By Ray Birch
LAKE FOREST, Ill.—Although economies of scale are most often cited as the drivers of mergers, the growing combinations among CUs are actually making them less efficient than banks, and increasing inefficiency could harm the industry, according to one person.
That’s the opinion of Michael Moebs, economist and CEO at Moebs $ervices, whose company recently completed a study of financial services staffing and efficiency.
What the survey reveals, according to Moebs, is credit unions’ philosophy of retaining employees when two organizations merge is markedly reducing their overall performance, while banks and thrifts are taking the opposite approach, letting more staff go when combinations occur.
There were 2,396,000 employees in financial services at the end of 2021. Even with the pandemic and the Great Recession—and the number of FIs dropping—this number has been growing over the past 12 years from a low of 2,301,000 in 2009, Moebs’ data show. Since then, thrifts have reduced overall employees by 9.3%, banks have increased employees by 1.2%, while CUs have increased their people count by 36.9%, the Moebs $ervices study shows.
“There is truly a strong distinction in management of people by banks, thrifts, and credit unions,” said Moebs. “Banks and thrifts can buy or merge. If they buy, then staff often are cut immediately. Credit unions can only merge. Mergers with credit unions differ from banks and thrifts in that there are no stockholders, so the major beneficiary are the staff of both sides of a merger. Staff on both sides of a merger are kept. Often the only people to leave are C-level people who are rewarded handsomely to depart. Mergers often cause staff to be retained much longer than needed. This keeps employee count higher at credit unions than it should be, especially as consolidation is occurring. CUs definitely need to change this to get more efficient. In the long run control of non-interest expense will be a big differentiating factor.”
Turning to Digital
Moebs said that while the practice of retaining staff in mergers has been common in credit unions for years—many boards won’t sign off on mergers if layoffs are to be the result--becoming more efficient and relying less on staff and more on technology is quickly becoming a focus for all FIs as consumers turn to digital delivery.
“Technology will play a big part in controlling staff count. As financial services become more digitized staff efficiency will rise, thus maintaining or lowering overall staff count. There will be fewer branches which will need fewer people,” said Moebs. “Credit unions would be wise to emphasize the Internet banking approach and keep their branch count down. They have an advantage over banks and thrifts, in that they don’t pay taxes. However, the actual situation is CUs are keeping branches down but adding more people than banks or thrifts. This is not the right strategic move for CUs. They should keep branches down and staff count down.”
What’s Ahead
Looking at the data paints a clear picture of the challenges ahead for credit unions, according to Moebs, who said there is a singular metric to indicate any FI’s efficiency.
“There is a simple ratio that is key to gauging an FI’s efficiency—total assets divided by full-time equivalent employees,” said Moebs. “There are some true differences based on size and leadership. The assets to FTE ratio considers both.”
Moebs noted that as an institution gets larger in asset size, the number of employees almost always goes up with it. Yet, efficient FIs will balance growth with maximizing productivity of current staff, he said.
“Regardless of asset size, some FIs have too many employees and are less efficient. The asset to FTE ratio makes this clear,” said Moebs.
Since before the Great Recession in 2006 to the pandemic of 2020-2022, FIs have substantially maximized employee efficiencies. There is now about twice as many assets per employees in financial services, Moebs told CUToday.info.
Thrifts Lead the Way
“Thrifts have led the way with $12 million in assets per employee, while banks trail not far behind at $11 million,” pointed out Moebs. “However, credit unions have maintained twice as many employees per assets during this time. Credit unions average $6 million in assets per employee.”
Moebs said thrifts have had the best staffing efficiency model in recent years.
“Thrifts are truly the ones to watch,” said Moebs. “They have always kept their employee count down. Unfortunately, the CUs have not picked up on their lead. As the number of total FIs has gone from 17,227 in 2006 to 9,896 in 2021, it is important, no matter what type of FI, each depository must keep a watchful eye on employee count.”
More Assets, More Efficient
Michael Moebs
The Moebs study shows larger asset size financial institutions are definitely more efficient in managing their employee count.
“There are several factors for this trend,” explained Moebs. “Growth, electronic wallets, number of branches, operating systems, and compensation have worked in the larger FIs’ favor. It is not easy being a chief executive officer as the consumer and small businesses have gained advantage being able to have a relationship with any FI nationwide.”
The Moebs study also shows there is a strong contrast in type of FIs with assets sizes less than $100 million. The banks in this asset range are 25% more efficient than either thrifts or CUs. In asset sizes above $100 million, banks and thrifts have one-third fewer people than CUs.