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Examining the federal credit union model in the 21st century
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Examining the federal credit union model in the 21st century
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Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 1 EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY By Michael W. Magro A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements of the Degree DOCTOR OF POLICY, PLANNING AND DEVELOPMENT August 2016 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 2 DEDICATION This paper is dedicated to many people in my life. First, to my wife Anna, without her support and patience, this report would not have been possible. To my mother and father, Pat and Ron, who always encouraged me to reach for the stars. And lastly, to my boys, William, Luke and Jack, who represent the future. I hope these boys understand the importance of seeking and applying knowledge as this is the key to their success. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 3 ACKNOWLEDGEMENTS This paper was an arduous task, one that I did not understand how to craft if it was not for the patience and reassuring nature of my chair, Dr. Peter Robertson. His dedication to the school and this program is exemplary, and my constant questions and anxieties were always calmed after meeting with him. Of course, all of the professors who aided me in this quest, Dr. Bob Myrtle, Dr. Richard Callahan, Professor Harry Richardson, Dr. Terry Cooper, Dr. Alexandra Michel, Dr. Martin Krieger, Dr. LaVonna Lewis, and Dr. Dora Kingsley, the dedication of the faculty at University of Southern California is unparalleled. Without these brilliant men and women, I would not have succeeded. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 4 TABLE OF CONTENTS DEDICATION ................................................................................................................................2 ACKNOWLEGEMENTS ...............................................................................................................3 TABLE OF CONTENTS ................................................................................................................4 LIST OF TABLES ..........................................................................................................................6 LIST OF FIGURES ........................................................................................................................7 ABSTRACT ....................................................................................................................................9 CHAPTER 1: CREDIT UNION MISSIONS ...............................................................................11 Introduction .......................................................................................................................11 Questions for Research .....................................................................................................12 Personal Purpose of Study .................................................................................................13 Passion for the Credit Union Model .................................................................................17 Conclusion .........................................................................................................................19 CHAPTER 2: FINANCIAL COOPERATIVE PURPOSE AND HISTORY OF THE CREDIT UNION INDUSTRY (1850-1973) ...............................................................................................21 Purpose for Cooperatives ..................................................................................................22 Financial Cooperatives Theory and Background ..............................................................27 Critical Points in Credit Union History .............................................................................34 Conclusion ........................................................................................................................43 CHAPTER 3: INDUSTRY SHOCK: CHANGES TO THE CREDIT UNION MODEL (1974- PRESENT) ....................................................................................................................................44 Changes to Share Draft .....................................................................................................45 Common Bond Abandoned ...............................................................................................48 Savings and Loan Crisis ....................................................................................................57 Credit Union-to-Bank Conversions ..................................................................................58 Data Trends (1974 – 1999) ...............................................................................................59 21 st Century Credit Unions (2000s to Present) .................................................................63 2008-2009 Financial Crisis ...............................................................................................65 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 5 Data Trends (2000 - 2012) ................................................................................................68 Conclusion ........................................................................................................................72 CHAPTER 4: STRATEGIC ANALYSIS OF CREDIT UNIONS IN THE 21 st CENTURY .....75 Introduction .......................................................................................................................75 Strategic Analysis: Political, Economic, Social and Technological .................................78 Four Core Issues ................................................................................................................84 Credit Unions Straying from Their Mission .....................................................................85 Credit Unions’ Lost Identity ...........................................................................................100 Banks’ Adjustments to Industry Changes .......................................................................109 The World Has Changed: Financial Industry .................................................................115 Conclusion ......................................................................................................................124 CHAPTER 5: RECOMMENDATIONS FOR RETURNING CREDIT UNIONS TO THEIR ROOTS .......................................................................................................................................126 Legislation, Regulation, Strategic and Cultural Recommendations ...............................128 Operational Recommendations .......................................................................................139 Marketing Recommendations .........................................................................................152 The New Business Model Evaluated ..............................................................................163 Final Thoughts ................................................................................................................168 BIBLIOGRAPHY ...........................................................................................................173 APPENDIX A: UNITED STATES CREDIT UNION STATISTICS .......................................207 APPENDIX B: FEDERAL COMMUNITY CHARTER CONVERSION BY CREDIT UNIONS ......................................................................................................................................................209 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 6 LIST OF TABLES TABLE 1.1: CREDIT UNION MEMBERSHIP GROWTH BY PERIOD .................................19 TABLE 4.1: FEDERAL COMMUNITY CHARTER CONVERSIONS BY YEAR (2008-2014) ........................................................................................................................................................92 TABLE 4.2: ONE YEAR CD RATE (2003 – 2014) ..................................................................106 TABLE 4.3: FIVE YEAR CD RATE (2003 – 2014) .................................................................107 TABLE 4.4 36-MONTH, NON-SECURED LOAN (2003-2014) ..........................................108 TABLE 5.1: SAMPLE CREDIT UNION INCOME STATEMENT, APRIL 2016 ..................165 TABLE 5.2: MODIFIED SAMPLE CREDIT UNION INCOME STATEMENT, APRIL 2016 (WITH RECOMMENDATIONS) ...............................................................................................166 TABLE 5.3: POTENTIAL SAMPLE CREDIT UNION INCOME STATEMENT in 2019 ....168 TABLE 5.4: STRATEGIC RECOMMENDATIONS ................................................................169 TABLE 5.5: OPERATIONAL RECOMMENDATIONS ..........................................................170 TABLE 5.6: MARKETING RECOMMENDATIONS ..............................................................171 TABLE A.1: US CREDIT UNION TOTALS (1939-2014) ........................................................208 TABLE A.2: FEDERAL COMMUNITY CHARTER CONVERSIONS 2008 ..........................210 TABLE A.3: FEDERAL COMMUNITY CHARTER CONVERSIONS 2009 ..........................211 TABLE A.4: FEDERAL COMMUNITY CHARTER CONVERSIONS 2010 ..........................212 TABLE A.5: FEDERAL COMMUNITY CHARTER CONVERSIONS 2011 ..........................213 TABLE A.6: FEDERAL COMMUNITY CHARTER CONVERSIONS 2012 ..........................214 TABLE A.7: FEDERAL COMMUNITY CHARTER CONVERSIONS 2013 .........................215 TABLE A.8: FEDERAL COMMUNITY CHARTER CONVERSIONS 2014 .........................216 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 7 LIST OF FIGURES FIGURE 1.1: EARLY CREDIT UNION MARKETING ICON..................................................15 FIGURE 1.2: CREDIT UNION MEMBERSHIP GROWTH (1939-1956) .................................18 FIGURE 2.1: CREDIT UNION MEMBERSHIP GROWTH (1944-1973) .................................40 FIGURE 2.2: CREDIT UNION ASSET GROWTH (1944-1973) ...............................................41 FIGURE 2.3: CREDIT UNION LOAN GROWTH (1944-1973) ................................................42 FIGURE 3.1: CREDIT UNION MEMBERSHIP GROWTH (1974-1999) .................................60 FIGURE 3.2: CREDIT UNION ASSET GROWTH (1974-1999) ...............................................61 FIGURE 3.3: CREDIT UNION LOAN GROWTH (1974-1999) ................................................62 FIGURE 3.4: TOTAL CREDIT UNIONs (1974-1999) ...............................................................63 FIGURE 3.5: NCUSIF LOSSES ..................................................................................................67 FIGURE 3.6: CREDIT UNION MEMBERSHIP GROWTH (2000-2012) .................................68 FIGURE 3.7: CREDIT UNION ASSET GROWTH (2000-2012) ...............................................69 FIGURE 3.8: CREDIT UNION LOAN GROWTH (2000-2012) ................................................70 FIGURE 3.9: TOTAL CREDIT UNIONS (2000-2012) ..............................................................71 FIGURE 3.10: MEMERSHIP INCREASE BY DECADE .........................................................72 FIGURE 4.1: CREDIT UNION/BANK MARKET SHARE IN TOTAL ASSETS SINCE 1992 ........................................................................................................................................................76 FIGURE 4.2: OPERATING EXPENSES/INCOME RATIO ......................................................77 FIGURE 4.3: INTEREST RATE SPREAD (1983-2015) ............................................................81 FIGURE 4.4: CREDIT UNION VS. SERVICE SECTOR COMPARISON ...............................99 FIGURE 4.5: CU FEE INCOME AS A PERCEENTAGE OF TOTAL INCOME ...................103 FIGURE 4.6: INSUFFICIENT FUND FEES (1996-2014) ........................................................104 FIGURE 4.7: INSUFFICIENT FUND FEES VARIANCE (1996-2014) .................................105 FIGURE 4.9: NUMBER OF CREDIT UNION GRAPH ...........................................................118 FIGURE 5.1: TYPES OF CREDIT UNION BOARDS .............................................................135 FIGURE 5.2: CORPORATE SOCIAL RESPONSIBILITY VALUE CURVE .........................137 FIGURE 5.3: RELIANCE ON FEE INCOME...........................................................................140 FIGURE 5.4: THE PROFITABILITY