Dive Brief:

• Most credit unions seeking mergers are looking to partner with a bank or fintech rather than merge with another credit union, according to a new study by Chicago-based consulting firm West Monroe Partners.
• The study found that less than half (46) of the 100 credit unions surveyed are seeking mergers with another credit union, while 32 would prefer to merge with banks and 22 would prefer deals with fintech companies.
• The credit unions cited technology and growth as reasons for seeking bank and fintech mergers.

Dive Insight:

In an increasingly competitive market, credit unions are using mergers to grow membership and boost their investment in technology. West Monroe's study shows banks and fintech companies are often the preferred choices when it comes to acquisitions.

"Credit union leaders feel that a bank or fintech partnership will facilitate access to technology that wouldn't be available otherwise,” West Monroe wrote in the report. "Leaders feel these mergers will, in the words of one respondent, 'make our business more viable in the long run.'"

The not-for-profit financial institutions have acquired 21 U.S. banks since 2018, compared with 12 acquisitions in the previous five years, according to S&P Global Market Intelligence data released in June. That figure increased to 22 when Colorado's Elevations Credit Union agreed to buy the assets of Cache Bank & Trust this month.

In response to the growing trend, National Credit Union Administration Chairman Rodney Hood said this month that the regulator will propose a rule clarifying credit unions' responsibilities when acquiring banks.

Banks and industry trade groups have slammed the practice, saying tax exemptions give credit unions an unfair advantage, and accuse some credit unions of neglecting their mission to serve low-income households.

But, the West Monroe report found, there is a level of convenience that comes with merging with a bank or fintech instead of another credit union.

"In a transaction between two credit unions, both parties have a responsibility to both entities' customers and board members; those concerns are abated in external transactions, clearing a more direct path forward," the report said.

Forty-three percent of credit unions that sought a merger with another credit union for more than a year said member alignment contributed to the delay, West Monroe found. That compares with 25% of those looking for a bank partner.

None of the credit unions seeking to merge with a fintech mentioned member alignment as a source of delay, with 88% citing regulations as an issue.

"While there are now fewer than 6,000 credit unions in the United States, they represent 117 million members — about one-third of the population," the report said. "To move forward successfully and respond to disruptive change, these organizations should first focus on what their growth plan should look like — then consider strategic M&A activity to support this plan."