The changing face of credit unions
By Laura Bruce • Bankrate.com

"Not for profit, not for charity, but for service."
-- The credit union motto

It's a bit like a lightweight boxer going toe-to-toe with a heavyweight. The heavyweight isn't going down, but the fast-on-his-feet lightweight is dancing around and delivering some stinging jabs.

The battle between banks and credit unions is intensifying, and consumers should be aware of the changes so they can make intelligent choices when deciding where to do their "banking."

To say credit unions don't compete with one another or with banks just doesn't ring true anymore. There's competition. Some of it's for sheer survival; some of it's for market share. Not all credit unions have jumped into the fray. Some employment or organization-based credit unions may have a very successful niche and be able to stay small and survive, maybe even thrive -- but they're part of a shrinking minority.

The original mission of credit unions was to provide financial services to relatively small groups of affiliated individuals who might be underserved by banks. Banking industry representatives say they have no beef with the thousands of credit unions that still stick to that goal. Even the behemoth Navy Federal Credit Union with 2.4 million members and $20 billion in assets appears to escape the harshest criticism because it sticks with fairly narrow criteria for membership.

Banks cry foul play
The banking industry's biggest gripe is with the hundreds of credit unions that have morphed into much larger institutions through expanded memberships that often allow anyone to join who lives or works within several counties surrounding the credit union. Banks complain about credit unions' expanded lending capabilities and their lengthening reach into asset management. All of this, banks say, and credit unions still get hefty tax exemptions.

Competition, economic conditions and the membership expansion that has resulted since the 1998 Credit Union Membership Access Act relaxed membership rules have led to consolidation in the credit union industry. A recent report by the U.S. General Accounting Office highlights the consolidation that has taken place since its last report on credit unions 10 years ago.

Shrinkage ... and growth
According to the report, there are 9,688 federally insured credit unions vs. 12,595 in 1992. At the same time, total assets have risen from $258 billion to $557 billion. Eleven percent of credit unions have assets in excess of $100 million, compared to 4 percent in 1992.

The 1,000 or so credit unions that comprise that 11 percent control 75 percent of all credit union assets. The 8,600 credit unions that have less than $100 million in assets represent almost 90 percent of the industry, yet they hold only 25 percent of the assets.

Many of the larger credit unions are gobbling up the smaller ones. The National Credit Union Administration approved 276 mergers through the first 10 months of 2003. Credit Union Journal, an industry trade publication, says 163 small credit unions disappeared through those mergers.

"There's a threshold and once you cross it, you're really not a credit union in the true sense of the word," says Charlotte Birch of the American Bankers Association. "After you've grown to be about a billion dollars or $5 billion and you're offering everything from life insurance to stock brokerage to the full range of financial products -- perhaps some community banks in the market don't even offer -- it seems the tax exemption they enjoy is a bit misplaced."

Small vs. big business
When it comes to loans, new and used vehicle loans make up the greater proportion of assets for smaller credit unions. Mortgage, home equity and credit card loans represent the lion's share of assets for larger credit unions. In fact, half of the smaller credit unions don't even offer those loans.

The report also mentions that credit unions "serve a slightly lower proportion of households with low or moderate incomes than banks." The GAO says that could be because many credit unions are employment based.

Traditionally, credit unions were chartered to serve organizations or associations, with employment and church-based memberships among the most popular. Community charters based on a geographical area have been available for decades but have become increasingly popular as many credit unions find a need to expand their membership base.