As Prepared for Delivery on June 25, 2020
Thank you, Mr. Chairman.
And thank you Martha Ninichuk and Pamela Williams for you presentation on minority depository institutions this morning.
The key takeaway from today’s presentation is that MDIs are disappearing, institution-by-institution, and that’s the unfortunate reality we face today. This paradigm presents two questions for our consideration:
- Why are MDIs disappearing? and
- What can we do about it?
I do not know the definitive answers to these inquiries, but I will offer my thoughts for your consideration. As always, I welcome and value your comments and suggestions.
MDI’s are principally disappearing because they cannot operate at the necessary economies of scale to support the business plan and model that are demanded by consumers of financial services today. This includes specific loan and account programs and other services that younger members, in particular, expect from their financial institutions.
Most notably, today’s members expect to conduct a distinct majority of their financial services from their smart phones. This includes not only reviewing their account balances but also depositing checks; transferring funds; monitoring activity in their checking, savings, IRA, 401(k), and other accounts; applying for automobile, mortgage, and other loans; paying their credit card, utility and other invoices; as well as engaging in an emerging and expanding array of other financial activities.
I visit the local branch of my primary financial institution less than once per year, as do my two twenty-something sons. In my view, any financial institution that doesn’t offer these services places itself at risk, as today’s younger generation transitions to middle-age consumers with their enhanced needs for seamless access to hassle-free financial services.
The problem, of course, is that maintaining these sophisticated financial services in a secure environment requires the deep pockets that most MDIs simply don’t have. While many, if not most, MDIs certainly appreciate the acute need to adopt these platforms, they don’t because they can’t afford the personnel, advisors, and consultants that are necessary to standup and maintain the computer systems and networks serving as the back-office for the most consumer friendly financial services computer applications.
Operating through a CUSO or another third party, while often more cost effective, nevertheless presents a financial challenge to many MDIs.
One approach is to consider mergers between smaller and financially weaker MDIs and other larger and more financially robust credit unions. This approach may solve one issue — the financial challenges of the MDIs, but it may create another problem — the closing of MDI branches that leave minority communities as financial deserts where residents do not have access to federally insured financial institutions within a reasonable distance.
Another approach is to consider mergers between two MDI credit unions, where the surviving MDI credit union continues to serve the fields of membership of both credit unions without abandoning either one of the minority communities to payday lenders and other similar institutions. These mergers only work if one of the merging MDIs is sufficiently financially viable so as to assist the merging partner.
A third approach is to consider the merger or consolidation of three or more MDI credit unions. I would think that the NCUA, wearing the slightly unorthodox hat of matchmaker could offer introductions to an array of struggling MDIs with compatible fields of membership and relative geographic proximity. At the end of the day, for example, five $100 million MDI credit unions could consolidate into one $500 million MDI institution with economies of scale and market force. As necessary, a non-MDI credit union that offers financial stability, together with viable IT and related expertise, could join the group provided the surviving credit union qualifies as an MDI.
This is easier said than done, as issues regarding the integration of multiple institutions and their systems and cultures, the composition and structure of the continuing management team, and the compensation packages to retiring employees will require deft, transparent, and inherently fair negotiations and resolutions.
The reality, as I see it today, is that we are going to have far fewer MDI credit unions within the next few years. We can wait on the sidelines and let larger non-MDIs gobble up smaller MDIs like a game of financial Pacman or we can work together to help orchestrate the consolidation of MDIs into much larger, more financially stable, institutions that are committed to serving minority communities as financially formidable MDI credit unions.
I strongly encourage the Board as well as Martha and Pamela to consider these ideas as they work to address the best approaches to preserving minority depository institutions.