This is a fundamental question that faces credit unions, and that credit union opponents frequently allude to with overtly negative tones. Opponents say that the only reason for a credit union to grow is to pad the pocketbooks of management.
This disingenuous claim belies the motives of bankers, and ignores a pretty wide swath of business theory and practice that says “growth is good for a company.”
Let’s begin there—why growth is good for a credit union.
First, by being larger, with a broader group of members, the credit union reduces the risk to any single member, and also to the entire credit union. The smaller an institution is, the more vulnerable it is to a single loan going bad, or to a bad actor. This becomes truer as auto and mortgage loans become larger and larger.
In fact, in 2024, many tiny credit unions purposefully limit their loan sizes, such that they can’t make a loan on a new truck. One loan for $60,000 or $80,000 that went bad could cause serious problems for the credit union’s viability.
Larger credit unions are better able to bear the risk of a loan going bad than a smaller credit union, because that risk is spread out across a larger group of people, and therefore a larger loan pool.
Likewise, existential risk is reduced when a credit union serves a broader group of people.
For decades, credit unions served only small groups with a tight common bond—those working for the same employer or living in the same small town that depended on a single plant or factory to support the community. When that single employer or the one factory in the community closed, suddenly a majority of the credit union’s members couldn’t pay on loans. Without a viable base of members, the credit union had to execute an exit strategy.
This kind of concentration risk has been the demise of thousands of credit unions.
The risk of the credit union is reduced if it adds multiple groups to its field of membership, or broadens its membership to include multiple communities. In this case, the closure of a single business or plant or factory will affect fewer members of the credit union.
This was highlighted by the Federal Reserve Bank of Atlanta, in a spring 1998 Economic Review, as a reason for credit unions to expand their fields of membership.
The more that a credit union’s membership shares a common bond of employment or otherwise has similar exposure to plant closings or other economic risks, the less diversified is its exposure to credit risk. Diversifying the membership base makes the credit union more resilient in the face of problems experienced by any one local employer. This diversification can be accomplished by multiple common bonds.[1]
So, in short, existential risk to the credit union is reduced by being larger and serving broader groups of people.
This isn’t limited to small institutions. Even large institutions with a narrow service focus can encounter trouble. Consider the recent example of Silicon Valley Bank (SVB) in early 2023. This large bank served a narrow group of venture capitalists. When that group experienced trouble, SVP failed. A broader, more diversified customer base would have served SVP well.
A second reason it’s good for credit unions to grow is that the cost of running a credit union never decreases. Inflation leads to equipment, health care, supplies, and basically everything else costing more. Employees cost more each year. How is a credit union to cover those increased costs? Through growth. By serving more members, making more loans, earning more income, the credit union can bear the increased costs of doing business.
This is closely related to the third reason: scale.
Scale allows the credit union to offer its products and services for less cost. A smaller credit union may want to offer home banking to its 1,000 members. While the credit union doesn’t charge for the service, somehow the credit union needs to earn income to cover the cost. So, collectively, those 1,000 members pay for home banking.
Consider a different credit union, with 100,000 members. The same principles apply: somehow, the credit union needs to earn the funds to pay for the home banking, which it offers to members for free. So, those 100,000 members bear that cost. Compared to the first credit union, the cost of home banking is decreased 100-fold.
That’s scale, and it applies to everything: the cost of adding new products and services, new locations, ATMs—everything benefits from the scale. In fact, many small institutions simply can’t offer some products and services because they don’t have the means to do so. They don’t have the scale to make it feasible.
Scale also means a credit union can make that $80,000 truck loan, because the risk of that loan defaulting is spread across 100,000 people—not just 1,000.
A fourth benefit of growth is that the credit union can specialize its employees. In a small institution, one person may be responsible for making loans and doing collections. Or, one person may be responsible for regulatory compliance and marketing. Or, in the smallest cases, one person may be responsible for everything.
On the other hand, in a larger institution, the scale creates enough work that one person can handle compliance. One can handle marketing. One can do collections. One can do loans. This specialization allows those employees to focus all their attention, training, and knowledge on one topic. They can become experts in the area. It’s reasonable to consider that an employee who spends 40 hours a week on something will be able to develop more skills in that area than an employee that only spend 4 hours a week on the same thing.
Bankers know all of this. They’re savvy businesspeople. Why, then, do they say that the credit unions have greedy motives for growth? Perhaps that says more about the bankers than the credit unions.
Those are the business reasons for growth. What about the philosophical reasons?
As soon as you get involved with credit unions, you become entangled in the credit union philosophy. This is different than the banker philosophy. Bankers are in it to make money. The very structure of banks—stock-held corporations or some other profit-focus organization—ensures that the purpose of banks is to make money for the owners. As soon as banks lag in this mission, they will be abandoned by owners in favor of a company that will make them more money.
That’s fine. There’s nothing wrong with that. Most companies have this profit motive.
This is not the case for credit unions. Credit unions are owned by their members, for the benefit of their members. They’re cooperatives. They exist solely to benefit those members.
So why would those members want a bigger institution? Why would those credit union employees want a bigger institution?
Well, not all of them do. But there are plenty who do, and the main reason is evangelism.
Credit unions exist to serve and help members. They very naturally want to help more people. They see the difference the credit union makes in people’s lives, and understand the alternative they offer, so naturally they want to help more people, and improve more lives.
Not to mention that they can better serve those people for all the reasons stated when talking about the business reasons: they can offer those members more products and services—thereby helping those people more—and reduce the price and risk for each of those people.
All of this is not to say that to succeed or help people a credit union needs to be large. There are many credit unions that have purposefully kept their fields of membership small. Many members appreciate the benefits of a smaller, more personal financial institution. But the reasons for growing a credit union are clear, and completely in line with the credit union philosophy.
[1] Economic Review, Federal Reserve Bank of Atlanta, Third Quarter 1998. Page 37, page 6 of this pdf: https://www.atlantafed.org/-/media/documents/research/publications/economic-review/1998/q3/vol83no3_srinivasan-king.pdf
