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  • D. Maurice Kreis

VSECU: Rob Miller is Wrong About the "Network Effect"

I am still waiting for someone to give me a good reason to vote for the merger of Vermont’s two biggest credit unions. I get to vote because I am a member of the smaller of the two, VSECU (the Vermont State Employees Credit Union), which would essentially be swallowed up by the NEFCU (the New England Federal Credit Union).

The other day I watched a video in which the CEOs of the two credit unions – John Dwyer of NEFCU and Rob Miller of VSECU – answered questions about the deal. These were softball questions, served up by a VSECU employee, as opposed to a public forum where actual members of the VSECU get to query their credit union’s leaders about why they like the proposed deal.


The answers were, nevertheless, illuminating – especially if you, like me, are looking to drill beneath the superficial “bigger is better” argument that has been the mainstay of the case for the transaction.


Rob Miller cited the “network effect” as a key reason why the state’s two biggest credit unions should combine. This was profoundly unpersuasive.


As Rob explained, the network effect is a thing. The telephone was useless when first invented – obviously, at least two people needed to have telephones for the invention to have any real purpose. And, as Rob explained, the more people who joined the telephone network over the years the more valuable it became. Imagine a world with two rival telephone networks that were not interconnected; neither would be as valuable, to its users, as one big system in which anyone can call anyone else.


Are you having trouble quitting Facebook even though you know Mark Zuckerberg is an evil charlatan and his company is undermining democracy? That’s the network effect in action. It’s an odd justification for a credit union merger.


It’s also an incorrect invocation of the network effect – which, I suppose, just proves that Rob Miller is not an economist and should not even play one on TV.


The key service a credit union provides – credit -- doesn’t become inherently more valuable because more people are members and are borrowing money alongside you. If you can weatherize your house because the VSECU is offering you a loan on terms you like and can afford, it doesn’t matter whether you are the only person obtaining that loan or whether thousands of others are doing exactly the same thing.


The network effect is easily confused with a related economic concept: economies of scale. As explained cogently on Wikipedia, economies of scale “describe decreasing average production costs in relation to the total volume of units produced.” In credit union terms, the question is whether a bigger CU chould offer better loan terms, and/or process loan applications more efficiently, than a smaller one.


From what I have been able to ascertain, the answer is: Yes, but only to a point. A credit union with only $100 million in assets (and a commensurate number of members) may not have the capacity to be as helpful to its members as a credit union like VSECU with more than a billion dollars in assets. But I have asked every industry expert I know, outside of the VSECU, and the verdict is unanimous: a billion-dollar credit union is already big enough to have achieved all of the available economies of scale.


In that regard, it’s noteworthy that by invoking the “network effect” Rob Miller pointedly did NOT offer an “economies of scale” argument. Maybe that was deliberate, or maybe he was just misspeaking as a non-economist. Either way, he should clarify.


Just to avoid any confusion: The network effect does apply to financial services, in the sense that it is advantageous to be able to move money around conveniently among people with bank accounts or credit union memberships. But that network already exists; the merger would not change that reality.


Miller also offered what has become a familiar justification for the proposed NEFCU-VSECU merger: the fact that the two CUs supposedly have complementary areas of expertise. According to this theory, NEFCU is really good at writing mortgages whereas VSECU has deep expertise in so-called “green” lending ( i.e., financing of household energy efficiency and renewable energy projects). I can’t argue with the idea that it would be a boost for NEFCU to be able to offer green loans. But mortgages are actually a pretty generic project, if only because the available interest rates are basically set by the Federal Housing Authority. Since both CUs already offer mortgages, for this theory to hold up someone will have to provide details of exactly what NEFCU can do on this front that VSECU cannot.


Finally, the two CEOs touted the fact that a combined VSECU/NEFCU would mean the members of each would have access to more branches. This argument is completely unpersuasive. To the extent having a nearby branch is really important to anyone, they almost certainly have already opted to join NEFCU rather than VSECU (or vice versa). Every credit union laments that we are now well into the era of online banking, in which everyone expects to be able to do business with their credit union via an app on their phone. So, the “everyone will have access to more branches” argument is really just a variation on the “bigger is automatically better” theme.


So, given that Rob Miller can’t seem to muster any real substantive arguments in favor of VSECU members approving the merger, what’s the reason for his enthusiasm – and the unanimous approval of the VSECU board? I believe Rob (and John Dwyer) when they insist there are no special financial benefits for them in the deal. So, what’s really going on here?


I don’t know, but I have a hunch: anxiety about the NCUA, which is the federal authority that regulates credit unions and insures their deposits. We’re well into the era in which the prime directive for CU management is no longer services to members but pleasing the regulators. And, from a regulatory perspective, bigger really is better – a more diverse balance sheet and more resources – makes a CU seem inherently less risky to the entity that is the financial backstop. It takes a lot of courage to stand up to pressure from the NCUA, especially given that most members don’t even know what the NCUA is, much less grasp the hold it has over CUs and their managers.


I could be wrong about that, of course. But if I had to vote today, it would be a negative vote without hesitation. From a member perspective, so far the proponents of the merger have offered nothing real or concrete by way of a justification. In these circumstances, it would be such a shame to see Vermont’s venerable state employees credit union consigned to oblivion.


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