PROBLEM....................................................................147 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 8 FIGURE 5.5: MEMBERSHIP PENETRATION .......................................................................153 FIGURE 5.6: AVERAGE CREDIT UNION LOAN PORTFOLIO (CUNA, 2016) .................164 FIGURE 5.7: SAMPLE CREDIT UNION LOAN PORTFOLIO, APRIL 2016 .......................165 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 9 ABSTRACT The paper will examine the credit union model today as well as review the origins of the industry. The question at hand is whether credit unions, as bound by their original mission, are still viable today. Chapter One outlines the various research questions that will be raised as well as the purpose for the study. Chapter Two begins by looking at the origins of the credit union movement and explains the purpose of the financial cooperatives as well as introducing the concept of being underserved, which is someone who has little or no access to traditional financial services. Chapter Two ends with a review of historical data that outlines the growth of the cooperatives. Chapter Three then looks at the various legislation that took place in the late 20 th century; starting in 1974, this chapter looks at reinterpretation of membership requirements that allowed credit unions to offer their services to other employee groups for the first time, and in the early 1980s, deregulation allowing the industry to offer a full array of financial services that paralleled what banks could offer. More dramatic changes took place in 1998 with the signing of the Credit Union Membership Access Act which allowed credit unions to offer their services to entire communities and provide their financial services to businesses for the first time. The changes in the late 20 th century changed the entire nature of the credit union, and Chapter Four looks at various data to see the effect these changes caused. In examining the data, credit union’s operating costs doubled, fees were increased and the number of underserved in America doubled in the past two decades. It appears that the credit union changes outlined in Chapter Three left behind the very people the industry was created to serve. After a thorough review of the current credit union model today, Chapter Five outlines specific recommendations Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 10 the industry should take to return the industry to its original roots. This final chapter offers recommendations for three distinct areas of credit union management and leadership that need to be addressed going forward: (1) legislative and regulatory, strategic and cultural recommendations; (2) specific credit union recommendations for operational changes to improve efficiencies; and (3) recommendations focusing on the marketing and branding of the financial model to ensure that it is representing the correct image and reaching out to the right members. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 11 Chapter 1: Credit Union Missions Introduction “You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy’s house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.” This quote from Frank Capra’s masterpiece It’s a Wonderful Life where George Bailey is trying to explain to his mob of customers who want all their money out of the savings and loan is a great way to start examining how credit unions have affected the financial industry. The lending model George describes to the angry customers outlines what credit unions have been doing for over a century…the model of “people helping people.” This financial model exists today in the form of a financial cooperative called a credit union. Starting in the early 20 th century, credit unions, which are democratically-controlled, non-profit financial cooperatives, were created by people pooling their resources to help people in their local community who were underserved by banks and other traditional financial services. Financial cooperatives were formed to assist farmers, people of color, immigrants and small towns of families who were being left behind by large banks. Credit unions became the first to provide financial services to these groups of people and proudly served them for years. This model worked and after 100 years of growth, the industry now serves over 100 million Americans today and boasts over $15 trillion in assets (NCUA, 2014). However, the credit union industry is facing some tough times and the model in which they were founded is being challenged today and in some ways is being left behind by Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 12 credit union leaders and administrators. Today over 20% of US households are underserved, as credit unions are not serving 24.8 million households today (FDIC, 2013). Many of these are low-income disenfranchised families similar to those which the early credit union leaders once served. Questions for Research Why are there so many underserved today in the United States? What is the current makeup of the underserved and why do they not utilize traditional financial services? Have credit unions lost their way in serving this segment? Is the mission, as defined by the founding fathers of credit union cooperatives, lost? Is the mission they defined at the turn of the twentieth century still viable today? Can credit unions regain their footing as the best providers of financial services for the low and middle income people? Can they offer services in areas that banks have left behind and serve the 25 million underserved in the United States? Have credit unions lost track of their core value as defined by the creators of this movement? If credit unions return to their roots, would this be financial viable? This paper will evaluate these questions and create an understanding of where credit unions are today and where they need to go in the future. Finally, the fundamental questions on which this entire paper is based are common ones in many industries. Should and how can credit unions return to their roots? Are the founding fathers’ principles still valid? Is the traditional model better than the contemporary? Many times the past seems romantic, and history is cleansed to give one a false belief that the past is better than the future. The purpose of this paper is to examine the fundamentals and core values of the credit union industry’s past and provide recommendations for the industry to follow going forward. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 13 In researching these questions, the report is divided into five chapters. Chapter One, this chapter, will look at the questions for research and discuss the personal purpose of this study. Chapter Two will outline the purpose and history of credit unions up until 1974. Chapter Three will then look at the major changes brought about with deregulation in the 1970s and membership requirement legislation adjustments that were signed into law in the late 1990s. Chapter Four will then evaluate the current state of the credit union industry and outline the challenges the current model faces, and Chapter Five will provide specific recommendations for the industry to address the issues raised in Chapter Four. Personal Purpose of Study For over 20 years of my professional career, I have worked in credit unions. When I was just 18 years old, I was hired to work at Xerox Federal Credit Union in El Segundo, CA for a college job. I did not know what a credit union was in 1988 when I started, but after a short period of time, I grew to understand and appreciate the model. Frankly, I never expected to spend twenty years in this industry when I started as an entry-level employee, but I quickly moved to a credit union executive position over the next decade. It was supposed to be a part- time job, but it turned into a lifelong passion, one in which I am still involved. After seeing many changes and talking with my colleagues I started to wonder if the model that I came to know is still viable and created an interest to research this industry in great detail. The personal purpose of my research is to evaluate the legislation and culture changes that have been made over the past few decades in this industry and determine if the current data supports the new model, or if we should return to the model that the founders created. Perhaps the new model is Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 14 the only one that works today? The goal of this research is objectively look at the data and see if the current credit union direction the leaders of the movement is the best for the future. When I first started, I remember a wonderful older woman named Carol, who had worked in the credit union since the 1960s. She was the Marketing Director at Xerox Federal Credit Union (now known as Xceed) and was my personal mentor and credit union sage. She told me story after story, teaching me about how credit unions are not driven by shareholder’s desire for massive profits, but by helping fellow employees and members achieve their financial goals. “We do not pay interest,” she would say, “we pay dividends…we don’t have customers, we have members!” She would continue and state, “we pay the best rates because we return the profits of the cooperative back to the membership in the form of lower rates and dividends.” Carol told stories from the “glory days,” and one particular story sticks in my mind and changed my entire outlook on this sector of the financial industry and changed the trajectory of my career. In late 1970s the United States was experiencing a sharp recession. As a result, many people were struggling to get by. Jobs were lost, payments were missed and our members were suffering. My colleague Carol was working in the lending department at the time, when a woman name Ann, who was in her mid-60s, entered the branch. She had just lost her husband, who worked at Xerox for 30 years. The two of them opened a joint account when they first got married and they were loyal members. She needed a hip operation, but complications with her health insurance meant that she was responsible for a large portion of the cost. She never worked a day in her life, as she managed the home, she had little cash, few assets and not much financial savvy and simply could not pay for this operation on her own, as such, Ann came to the credit union because, as she proudly stated, “this is the place I trust.” After 30 years at our Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 15 institution, where she bought cars, purchased savings bonds for her children and grandchildren, and came in each week to cash her husband’s paycheck, she needed help. Carol took her application, but the numbers did not work. She could not possibly make this loan to Ann, so she called her boss, who in turn called the President of the credit union. After a few minutes of looking over the file, the President said, “we don’t book loans just by the numbers here…we look at the quality of their character! She has been a loyal member of this credit union for 30+ years,” he stated. “This loan is approved and I will put my reputation on the line that this woman will pay us back every cent!” The loan was approved. A five year personal loan was issued for $3,500…it was paid in full two years early. As it turns out, Ann had the surgery and started a part time job at a local embroidery shop. She did not make much, but with some belt tightening, she was able to take care of her obligation. Just recalling this story and writing it down brings emotions that I can’t describe. As a business student at Loyola Marymount, I was taught that you must “maximize shareholder wealth” and ensure that you have sound operations and controls; yet I was working where they took chances with people and did not always follow the written code. These people believed in judging a person’s character, not the amount of money they had in their account. At that moment, I became a believer, and I am proud to state that I still am part of this movement 27 years later and I proudly serve as a volunteer Board Member for LA Financial Credit Union. Figure 1.1: Early Credit Union Marketing Icon (America’s Credit union Museum) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 16 However, in remembering this story, I can’t help but ask myself, “would this have happened in a credit union today?” Sadly the answer is no – which is the fundamental reason for my study. Can the model of the past be reintroduced today? Is this model still viable? I still believe that the original credit union model is feasible and sustainable and I hope that this study can provide some insight to industry leaders and help them return to the roots of what made credit unions a fundamental institution of the United States. My education about credit unions continued as I progressed in my career. About 17 years ago, as the Senior Vice President and Chief Information Officer, I worked in a credit union that changed to a new software system. The new system was from a banking software company that acquired a credit union software company. They simply thought that banks and credit unions operate the same; so naturally, the software could be the same. This was not true, but this paper is not about software, it is about credit unions. As a new customer of this system, I was invited to the software company’s user conference where both banks and credit union management would attend. The first night I strolled down to the reception area to network with other executives and as I entered the ballroom of the hotel, I saw hundreds of men in sports jackets talking politely with each other, drinking wine and listening to quiet music. After a few minutes of mingling, one of the vice presidents of the new software company, who knew me, told me I was in the wrong reception area, he stated that I was in the banking reception and the credit union reception was the next ballroom. I excused myself and went to the next room where I saw a different scene. I saw men and women casually dressed, laughing, dancing to louder music and appearing to have a wild time. I smiled to myself and realized, banks are simply different from credit unions. