisitions for strategic growth.
At the same time, tech-powered convenience is emerging as a key factor in the financial services industry. A whopping 12 million Americans now cash checks via smartphones, and teller transactions are declining by 7.5% each year. In many ways, credit unions’ ability to execute a successful business strategy and attract M&A opportunities now hinges on the delivery of a stellar member experience built on a high-tech foundation.
While many mega banks are more likely to have the resources to achieve major digital transformations — like mobile apps, mobile payments and digital check deposit — mid-market banks and credit unions will need to refresh their tech talent in order to keep up.
In addition to creating digital experiences for members, creating a more digital operating model can also trim operation costs and boost efficiency allowing credit unions to more effectively compete against larger, tech-forward banks. For many credit unions, an M&A deal can jumpstart their digital transformation processes so that they can offer strong service and impressive technology.
To learn more about the changing M&A landscape for credit unions, West Monroe recently surveyed 100 credit union leaders whose firms are actively pursuing transactions. We asked them a range of questions related to their M&A plans, such as their ideal targets, concerns about regulations, and more.
Inside the credit union M&A process
Industry leaders feel the pressure to pursue digital transformation initiatives to keep up with members’ ever-changing expectations. With banking members increasingly demanding sophisticated yet easy-to-use financial technology, some credit unions may never achieve ideal growth on their own.
As a result, they’re turning to M&A deals to stay competitive. Rather than building from the ground up, many credit unions are attracted to the idea of acquiring more sophisticated banking platforms and member-centric tools. But how do they go about the process of M&A? According to our data, these are the top trends in today’s M&A landscape.
- Merging with another credit union isn’t ideal for most. Credit unions are casting a wide net in their search for the right merger and acquisition partner — and surprisingly, many are looking far beyond other credit unions. Fewer than half (46%) of respondents to West Monroe’s poll are looking to merge with another credit union.
Instead, most want to merge with banks (32%) or fintech organizations (22%). Their primary reasons for setting their sights beyond their credit union peers are twofold. First, credit union leaders feel that a bank or fintech partnership will facilitate access to technology that wouldn’t be available otherwise — a key reason most credit unions set out to make a deal in the first place. Second, leaders feel that a bank or fintech merger will make their businesses more viable and diversified in the long run.
2. Better to buy than be bought. Most credit unions in the M&A process want to acquire, especially those who want to merge with another credit union. Roughly two-thirds (64%) of respondents told West Monroe their credit union would prefer to purchase within the next two years rather than be acquired by another financial organization.
Those that want to merge with banks or fintech organizations are less bold in their preferences, though they still skew toward being the acquirer. Their main goals in acquiring are cost savings (59%) and improving the member experience (56%).
The credit unions that hope to be acquired have been waiting longer than planned to find the right merger partner, suggesting the M&A market is hotter for those hoping to do the acquiring. Sixty-one percent of those looking to be acquired are aiming for a larger organization with greater assets as a merger partner, while 44% are looking for a partner with the same amount of assets.
3. Regulations, cost and a potential recession cause doubt. Pursuing an M&A deal is a big decision and certain factors cause hesitation among credit union leaders. More than half (52%) of intended buyers cited high prices as a deterrent. Meanwhile, 47% of buyers said they’re concerned about an uncertain economy.
In addition to cost and economic conditions, credit union leadership is cautious about the new regulations they might face depending on their merger partners. In fact, nearly two-thirds (62%) of those who faced a merger delay of more than a year cited regulatory issues as the cause. Due to the slowdown regulations can create, 2 in 5 credit union leaders say they would want to assess a potential partner’s regulatory and compliance gaps before any merger.
Among those concerned about regulations when pursuing an M&A deal, credit unions seeking a fintech transaction most often run into compliance struggles — 88% of those merging with a fintech organization cited regulations as a merger delay factor. By contrast, only 50% of those merging with other credit unions and 42% of those merging with banks said the same.
There are now more than 6,000 credit unions in the United States, representing about one-third of the population (117 million members collectively). Credit unions face shifting member expectations, and M&A is one of the top ways they’re responding. It’s clear that traditional credit union business strategies need to be challenged to survive a member landscape deeply rooted in a technology-powered member experience.
John Stockamp is the Director in West Monroe’s Financial Services Practice