The challenges of running a credit union have never been greater. In times past, credit unions lived off the net interest margin. The interest earned on loans was more than enough to pay for the operation of the credit union and the dividends paid on the share accounts.

On an industry-wide basis, the net interest margin can no longer be counted upon to sustain credit unions. In many credit unions, particularly small credit unions, the operating expense ratio is greater than the net interest margin. Unless those credit unions find a way to increase income and reduce operating expenses, they are in the midst of a slow motion self-liquidation, probably ending in emergency mergers.

How did this all come to pass? What changed? The costs of running a credit union have increased dramatically over the past 20 years. The increased costs of technology, compliance, personnel, and branches have put a squeeze on all financial institutions. However, the impact on the larger financial institutions is much less critical, due to the fact that the larger financial institutions have scale and can spread the costs over a greater customer base. Non-profit status helps credit unions, but scale is king and big banks have a much lower per-customer cost structure.

Credit unions also have other competitors that did not exist 20 years ago, including the pure Internet competitors—think ING Direct and Lending Tree—that have very low cost structures. There is no doubt that the impact of higher operating costs is disproportionately greater in credit unions than in their competitors.

Coupled with higher operating costs is the downward pressure on pricing. The competition of the larger banks and Internet competitors keep prices and profit margins low, resulting in prices that are sometimes lower than a credit union needs to support itself.