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 17 Let me repeat, credit unions are different from banks, and in many more ways than the staffing of the organization and legal structure. Credit unions differ in both their charter (non- profit status) and the culture they represent. However, things have changed over the past few decades, as credit unions seem to be seeking to become more like banks, as this paper will examine. Simply put, credit unions have lost their way and need to return to their roots, or they will cease to be different from banks and continue to disappear as a financial institutional choice that many Americans utilize. Passion for the Credit Union Model The model is simple and it works, so why stray? Credit unions were developed in the early twentieth century to provide a cooperative of credit for certain affinity groups. In other words, if rural farmers in North Carolina needed financial assistance, getting a loan from a larger institution was difficult and costly and it was well documented that in 1910s “Tar Heel farmers suffered from exorbitant loan interest rates” (NorthCarolinaHistory.org, 2015). So the local farmers pooled their resources, hired a manager of the funds (most of the time a volunteer was used) and as a collective, they were able to pool their monies together to help other farmers buy seed, tractors or various other capital expenses. A small percentage of the interest income from the loans would pay for the administrative costs and the rest would be returned as dividends to the participating farmers. Farmers were able to make money by investing in other like-minded people in their own community. This happened all over the United States, from Massachusetts to Mississippi, New York to California; financial cooperatives were started and began to thrive in the early part of the 20 th century. This model also disintermediated the banks, since people could rely on each other rather than a third-party such as a bank. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 18 The model of helping people in a responsible, managed way is the core of the mission. The credit union manager was responsible for running the institution, approving the loans and collecting payments. It was a simple model of people helping people, and people flocked to this model. In 1939, 2.3 million Americans were members of credit unions. For the next 38 years membership would grow at 1 an average annual rate of 7.1%. Figure 1.2: Credit Union Membership Growth (1939-1956) This simple model also changed the financial world. Banks, which had a monopoly on lending, were suddenly challenged. At first, as in most industries, the larger established business ignored the smaller, seemingly insignificant threat. After all, credit unions were attracting very small clients that the banks were not really interested in serving anyway. But as this movement 16% 17% -5% -3% -3% -3% 8% 8% 11% 8% 11% 11% 12% 11% 10% 10% 10% 8% -10% -5% 0% 5% 10% 15% 20% 1940 1939 1944 1943 1942 1941 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 Credit Union Membership Growth (1939-1956) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 19 grew larger, banks took notice and began to fight back. Many bankers are now engaged in legal battles with credit unions, as they are challenging the credit union mission and tax-status. Conclusion I witnessed the change of the credit union mission as I worked at Xerox, Lockheed, LA Financial and USC credit unions from the 1980s into the 2010s. As stated above, growth in the first 34 years of the movement averaged 7% per year. However, when credit unions changed dramatically in 1974 when they added share drafts (checking accounts) from 1974 until 1998, the growth in membership has dropped to just 3.2% per year. With the passing of the Credit Union Member Access Act in 1998, where federal community credit unions and business lending were allowed, the rate of growth from 1999 to 2015 slowed to an anemic 1.2%. And with the underserved population doubling in the last two decades, it would seem that credit unions should be growing at a much larger rate if they were staying true to their original mission. Years Average Annual Growth 1939-1973 7.0% 1974-1998 3.2% 1999-2015 1.2% Table 1.1: Credit Union Membership Growth by Period What happened? I believe the mission changed, as credit unions stopped focusing on the underserved. Looking at the data further, the future is grim for the credit union industry. According to a Credit Union National Association study in 2013, the average age of a credit union member is 48.5 and 39% of Americans do not know what a credit union does. In a recent Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 20 study, it was found that 69% of people age 18 to 24 know very little about credit unions (Rodgers, 2011). This age and awareness problem is a concern for the industry, since average income and expenditures peak at age 50 (Credit Union Savvy, 2011), which will most likely mean that revenues for credit unions will suffer if they cannot attract younger members. This paper will focus on examining the credit union model, both in the past and present, and then create recommendations to help industry leaders succeed in today’s financial market. Currently, I am serving as a Board Member for LA Financial Credit Union in Pasadena, CA where I hope my research on credit unions can be utilized to assist our membership. Credit unions are an important part of the financial industry, and it is with great sincerity that I hope this paper will help contribute to the future success of a model of people helping people. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 21 Chapter 2: Financial Cooperative Purpose and History of the Credit Union Industry (1850-1973) Cooperatives have existed for several centuries. While cooperatives can take many different forms, this paper will investigate the credit cooperative known as the credit union, and this chapter focuses on the history from 1850 to 1973. The start of the credit union movement can be traced back to Germany, where “Hermann Schulze-Delitzsch, a politician and judge, founded the first urban credit cooperative in 1850” (McKillop, 2009). The first rural credit union was started by Friedrich Wilhem Raiffeisen, a mayor in a small town of Flammersfeld, Germany, who started experimenting with cooperative credit, to help provide loans to the poor of his district in 1864 (Bergengren, 1937, p. 144). The credit union was born with a principle of helping low income households gain access to credit at reasonable cost and to protect these people from “the great social and economic curse” (Bergengren, 1937, p. 148) of usury. Today, credit unions provide a major financial service worldwide for many members that are part of some type of community and account for about 10% of the market share in the financial community (Credit Union Journal 2010). The community was defined by credit union law as: “organizations that are limited to groups (of both large and small membership) having a common bond of occupation or association or to groups within a well-defined neighborhood, community or rural district” (Neifeld, 1939, p. 323). Credit Unions are non-profit, member-owned entities that provide credit access to their membership, which may or may not have been available through other financial organizations. The purpose of this chapter is to provide an introduction to the financial cooperative and understand the basic overview and history of credit cooperatives known as credit Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 22 unions. This chapter consists of a discussion of the following: purpose for financial cooperatives, an understanding of financial cooperatives in terms of its theory and background, and a look at the critical historical events in the US credit union industry from 1900 to 1973. Purpose for Cooperatives The best place to start the history of credit unions is with an understanding of their existence. In the mid-19 th century very few people had access to capital and outside of the affluent and well connected, getting a loan was challenging. When they did find access to funds, the rate and terms were unbearable for the borrower. “Prior to 1782, when the first public American bank (the Bank of North America) was chartered, financial intermediation occurred through private lenders. Borrowers from private banks were allegedly charged exorbitant rates of interest; financial intermediaries were scarce” (Meissner 2005, p. 509). A new financial model, in the form of public banks, came into being that would be used as a model in the early days of the United States, but this model still did not serve the average United States citizen. “These [public chartered] banks often resembled familial clubs” that had tight lending practices to the well-connected and “bankers showed judicious restraint” in lending (Meissner 2005, p 510). As a result, capital was scarce and people had to seek other means to secure a loan. In finding these private lenders, usury ran rampant. Even though usury “laws and moral charges can be traced back to 1800 B.C” (Blitz 1965, p. 608) and “the code of Hammurabi, the Old Testament, Vedic and Roman law, and the Koran among other religious and legal codes banned usury” (Bodenhorn, 2005, p. 179), people in modern times have become victims. Even with US regulatory protection provided by the Consumer Financial Protection Bureau, and various state laws, consumers have been historically underserved by the financial industry. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 23 Worse, data has shown that early American banks regularly violated usury laws (Horowitz, 1977). So even if someone did break into the “club” and found a lender willing to loan them money, they often paid a high cost of capital; in some cases, borrowers often had to pay twice, even thrice, the legal limit (Bodenhorn, 2005). The government of the United States reacted, as all but three states had usury laws on the books by 1900. While the usury laws had three objectives, protect the small borrowers, curb monopolistic power of the creditors, and regulate the allocation of resources (Blitz, 1965) but the laws did not work. The laws to protect consumers actually decreased the amount of credit available; since banks were not allowed to a charge exorbitant rate, they would simply not loan out money to certain groups. In short, the banks during these years chose to offer loans to their familiar clients and excluded those whom they felt were a poor investment since they could not charge adequate rates to absorb their perceived risk. In some cases, racism played a role in our banking system. In the rural south, as Neil McMillen wrote in his book, Dark Journey: Black Mississippians in the Age of Jim Crow, “blacks could not get credit at white institutions.” The author continues the point by writing, “in black counties the idea of borrowing money from a bank seemed ludicrous. ‘[You] couldn’t get no money out of a bank’ Clinton Andersen stated, ‘[you] had to borrow it from private folks’ (McMillen, 1939, p. 154). This story and many others led to people working together to form cooperatives. It may be logical to think that the financial industry progressed past this problem as the nation moved into the 20 th century and beyond. However, as the financial world began to serve larger populations after World War II, there were many communities that were underserved, and today there are still millions of Americans that are underserved. