The day Newbridge Credit Union died in 2013 after a savage run on its savings, the sense of loss of a social keystone cut deep and as widely felt throughout the local community. Credit Unions, much like Post Offices and GAA clubs, run by locals for locals, are an integral part of Irish communities, Newbridge was not just another characterless financial institution, it was part of the social capital of its people. Newbridge management had run the ship on to the rocks, breaching regulatory guidelines and coming a cropper after concentrated lending to developers. Thankfully, Newbridge was one of the outliers. PTSB took over the remains.
The map of the credit union marketplace is fast changing, shrinking the number of players from 419 in 2008 to 292 by October 2016 adding bigger Credit Unions to the map. Those with assets in excess of €100m now account for the lion’s share of total assets held, while the number of minnows has halved in just four years. Change comes not a moment too soon because these three ratios are unpleasant reading;
- Loans as a percentage of €14bn in assets fell to 26%, that’s the sixth worst in the world after countries like Papa New Guinea, Hong Kong and Malaysia and very far below Africa at 79%, North America at 68% and Europe at 57%.
- Total income fell one third from its peak at €860m in 2007 to €562m last year, meanwhile the cost base nearly doubled. Costs as a percentage of income has risen to 57% but that’s the average, small credit unions are trading on very thin ice with costs absorbing 74% of income.
- The loan book itself has shrunk by 43% from €6.7bn in 2007 to €3.8bn in 2015 but it has also altered, pulling in sharply from the more profitable long term loans over five and ten years, to today, where 90% of loans are for under five years.
Having a huge excess of savings over loans forced Irish Credit Unions to prop up rates for savers by investing about three quarters of their money in retail investment products, bank deposits and Government bonds hoping that, after investment industry intermediation costs and market risk, there will be a competitive profit above the risk free rate of return leftover for members. Two huge collapses since the millennium, the Dotcom crash and the Global Financial Crisis has underlined the much bigger ups and downs that characterise the modern investment cycles, adding huge risks to those hoping to plot a safe course while paying out steady dividends.
Credit Unions ideally ought to immunise themselves from these forces by making far more money from lending locally than from investing globally but, by taking in so much money, many Credit Unions look more like risky Investment Trusts than stable Savings and Loans. The reaction of the Central Bank of Ireland and the Registrar of Credit Unions has been hard-nosed, banning investment in equities and forcing investment in cash instruments and bonds, while restricting savings per member to no more than €100k, the Deposit Guarantee Scheme ceiling. This is tough medicine but the alternative, soft regulation, has been tried and failed.
Irish Credit Unions, despite these enormous challenges have shown remarkable resilience, dealing with enforced consolidation from regulatory pressure and from economic headwinds, all the while busily improving governance standards and hiring fresh talent.
Reconstruction is really only just beginning in the face of limp demand for credit and chronically low returns from the restricted pool of investments allowed under the new regulations and while this is happening, Credit Unions are searching around for more opportunities to merge as a way of driving down costs.
Unquestionably the near future will need to see the arrival of muscular support players that will sit behind a consolidated Credit Union marketplace and give it the digital tools needed to take on modern banking competition. This next phase will require Credit Unions to cooperate nationally, not just regionally but now that the sector is beginning to show signs of growth once again, this ought to evolve pretty soon. Three questions arise;
- Are Credit Unions safe? Yes, most are but the work in shoring up balance sheets is on-going.
- Will small local Credit Unions survive? The answer is, not as independent stand-alone entities but, instead as branches of bigger ones.
- Will Credit Unions step up to the plate and really take on the banks? The answer is that they will have to, because if they don’t, shadow banking players and new forms of credit competition in current account, overdraft and savings product that you can have on your phone will conquer the next generation of members using technology.
The race is on between Credit Union’s capacity to equip themselves and the fast pace of change. Call me parochial but as a fifth generation boy from The Lough in Cork whose Credit Union is one of Ireland’s oldest and most venerable, I’d bet on the movement’s irrepressible character to come through stronger than ever, for their local communities and for their neighbours in the times ahead.
Informed Responses
CEO at Tralee Credit Union
Hi Eddie, your article on credit unions has a lot of truth in it. Credit unions have weathered the economic storm, or more correctly, economic hurricane of the last seven years bruised but not beaten. This same hurricane blew away, or would have blown away, all our banks but for the intervention of the state and the use of our taxes to prop them up. The Irish people have “invested” billions in shoring up the reserves and businesses of our privately owned banks. In 2012 the Minister for Finance, on the advice of Central Bank said that credit unions might need as much as half a billion to bail them out of difficulty. In fact it has taken about €20 million to help our credit unions through the worth economic downturn in 100 years. The plight of the credit unions was not helped by restrictions placed indiscriminately by Central Bank on credit union lending and investments. These restrictions, allegedly placed on credit union “to safeguard members savings” had the complete opposite effect weakening credit unions to the extent that some failed. Credit Unions are suffering, not from their failure but from their successes. During the downturn when people were afraid to borrow they saved in the place they trusted most, their credit union. This means that yes, our credit unions are awash with funds and yes the “low interest” policies being adopted by central banks to try and stimulate economic growth means that credit unions investments are not getting great returns. Credit Unions have very good financial reserves and have maintained these reserves even through the “storm” And credit union members have good memories. They are remembering where they got their loans when the banks couldn’t or wouldn’t help them. Members have started to borrow again and credit unions will survive and will be strong because being owned by their members, they don’t just have an interest in the community; they are the community. We may finish up with less credit unions but hopefully, if they are allowed to develop without interference they will continue to keep their same trusted and valued place in their communities. Fintan Ryan
Director at Vard Brand Design / OwnOurOil.ie / OVVO
Thanks Eddie, the biggest threat to all banking and financial services is the pace of change and the transition to our new digital world. The traditional ‘bricks and mortar’ retail bank offering is under extreme pressure globally, and it’s anyone’s guess if it will survive in its current format into the future. The point you make about community is so important, and the vital role that Credit Unions, Banks, and Post Offices play is crucial. The challenge is how the Credit Unions will evolve, not just as financial instructions but also as individual commercial enterprises, what roles can they fulfil in a digital age, how can they remain relevant in a digital revolution? With the emergence of A.I. (Artificial Intelligence) we are witnessing a new frontier in customer engagement and extends well beyond the digital revolution banks are currently adapting to. From a brand perspective, A.I. is not just a new metric or vehicle to understand data, but a tool to transform banking as we know it. What is the role of a high street offering in this new world, how do Credit Unions and banks keep customers coming through their doors, some of the answers may lay in their unique services, the values of ‘one on one’ advice and the importance of relationships etc. Forces outside of the Credit Unions and Banks such as the continuing emergence of tech-savvy challenger banking and financial products are effecting every facet of banking globally, how will this manifest itself on banking in the towns of Ireland, will these new apps & tech offerings eventually threaten to erode the grip on customer loyalty. With low barrier to entry, speed and agility on the challenger’s side, financial institutions will need to respond swiftly. However in their haste, it is imperative that Credit Unions take the time to understand their unique brands offering and compete smartly. Core traditional values of trust and security, while old fashioned, may hold the key to them taking the higher ground. What challenger’s lack, Credit Unions hold in abundance, if properly steered. It’s a brave new world for Credit Unions and Banks. Those who fully understand the implications of the challenges are ahead of the posse and will reap the rewards. Those that remain playing by the old rules will have a lot of catch-up to do. It’s all to play for, the brave as always, will be rewarded.