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 24 Underserved Defined. Before we continue forward, let us examine the underserved segment. The underserved are people who do not have a checking or savings account and do not use or want to utilize a US regulated financial institution. Instead, these people turn to the informal banking sector, which “provides savings and credit facilities for small farmers in rural areas, and for lower income households and small-scale enterprises in urban areas” (Germidis, 1991, p. 6). There are many options these underserved families can choose from when needing to cash a check or get access to credit. According to a report by the Congressional Research Service, these households utilize the following four alternative services: check-cashing firms, rotating savings and credit associations (ROSCAs), unchartered banks, or pawnshops. In all cases, the costs of using these services are higher, as are the risks associated with these unregulated sources (Chiteji, 1991). The demographic makeup of this sector includes families that are poor and many that are recent immigrants to the US. When looking at the underserved data it shows that “55.1% had incomes in the lowest 20% of that distribution, 56.6% were cases where the family head was younger than 45, and 61% were nonwhite or Hispanic” (Stanley, 2006, p 2). The evidence is clear that higher income, more education, and greater proficiency in English decrease the probability of being underserved (Stanley, 2006). In some cases, many folks do not have any access (physical or virtual) to financial institutions, so they choose to utilize alternative sources that are convenient (Sivy, 2012). As we know, 24.8 million Americans are underserved, and according to a recent study conducted by the FDIC in 2013, 30% of the 230 billion financial transactions in the US occur in an alternative financial service (ROSCAs, pawnshops, check-cashing firms and unchartered banks) costing the Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 25 consumer billions in fees. To quantify this, on average, families “without a bank account pay $15,000 in fees over a lifetime to check cashers/fringe bankers. Furthermore, the annualized interest rates charged by check-cashing outlets range from 213% to 913%” (Stanley, 2006, p 2). Looking at the various informal services they use, let us look first at check-cashing and remittance services; these are services that allow people without banks to cash checks and send wire transfers, usually to their home country. In using a check-cashing service, the fee can be upwards of 3% of the check amount, where according to a recent study, a family making $50,000 a year will spend $1,506 in fees to get access to their paycheck (Bell, 2011). There are an estimated 13,000 centers in the US today and the industry is growing rapidly; since 2004 the revenues in check remittance fees have grown from 12.9 billion to 18.3 billion and are expected to rise further (FDIC, 2013). The second alternative financial service is rotating savings and credit associations. ROSCAs have existed in the United States for 80 years and are very commonly used by immigrants to America. ROSCAs are “an association formed upon a core of participants who agree to make regular contributions to a fund which is given, in whole or in part, to each contributor in rotation” (Ardener, 1964, p. 201). For example, 10 people get together and put $100 a month into a general fund, and each month, a different person utilizes the funds, until all members of the ROSCA have used the funds. While this service helps people in the short term, these monies that are pooled are not invested and interest income is lost. These are self-policing, unregulated funds and are quite effective for their members (Chiteji, 1991), but they pose more risk for customers than the regulated financial industry. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 26 In researching ROSCAs, data are difficult to locate, but some small surveys find these are quite popular in immigrant communities. “Although no firm numbers exist to document the number of ROSCAs in the U.S. or the number of total participants, informal estimates abound. In 1983, the Korea Times estimated that there were ‘at least 1,000’ ROSCAs in Los Angeles” (Hevener, 2002, p. 222). In the same survey, it was estimated that a staggering 50% of foreign- born Japanese in California utilize a ROSCA. Another informal banking choice for US households is unchartered banks, which are banks that are not licensed or regulated by the United States and offer similar services informally to their users. While they often license themselves as an “investment club” (Chiteji, 1991, p. 2), they are not legal, safe, or inexpensive services to use. Regardless, they are quite popular with the immigrant communities and those of lesser means, but they post great risk to the investors. While they act like a bank, they are not insured and they offer services at much higher rates than banks or credit unions. The exact count of unchartered banks is difficult since they are illegal and operate in secrecy. The last alternative financial service to consider is pawnshops. Pawnshops are another place where people seek credit and where people can borrow money at a certain interest rate in exchange for collateral. The cost of using these alternatives is staggering; a study by the Center for Financial Services Innovation states that US households annually spend $89 billion dollars in costs and fees associated with these lending sources. To make matters worse, the number of pawnshops has grown tremendously over the years. In 1911, there were 1,976 pawnshops in the US, and by 2010, that number grew to over 10,000. In other words, there was one pawnshop per 47,500 people in 1911, and that increased to one pawnshop for about 35,700 people (Caskey, Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 27 1991). Today that number is roughly one for every 30,900 persons, showing the trend continuing to increase for this informal financial service. With a full understanding of the underserved problem both past and present, and with all these issues listed above: lack of capital, usury, bigotry, underserved markets, and nepotism, the concept and purpose for the financial cooperative was developed. The basis for the new cooperative model can be stated as such: “a cooperative business is established to benefit all of its members/owners. This notion has been with the credit union movement since its inception and clearly separates credit unions from all other financial businesses” (Kimmett, 2005, p. 71). Financial Cooperatives Theory and Background In understanding the purpose of cooperatives, this paper specifically investigates the theory, concept and purpose of financial cooperatives in general. “In cooperative credit societies, members pool their savings and from the pool make loans, charging a carefully restricted rate of interest, which results in earnings that turn into surplus (against the possibility of a bad loan) and dividend to the members” (Bergengren 1937). This cooperative credit allowed those with lesser means access to credit. The poor and minorities in many areas simply did not have credit resources in the 19 th century and if the need presented itself to borrow money, they were required to seek “alternative” sources of capital that were costly. This alternative source charged excessive interest rates; for example a $30 loan could cost $1080 in interest (Bergengren 1937, p. 144). To answer this concern, in 1900, the credit union movement crossed the Atlantic to Levis, Quebec, where Alphonse Desjardins organized a credit union to help relieve the working class from usurious interest charged by loan sharks (Hayes, 2005). The history of the credit Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 28 union movement in the United States was started in Massachusetts by a gentleman who was influenced by the cooperative model he personally saw in Canada. The first credit cooperatives, utilizing the model that Raiffeisen developed, were founded by Alphonse Desjardins in North America, first in Canada and then in the Catholic Parishes in New Hampshire and Rhode Island. He called these credit societies La Caisse Populaire or People’s Bank (Bergengren 1937, p. 145). St. Mary's Cooperative Credit Association of Manchester, NH holds the distinction as the first credit union in the United States. Assisted by a personal visit from Alphonse Desjardins, St. Mary's was founded by French-speaking immigrants to Manchester from the Maritime Provinces of Canada in November 1908 (“St. Mary's Hosts 100th Annual Shareholder Meeting” 2009). The credit union was chartered as "St. Mary's Cooperative Credit Association" and required the purchase of a $5 share of capital stock to become an owner/member. The purchase of one share of stock for $5 is still in place today. This model, outlined by Desjardins, was to become the credit union movement, where people of common bond would pool their money and create a local community credit union. In other words, the cooperative would coordinate the pooling of capital from investors and pay a dividend on the money invested by loaning it to other like-minded members and charging interest on the monies borrowed. As the borrower paid off their debt in monthly payments, the interest charged would be returned to the investor as a dividend. Any excess money would be used to pay for operating costs, reinvested in the cooperative or returned to the investors in the form of a year-end dividend. Note that there were no shareholders and the credit union was a nonprofit organization, returning all money to the cooperative. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 29 Some would argue that the early start of credit unions was not as successful as the proponents of the movement wanted people to believe. While the model was simple, as outlined above, the early credit union model only seemed to work for specific industries, businesses and communities that were predominantly in the north east of the United States in the early history of the movement. The popularity of the credit union did not spread outside of this area until later in the 20 th century (see the next chapter for the growth of credit unions) and eventually they were opened in all 50 states, covering varying industries and communities. Let us dig a bit deeper at the financial cooperative model and look at the defining features that contributed to the success of credit unions early in their history are: economies of operations; common bond; development of thrift; and development of administrative ability (Neifeld, 1939, p. 325). Four Principles of Credit Unions. First, economies of operations provide credit unions a unique advantage to other financial institutions, which allows credit unions to provide lower rates on loans. First, credit unions had an overall lower risk due to their model of lending. In the beginning, “unsecured loans were not allowed to exceed $50, and if they exceeded that limit another member would endorse the loan and minimize the risk” (Neifeld, 1939, p. 327). However, this was not the only reason for the lower cost of operations. The operations of early credit unions were run by volunteers, who were paid no salary. This salary expense would give the credit union distinct advantages over other institutions. Another reason for the lower costs was due to corporate subsidies. These subsidies would come in the form of free space to perform their operations. A third advantage credit unions enjoyed was governmental subsidies. These subsidies would come in the form of a non-profit status, which would exempt the institution from Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 30 taxation. Lastly, philanthropic subsidies would assist credit unions. Many individuals, such as Edward Filene, Pierre Jay, Alphonse Desjardins and others would give time and money to the cause to ensure its success. Many of these economic benefits do not exist today in credit unions, as we will discuss later in this paper, but these benefits were critical to the early success of the movement and are a key element to the long term success of the industry. A second factor that favors the early credit union movement is the common bond of its membership (Neifeld, 1939, p. 332). This bond allows for a credit union to prosper as it restricts access to the institution unless there is a singularity in the affiliation of the membership. This has a tremendous effect on the cooperative with regards to participation and risk. In other words, when marketing to a select group of members, a credit union could minimize costs by promoting the credit union at specific controlled locations that would have a high density of members and potential members. In other words, if Xerox Federal Credit Union wants to attract more members, they can go to the employer’s site and deliver the message to 100% of potential consumers, thus cutting the cost and increasing the return on marketing dollars spent. In contrast, if a credit union had to advertise to the general public, the cost most likely could not justify the return. In the early days of the movement, employers often granted space at limited or no cost inside the business. Most often, credit union members would share the same employer and this relationship would spill over into the relationship with the credit union providing stability and long term success. The early credit unions were successful only in employment groups with low turnover and steady work (Neifeld, 1939, p. 333). Therefore the success of the business was directly related to the credit union’s success. When there was employment strife, such as the Boston police strike in 1919, the City Employee’s Credit Union experienced financial Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 31 losses from some of its police members as they were unable to pay their obligations (Neifeld, 1939, p. 334). Future credit unions would adopt a more diversified approach to this issue, but the early credit union cooperative usually had a single-source membership bond. This common bond was a helpful factor to the early credit unions, but since all the “eggs are in one basket,” if the employer has trouble, the credit union can fail since its interests are not diversified across a cross-section of employment. However, early credit unions were somewhat restricted since the “reliance on the common bond as a factor for reducing operating expenses limits the possible size of the credit union” (Neifeld, 1939, p. 336). Issues with the growth, common bond and diversification of membership as competing factors will be investigated further in Chapter Three. The third factor for success is the “development of thrift among its members” (Neifeld, 1939, p. 339). As a cornerstone of the credit union movement, financial literacy is emphasized to help members understand the various financial products and services that are available, in order to help members save money and promote thrift. The education and opportunity for members to save systematically is very appealing to the underserved and unbanked, as they did not have access to reasonable financial services before the credit union model was available. However, the common bond feature, as pointed out above, could cause the savings to be at risk. “If a common hardship should affect every member of the credit union who should apply simultaneously for credit, the more thrifty members would be disappointed” (Neifeld, 1939, p. 339) since the money they saved would not be available and they would not be able to borrow. This caused a problem in the early model for credit unions, but from a positive perspective, learning about and encouraging savings was beneficial to its membership. In today’s credit Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 32 union, what was once a core purpose for the credit union movement, the goal of financial literacy is floundering, as only 32.1% of today’s credit unions provide financial education (CUNA, 2013). The last factor is the “development of administrative ability” (Neifeld, 1939, p. 344). Individuals in the early part of the 20 th century while working in the credit union field began developing the necessary skills to manage a credit union. This ability was somewhat limited only to the few in the early days of the credit union and was cause for some concern; since having a limited number of experienced credit union administrators would leave the cooperative open to risk if a few left the organization, and in the early stages many thought the credit union movement would never succeed (Neifeld, 1939, p. 345). While this has little impact on today’s credit union, the movement proved that a cooperative can be started and maintained successfully without hiring expensive, experienced staff. This aspect of the model would change over time, and with technology of the 21 st century, credit unions need professionals to manage the operations, but the early movement was about people helping people and with limited access to administrators, the early model would require that people would learn the skill to promote the well-being of the credit union. This concept lead to a greater trust, since the administrator was “one of their own” in the common bond, and this familiarity helped credit unions survive some of the toughest times in US history. During the depression, credit unions remained open during the darkest days due to the faith members had in credit unions and their local administrators. Additionally there were nearly no runs on any institution, due to “honest and efficient” management (Bergengren 1937, p. 147). So despite concerns about turnover of administrators, it Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 33 appears that the model succeeded despite this risk, as people helping people created a trust that helped sustain the initial model. In concluding the background of cooperatives, the model created in Germany, where rural communities pooled resources and helped the poor in their districts, had successfully made its way to North American in the early 19 th century. In Canada and the United States, the model shifted subtly to a common bond of employers and small communities to provide thrift and savings. For proponents of the credit union movement, the credit union was a “cooperative that seeks to perform a high and important public service, by seeking to eliminate the wastes of high- rate money lending” (Bergengren 1937, p. 148). For better or worse, the credit unions industry affected how ordinary people gained access to credit and financial services. Many people who did not have access to low cost credit turned to credit unions, who loan money “based on character” (Cassity, 2000, p. 337), rather than on collateral and other measures. This culture of lending that characterized credit unions throughout their early history was a distinct reason that people of lesser means were able to join and borrow money from the cooperative. However, the early movement was not without its critics who said, “the credit union movement will probably become somewhat more important, but it is doubtful if it will ever realize the expectations of its friends and supporters” (Neifeld, 1939, p. 345). Depending on measurements, it can be argued that credit unions did achieve success in the United States; however, the movement has had its highs and lows. In the next section, this paper will look at the critical points in credit union history and how these have had effects on the current movement. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 34 Critical Points in Credit Union History Historical Background (1900 – 1934). After St. Mary’s was founded in 1908 in New Hampshire, Edward A. Filene, a Boston businessman and economist cooperated with Pierre Jay, the Bank Commissioner of Massachusetts, to enact a law to organize credit unions (Bergengren 1937, p. 145). The model was the financial cooperative, where low and moderate income people could gain access to credit at a reasonable cost. The cooperatives would be volunteer, non-profit organizations that took in deposits from a common membership group, and made loans to these members. Edward Filene hired Roy Bergengren to assist in spreading the movement to other states. Mr. Bergengren drafted the Uniform Credit Union Law stating “a credit union is a cooperative society incorporated for the two-fold purpose of promoting thrift among its members and creating a source of credit for them at legitimate rates of interest for provident purposes” (Neifeld, 1939, p. 323). This law was passed by the Massachusetts legislative early in the movement and provided a baseline for many states and eventually the federal credit union legislation (Clark 51). The credit union idea spread to other parts of the United States and in one early example in North Carolina, the legislature passed a credit union law in 1915 that allowed farmers to create credit unions, whose purpose was to take in deposits and give loans for productive purposes for farmers (Camp 1916). In just six months, seven credit unions were formed to provide credit services to farms in rural North Carolina. Until this law was passed in North Carolina, and credit unions started providing these services, because “unorganized farmers generally had to depend upon one agency for credit” (Camp, 1916, p. 689) and in many cases they did not loan money Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 35 cheaply to rural areas. In the opinion of banker’s at the time, “your credit union provides the machinery for getting credit into the country which we need. We have plenty of funds to loan but no way of getting them out to farmers” (Camp, 1916, p. 690). In North Carolina, credit unions replaced commercial banks, because “unlike a bank, a credit union can operate on a smaller scale” (Camp, 1916, p. 691). By creating a niche, credit unions were able to help specific groups of people who had some affinity such as farmers, state workers, telephone employees, city employees, military personnel, federal workers, factory workers, African Americans, and many other groups that were underserved by the banking industry. In New York, the Russell Sage Foundation was founded and assumed initial responsibility for getting the credit union movement off the ground in New York City. The foundation, established in 1907 for the “improvement of the social and living conditions in the United States,” financed “anti-loan shark campaigns, and promoted credit unions as the solution” and in the “early years, paid organizers traveled from place to place to stimulate interest in credit unions” (Barron 396). Additionally, in 1921, in order to promote the credit union model throughout the United States, Mr. Filene organized the Credit Union National Extension Bureau (known today as Credit Union National Association (CUNA)), financing it with one million dollars with the objectives to (1) to obtain necessary laws, (2) to make major organization demonstration and (3) at the earliest possible time, to organize credit unions resulting from its activities into State Leagues and a National Association (Bergengren 1937, p. 145). This work of Mr. Filene and the Russell Sage Foundation undoubtedly propelled the early movement and was a major catalyst for credit unions to grow and thrive in the United States. The early works of the American philanthropists carried forward the finance cooperative. These people were Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 36 dedicated to promoting and educating people who had limited access to financial services, ensuring that they were aware of choices they had, and helping coordinate and organize the development of cooperatives that could serve a group of people with a common bond. Historical Background (1934-1973). As the movement continued into the early 1930s, the growth of the credit union industry was not “outstandingly successful” (Neifeld, 1939, p. 325) as most of the growth of credit unions was centered in three New England states. In 1934, in part to spur the spread of credit unions and to “remedy the truly national problem of usurious money lending which made it difficult for people of small means to obtain credit” (Cassity 2000, p. 335), the Federal Credit Union Act (FCUA) proposed by Senator Morris Sheppard was passed by the U.S. Congress, which allowed “Federal credit unions to be formed during the height of the great depression to provide working people with access to affordable financial services through a cooperatively owned financial institution” (2005 House Ways and Means). Federal credit unions would be organized as “cooperatives of small investors having small savings and limited to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, small community or rural district.” With the passage of this law, research found that “the act enhanced the institutional standing of all credit unions in the short run and thus increased founding rates of all types of credit unions” (Barron 396). When the Federal Credit Union act was passed, the United States was in the middle of the depression. The credit union movement survived as “no banks in all history have a better record during the depression” (Bergengren 1937, p. 147), where very few, in relative terms, had to dissolve. While banks were closing their doors, many people had to turn to credit unions as a Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 37 safe place to secure their money. “In 1931, 2298 banks suspended operations, and the following year the number was still high, reaching 1456; furthermore a Princeton University study found that 34.5 percent of all bank deposits had been lost, as had 35.9 percent of company investment funds, and 32 percent of investments in building and loan societies. In contrast, only 6.7 percent of investments in credit unions had been lost” (Ryder, 2009, p. 76). Surviving the depression showed that the financial cooperative model was able to withstand great pressure from extreme external economic situations; it also demonstrated that average Americans with a common bond could work together to form a cooperative to assist each other in a time of need. In one example of how the passage of this act helped ordinary Americans, the Pasadena Schools Federal Credit Union was founded in 1936 by a group of teachers to make credit more available to “people of small means;” this modest start was helpful for many people and this credit union still serves the teachers of the Pasadena area today and has over 9,700 members with assets over $100 million (NCUA Call Report, 2015). After World War II, the credit union had significant success. From 1946 to 1957, credit unions grew in membership by 10% per year and their loan portfolio grew at 17% (CUNA). Being utilized primarily by blue collar and low income families, credit unions were a beacon for returning soldiers as the “baby boomers” began their lives. Considering that car loans and personal loans were all credit unions could offer (mortgage offerings were not offered until the regulatory changes in 1973), the growth showed how the cooperative model could help fund and assist everyday people. As the growth continued, Congress took note and a few laws were passed to help the movement. In 1970, the “National Credit Union Administration (NCUA) became an Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 38 independent federal agency. Congress also created the National Credit Union Share Insurance Fund (NCUSIF) to protect deposits at credit unions. The assets and members served in U.S. credit unions grew tremendously during the 1970s, as the number of credit union members more than doubled during the decade, and credit union assets tripled to more than $65 billion” (NCUA.gov). Furthermore, credit unions were called upon further to help those with less, as an act was passed to alleviate a problem that credit unions have raising capital. Much different than a bank that can raise capital independent of its customers, ALL credit union capital comes in the form of share deposit from membership. Since this causes problems in low-income areas and since a credit union cannot lend more money than it has on deposit (less a reserve rate), an act was passed in 1970 that “established authority for low-income designated credit unions to accept non-member share deposit” (2005 House Ways and Means). This action allowed about 12% of credit unions to raise funds to bring in investment into the lower-income neighborhoods. Much has changed since the idea came to a German mayor; the credit union movement from the early 19 th century until around 1973 was characterized as a small powerful movement that helped many in “common bond” areas such as rural farmers, federal and state employees, manufacturers and other employee groups. Until deregulation occurred in the late 1970s, which will be discussed in Chapter Three, credit unions had a simple model. Take deposits from a group with a “common bond” and then grant access to the entire membership to take out loans against the capital collected from the collective and charge the members a reasonable interest on their loan. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 39 One concern continued to be prevalent with the credit union leaders of the time. As Neifeld pointed out above, cooperatives had little to no diversification due to the common bond provision in the credit union law; and with this lack of diversity, the chance of a failure in the system appeared higher to some. As Chapter Three will outline, the NCUA addressed this inability to diversify in the credit union movement which will cause the model to shift dramatically. In addition to NCUA regulatory changes, and after the passage of a new law deregulating financial institutions, credit unions would begin to take on a new form and a new approach to how and what services were offered and to whom they can offer these services. This new approach appears to have had some great bonuses, but apparently may have also brought a lot of controversy and problems for credit unions. The question arose as to whether credit unions would keep to their traditional roots and motivation as an organization, and in the words of an early proponent, show that “cooperative finance proves that there is a better motivation in human affairs than the private acquisition of things, to demonstrate that the brotherhood of man is good business” (Bergengren 1937, p. 148). Data Trends. To conclude this discussion of the early history of credit union it is useful to examine various data trends during this period. Data are presented below in three areas that are universally used to measure the performance of these financials firms: credit union size (number of members), asset growth, and loan growth. By looking at these trends, we can measure the basic success of these firms and see trends to reflect upon to determine the relative success of the movement. Credit Union Size (Member Growth) 1939-1973. According to CUNA mutual, credit unions had 2,251,466 members in 1939, and that number moved up to 27,440,700 in 1973. With Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 40 the exception of the World War II years, credit unions added members to their ranks each year and membership grew at an average rate of 7%. The “boom” years of credit unions came right after the war where eight out of nine years saw a 10% increase in membership growth. Figure 2.1 shows the overall trend of member growth during the early years of credit unions and represents 1,119% overall growth. Figure 2.1 Credit Union Membership Growth 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 ’40 ‘42 ’44 ’46 ’48 ’50 ’52 ’54 ’56 ’58 ’60 ’62 ’64 ’66 ’68 ’70 ’72 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 41 Asset Growth 1944-1973. Looking at asset growth, which shows the overall size in terms of assets, CUNA mutual states that in 1944 credit unions had $396,295,985 and that number swelled to $ 28,229,234,202 in 1973. After World War II, in connection with the increase in membership, the credit union movement saw major increases in asset growth, where growth never was lower than 14%, with 24% being the highest in 1946. The overall average growth rate for this period was 14%. Figure 2.2 shows the overall trend of asset growth during the early years of credit unions. When adjusting for inflation (using real US consumer price index), the real growth in assets was 2,724%. Figure 2.2 Credit Union Asset Growth 0 5,000,000,000 10,000,000,000 15,000,000,000 20,000,000,000 25,000,000,000 30,000,000,000 ’44 ’46 ’48 ’50 ’52 ’54 ’56 ’58 ’60 ’62 ’64 ’66 ’68 ’70 ’72 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 42 Loan Growth 1944-1973. The last data to consider is loan growth, which is very significant, since most of the revenue a credit union is generates from loan interest income. As loan growth increases, the revenue for the entity increases, allowing for better services and return to the membership. In 1944, credit unions had $121,923,835 in loans outstanding to members; this number grew to $21,697,130,876 in 1973. Similar to assets and membership growth, the biggest years for loan growth were right after World War II and the loan portfolio of credit unions grew at an average rate of 16% for this time period. Figure 2.3 shows the overall trend of growth during the early years of credit unions. When adjusting for inflation (using real US consumer price index), the overall real growth in loans was 9,078%. To put it simply, the total loan growth in credit unions after World War II is extraordinary and demonstrates that this simple financial model seemed to work quite well. Figure 2.3 Credit Union Loan Growth 0 5,000,000,000 10,000,000,000 15,000,000,000 20,000,000,000 25,000,000,000 30,000,000,000 '44 ’46 ’48 ’50 ’52 ’54 ’56 ’58 ’60 ’62 ’64 ’66 ’68 ’70 ’72 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 43 Conclusion In sum, the early phases of the credit union set the stage for solid increase in support for the movement and financial growth for the credit union industry up until 1973. We used the time period of 1850 to 1973 to specifically identify the historical era of this financial cooperative movement. Starting in the mid 70s and early 80s, federal legislation would be passed that changed the credit union model. In chapter three, we will look at the history, data trends, legislation and controversy, from 1974 forward, which brought forth this change. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 44 Chapter 3: Industry Shock: Changes to the Credit Union Model (1974-Present) The world of credit unions began to change dramatically in the late 1970s as new legislation impacted the industry and infuriated bankers across the country. The National Credit Union Administration (NCUA), the newly formed agency for credit union advocacy, was very active from the start, and not only did the organization help create legislation that changed products and services, but the NCUA changed the traditional interpretation of the various rules governing credit union charters since the Federal Credit Union Act was passed in 1934. This new approach, while successful at diversifying and increasing the product and service opportunities of credit unions, was not without its detractors. Some bankers launched attacks at the industry and claimed that the new services and markets credit unions were entering were a direct contradiction to the original intent of the credit union movement, and as such, credit unions should lose their non-profit status and tax benefits that are accorded from that status. Bankers stated that “credit unions are not fulfilling their mandate to serve persons of modest means” (Hayes, 2005, p. 134), since they were attempting to court higher end clients with new services. The mission and movement were under attack, as bankers cried foul and wanted credit unions to lose their tax-exempt status that was in place from the beginning of the movement, or be stopped from offering services that were similar (if not the same) as banks. This chapter explores the major changes that affected credit unions from 1974 into the 21 st century. It will examine the events, controversies and issues that arose from the various changes made during this period and outline the current state of the financial cooperative. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 45 “As a result of legislation passed in 1976, 1978 and 1980, credit unions were authorized to offer services in the form of longer loan maturities, lines of credit and other loan ceilings, 30 year mortgage loans and 15 year home improvement loans” (Black, 1981, p. 529). With these changes, credit unions became more than just a local savings and loan; they were beginning to become a full service financial institution. This paper will use 1974 as the natural break in the history of the credit union movement as the industry, fully mature, began to operate in a different manner than originally intended. Thru legislation and NCUA interpretations, credit unions began to offer more services than in the past and thus began to challenge banks with new product offerings. Before 1974, credit unions were savings organizations that allowed consumer lending. After 1974, this changed dramatically, and even the smallest credit unions became full-service financial institutions that looked and offered services similar to a bank. The change started in 1974 would continue for the next 40 years and is continuing into the 21 st century. Changes to Share Draft The change started with the share draft. The credit union movement seemed to change overnight, and the share draft was the start of a major shift in its history. Before 1974, a member would have to visit a credit union in person to withdraw funds. No credit union was allowed, by law, to offer any other means of withdrawal (i.e., no checking or transactional accounts). However, this changed in 1974 when the NCUA began a pilot program allowing credit unions to offer a share draft. “As defined by the NCUA, a share draft is a negotiable or non-negotiable instrument which directs a Federal credit union to withdraw funds from a member's share draft account and pay those funds to either the member or a third party designated by the member. A Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 46 share draft is payable through a bank and is similar to other forms of payment through drafts drawn against other nonbanking institutions such as money order companies and insurance companies" (Ambrose, 1978, p. 44). This interpretation drew the ire of bankers throughout the country and started a series of lawsuits filed against various credit unions with the intent to stop the NCUA from allowing share drafts. The pilot program “increased antagonism and opposition by the banking world, and consistent with this opposition, the American Bankers Association (ABA) in 1976 and 1977 filed suit against the Administrator of the National Credit Union Administration seeking to prevent credit unions from using share drafts, a third-party payment device similar to a bank check” (Collins, 1978, p. 12). The first suit was thrown out of court, but another suit in 1977 was ruled on, and the court decided that the NCUA should determine the fate of share drafts. Naturally, “on December 8, 1977, the National Credit Union Administration (NCUA) promulgated a final rule regulating the offering of a new type of account by credit unions - the share draft account” (Collins, 1978, p. 102) and the share draft became a regular offering at most credit unions. Regardless of the share draft lawsuits, credit union progress continued. In late 1977, credit unions, with the blessing of NCUA, began to offer credit cards to their members, as Jim R. Williams, President of Credit Union National Associations declared it as a great step for members belonging to credit unions, however, the banks felt that it was difficult to differentiate between a bank and a credit union and accused the industry of abandoning its original mission (Halverson, 1978). Additionally in 1977, credit union legislation was passed to allow 30 year mortgages and time-share deposits (similar to a bank’s certificate of deposits or CDs). Even with strong Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 47 banking opposition, the bill passed the house by a 401 to 4 vote, thus emphasizing the unity in which the legislation was passed. This gave the credit union a legislative shot in the arm, giving it confidence to continue to move forward with programs that did not originate from the traditional charter. All of these events caused greater animosity with banks, and the share draft that was started in 1974 continued to be a thorn in the banker’s side and was the subject of many lawsuits and court rulings. The share draft controversy never went away, and after years of legal battles from bankers, the Deregulation and Monetary Control Act of 1980 passed and became law. This law officially legislated what the NCUA had been doing since 1974, allowing transactional accounts for its member credit unions. With this law passed, credit unions could now offer transactional accounts (i.e., checking, mutual funds) and of course bankers were not happy and increased the legal challenging and lobbying efforts with congress. With credit unions now offering many of the same financial services as banks, the credit unions were now poised to compete head to head with banks. From the humble beginnings of helping those who did not have access to a financial institution, the credit union movement had modernized and was ready to take bolder steps to offer more products and services to their membership. Of course, with the steps of change comes challenge; and from 1974 forward, the credit union versus bank mentality began in earnest. Throughout this period, banks have continually challenged and put up road blocks to retard the growth of the credit union movement. Which party is right on these issues? Should credit unions be allowed these products and services? Was the movement just trying to offer more services to help their membership? Did the bankers just want to continue to limit competition in their industry? It is difficult to know for Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 48 sure, but there are clear lines dividing the two camps, and the biggest challenge from the credit unions to the bankers was still to come; the common bond industry controversy would go all the way to the U.S. Supreme Court. Common Bond Abandoned While these legislative efforts of the late 1970s were big for the movement, the biggest change was yet to come. The common bond was a principle that was in place since the first concept of the credit union originated in Germany. The common bond concept came across the Atlantic into Canada and then down to the United States at St. Mary's Cooperative Credit Association in New England in 1909, and was a cornerstone of the movement. Common bond refers to credit union membership that has common interest that could be used to organize and create a financial cooperative. The common bond included examples of rural farmers, African Americans, union workers, and many others. In 1982 the NCUA, perhaps emboldened from their legislative successes of the 1970s, reinterpreted the common bond principle that attached a credit union to a single sponsor or group to allow a single credit union to draw from multiple groups (Cassity, 2000, p. 38). This ruling was a major shift in credit union operation, and the change opened the door for credit unions to acquire members from other companies, communities or groups. Before this change of interpretation by the NCUA, a credit union would only be allowed a single group that they could have as members; this was due to the fact that the 1934 Credit Union Act states, "The common bond is a characteristic prerequisite to the fulfillment of group objectives and when present among persons of related interests and purposes, these persons could be expected to effectively Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 49 operate a credit union. Federal credit union membership shall be limited to groups having a common bond of occupation or association” (Federal Credit Union Act 1934). For example, in the traditional credit union charters, it was explicit that an electricians’ credit union would have members from a specific electrical union; or an agriculture credit union would have members in the farming industry as they all had something in common (i.e., electrician’s union or local farmers). In 1982, the NCUA liberally interpreted the common bond language in the Federal Credit Union Act to create three common bond categories: “associational,” “occupational,” or “residential.” In other words, a credit union membership could include anyone that, for example, may be involved in the farming industry; it allowed a credit union to attract as members anyone who belongs to a specific home owners’ association, or someone who may live in a certain community. In general, it became very difficult not to find a way for a person to qualify for any credit union membership as some credit unions would have you join an association when you opened your account. At the time of the reinterpretation of common bond, the NCUA created the special employee group (SEG). A SEG allows credit unions to offer their financial services to companies that are not currently serviced by a credit union (for example, a small hardware store or a car dealership). The SEG group would be created, and with the NCUA approval, a credit union could then add these employee groups to their membership. With this new multi-common bond program, some credit unions added over 1,000 SEG groups that they could call their own; and some organizations dedicated staff to court and recruit new SEGs to add to their membership and increase the size of their credit union. In one case, Lockheed Federal Credit Union (LFCU) in Burbank, CA took great advantage of the SEG program in the 1980s and 1990s to dramatically increase their membership Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 50 size. LFCU was founded in 1937 for the employees of the aerospace company (note: there were actually three separate Lockheed credit unions dispersed throughout the country providing services to their local Lockheed employees). Before moving to a community charter and changing their name (in 2000), Lockheed had hundreds of unrelated companies that could join the credit union. Additionally, they created associations that a person could join (without any challenging requirements) to become members. Essentially, anyone would be able to join Lockheed Federal Credit Union. This multiple common-bond approach allowed Lockheed to grow even when their sponsor, Lockheed Martin, closed all operations near their credit union headquarters in Southern California. This move did not hurt their growth, since their original sponsor didn’t really generate their growth anymore. All the growth came from aggressive marketing to SEGs and the local community and eventually the credit union stopped marketing to Lockheed employees. The original charter was abandoned, and Lockheed (like many other credit unions) changed their name to Logix to represent the fact that the aerospace giant was not their primary source of members anymore and they wanted to represent and market to a larger base. In other cases, credit unions were a bit too blatant in their attempts to bring in other members to their credit union. In one example, a Massachusetts’ credit union advertised “if they have a pulse” they are probably qualified to join Graylock Federal Credit Union (Hayes, 2005, p. 134). This was a slap in the face to the banks and allowed for greater scrutiny from banks and federal agencies. This slap was not unnoticed by the American Bankers Association and naturally, they took swift legal action to block the NCUA’s ruling and file several lawsuits in various states. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 51 Many lawsuits were filed, but the most significant case dated back to 1990 when four North Carolina banks and the ABA sued the NCUA for letting AT&T Family Federal Credit Union enroll employee groups unrelated to its original sponsor. The bankers contended that the regulator was violating the Federal Credit Union Act. Unfortunately for the bankers, the United States District Judge affirmed the NCUA’s interpretation and upheld these new membership rules. "The NCUA's interpretation of the common-bond provision is a reasonable construction of an ambiguous statute," said U.S. District Judge John H. Pratt in a 12-page decision. In his decision he stated, "The common bond provision was not an end in itself, but its purpose was to support the underlying policy of promoting stable credit unions. It also suggests that Congress intended a flexible interpretation of the provision. This assumption is supported by the fact that Congress has not objected" to the agency's liberal interpretation of the statute, in effect since 1982 (Arndorfer 1994). This ruling did not stop the lawsuits or the appeals, and in 1998 the United States Supreme Court intervened and took the opposite side of Congress and the NCUA. In February of 1998, the Supreme Court ruled in favor of banks and did not agree with the free interpretation of the common bond language. “Justice Clarence Thomas wrote for the court, ‘Because we conclude that Congress has made it clear that the same common bond of occupation must unite each member of an occupationally defined federal credit union, we hold that the (government's) contrary interpretation is impermissible.’ His opinion was joined by Chief Justice William H. Rehnquist and Justices Anthony M. Kennedy, Ruth Bader Ginsburg and Antonin Scalia” (Buffalo News 1998). Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 52 This ruling set the movement back, as many credit unions, such as Lockheed, had begun diversifying their membership by utilizing and acquiring other “common-bond” employees and associations. When the Supreme Court stopped the multiple common-bond credit unions, Lockheed had to refrain from marketing to all their SEG groups. Credit unions rapidly responded with legislative lobbying efforts of their own, and the bank vs. credit union battle was in full force. Immediately following the Supreme Court decision, advocates for the NCUA and credit unions mobilized and pushed congress to pass HR 1151, The Credit Union Membership Access Act, a bipartisan bill introduced by Reps. Steven LaTourette (R-Ohio) and Paul Kanjorski (D- Pa.) on March 20, 1997. The Supreme Court had its say, and then the people voiced their opinion. In August 1998, President Bill Clinton signed HR 1151 (The Credit Union Access Law) into law, thus reaffirming the credit union movement and allowing them to continue to have liberal membership access. The bankers were furious, but today this law stands as a cornerstone for credit union membership access. The Credit Union Membership Access Act allows the multiple common-bond credit unions to continue recruiting members from many sources, and has specific language that spelled out the ability for federal credit unions to gain access to entire communities. This law allows credit unions to offer membership to anyone “who lives, works, worships, or attends school within a geographical field of membership” (HR 1151). In other words, it would allow credit unions to apply to the NCUA for community charters that could conceivably cover millions of potential members. As one might expect, bankers were not happy and stated that the “NCUA not only allowed, but encouraged credit unions to abandon their historically well-defined groups, Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 53 such as employees in a specific company, and move on to adopt all-encompassing “community charters” (Hayes, 2005) The biggest fight is over the “unfair” advantage that banks feel that credit unions have due to the tax-exempt status. Additionally, banks must adhere to Community Reinvestment Act (CRA) requirements that credit unions are immune from. The CRA costs banks money and in some minds this difference gives the credit unions another advantage with regards to operating costs and marketing efforts. Perhaps even larger than the passing of HR 1151, the services credit unions could offer grew to a new height as well with more action from the NCUA. In 1998, credit unions were given the right from NUCA to form Credit Union Service Organizations (CUSOs). As specified by the NCUA list of services that are allowed by this law, updated January 2010, include: ([63 FR 10756, Mar. 5, 1998, as amended at 64 FR 33187, June 22, 1999; 64 FR 66361, Nov. 26, 1999; 66 FR 40578, Aug. 3, 2001; 68 FR 56551, Oct. 1, 2003; 73 FR 79312, Dec. 29, 2008) (a) Checking and currency services: (1) Check cashing; (2) Coin and currency services; (3) Money order, savings bonds, travelers checks, and purchase and sale of U.S. Mint commemorative coins services; and (4) Stored Value Products; (b) Clerical, professional and management services: (1) Accounting services; (2) Courier services; (3) Credit analysis; Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 54 (4) Facsimile transmissions and copying services; (5) Internal audits for credit unions; (6) Locator services; (7) Management and personnel training and support; (8) Marketing services; (9) Research services; (10) Supervisory committee audits; and (11) Employee leasing services; (c) Business loan origination; (d) Consumer mortgage loan origination; (e) Electronic transaction services: (1) Automated teller machine (ATM) services; (2) Credit card and debit card services; (3) Data processing; (4) Electronic fund transfer (EFT) services; (5) Electronic income tax filing; (6) Payment item processing; (7) Wire transfer services; and (8) Cyber financial services; (f) Financial counseling services: (1) Developing and administering Individual Retirement Accounts (IRA), Keogh, deferred compensation, and other personnel benefit plans; Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 55 (2) Estate planning; (3) Financial planning and counseling; (4) Income tax preparation; (5) Investment counseling; (6) Retirement counseling; (7) Business counseling and consultant services; and (g) Fixed asset services: (1) Management, development, sale, or lease of fixed assets; and (2) Sale, lease, or servicing of computer hardware or software; (h) Insurance brokerage or agency: (1) Agency for sale of insurance; (2) Provision of vehicle warranty programs; (3) Provision of group purchasing programs; (4) Real estate settlement services; and (i) Leasing: (1) Personal property; and (2) Real estate leasing of excess CUSO property; (j) Loan support services: (1) Debt collection services; (2) Loan processing, servicing, and sales; (3) Sale of repossessed collateral; (4) Real estate settlement services; Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 56 (5) Purchase and servicing of non-performing loans; and (6) Referral and processing of loan applications for members whose loan applications have been denied by the credit union; (k) Record retention, security and disaster recovery services: (1) Alarm-monitoring and other security services; (2) Disaster recovery services; (3) Microfilm, microfiche, optical and electronic imaging, CD-ROM data storage and retrieval services; (4) Provision of forms and supplies; and (5) Record retention and storage; (l) Securities brokerage services; (m) Shared credit union branch (service center) operations; (n) Student loan origination; (o) Travel agency services; (p) Trust and trust-related services: (1) Acting as administrator for prepaid legal service plans; (2) Acting as trustee, guardian, conservator, estate administrator, or in any other fiduciary capacity; and (3) Trust services; (q) Real estate brokerage services; (r) CUSO investments in non-CUSO service providers: In connection with providing a permissible service, a CUSO may invest in a non-CUSO service provider; the amount of Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 57 the CUSO's investment is limited to the amount necessary to participate in the service provider, or a greater amount if necessary to receive a reduced price for goods or services; (s) Credit card loan origination; (t) Payroll processing services; (s) Credit card loan origination; (t) Payroll processing services. The CUSO operations listed above represent a broad range of services that can be associated with a credit union. These CUSOs allow credit unions to offer similar services to banks, insurance companies and investment broker’s offices, continuing to blur the line regarding the financial services that can be offered between a credit union and a bank. These services put yet another red flag in front of bankers and caused the NCUA and credit union to fight more litigation, increase their lobbying efforts, and push for legislation that would continue to meet the objective as outlined by the current leaders of the movement. The original movement called for volunteers to organize a financial cooperative that would provide relief from usurious lenders, allowing low to moderate income families to borrow at a reasonable cost of funds for provident purposes, but the leaders of the late 20 th century credit unions felt they had to grow larger and continue to be the alternative option to the bankers. Savings and Loan Crisis Before wrapping up the historical actions of the 1980s and 1990s, we should pause and evaluate a major problem in the financial world in the middle of the 1980s. The Savings and Loan (S&L) crisis saw over 700 savings and loan institutions go bankrupt. In order to solve this Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 58 problem, President George H.W. Bush bailed out these institutions. In general, many point to the deregulation of the early 1980s as a cause of this problem, as S&Ls morphed from a simple savings and lending institution to a full-blown banking center, similar to the changes outlined above for credit unions. The purpose of this paper is not to detail the problems of the S&L crisis, but basically these institutions lent out too much money and overreached during a real estate bubble. When the bubble burst, the loans were not repaid, and since they lacked net worth, many S&Ls went bust. This paper brings this subject to light since credit unions have a very similar history with regard to regulation, and since bankers pounced to denounce the credit union model shortly after the crisis began to unfold. In one committee hearing, Paul Nelson, former House Banking Committee staff director stated that “credit union problems will surface in the next year or two, placing further strain on a financial system burdened by the savings and loan crisis and inhibiting any attempt at serious industry reform” (Trigaux, 1989). Mr. Nelson clearly based this prediction on the fact that many of the same conditions existed that caused harm to the S&Ls. Fortunately for credit unions, no major problems were uncovered and no bail out was required. It appears that the model survived the deregulation that caused harm to the S&Ls. Credit Union-to-Bank Conversions One of the last points to discuss in looking at the history of credit unions in the late 20 th century is a new trend that started in 1995: credit union-to-bank conversions. To date, there have been 30 conversions, where credit unions have changed to bank status, moving away from member-owned and operated to a fully functional public bank that is owned by stockholders. In other words, members give up their ownership in a credit union through a buyout of each Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 59 member, and the once “volunteer” board gains shares in the newly converted bank. Executive management is also given stock and stock options in the newly formed organization. This has caused controversy, as most of these conversions have been quite lucrative for the very few, specifically the executives and board members of the converting credit union. According to CU Financial Services, a conversion could net a board of director up to $400,000 and management could enjoy a $10 million plus ownership stake (Crenshaw, 2006). In order to change the charter, a membership vote is required, but voter turnout is fractional and easily managed, and the charter conversions are affirmed by the very few. In some cases, members organize opposition to the charter change and in five cases have been successful in stopping the conversion. While the NCUA frowns on these types of conversions, the American Bankers Association welcomes these conversions with open arms. As stated above, only 30 credit unions have converted suggesting that converting to a bank is a rare event for most cooperatives. Data Trends (1974 - 1999) After Clinton signed the The Credit Union Access Act (HR 1151) into law, perhaps the most dynamic legislative event in two decades, the credit union had fully embraced a new approach in its business model. Before looking into the changes this law brought, here are the detailed data trends for these two and a half decades. Membership Growth 1974-1999 Looking at membership growth, as graphed in Figure 3.1, which shows the overall size in terms of members, CUNA mutual states that in 1974 credit unions had 29,449,999 members and that number swelled to 77,516,502 in 1999. Beginning with the introduction of the share draft, membership grew around 3.1% a year. This is significantly less than the 20 or so years of the Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 60 overall average growth rate of about 14%, but Figure 3.1 shows the trend of healthy growth in membership size during this period. Figure 3.1 Credit Union Membership Growth (1974-1999) Asset Growth 1974-1999. In 1974 the total assets in the credit union industry, as seen in Figure 3.2, had reached $31,660,454,007; this number grew to $422,567,345,691 in 1999. Overall growth was positive, averaging year over year growth of 9.6%; however in the last ten years averaged annual growth in asset size decreased to 6.9%. Adjusting for inflation during this time (using US Consumer Price Index data), the overall growth in real dollars was around 256%. In comparison with the previous period of 30 years, this asset growth rate in real terms is 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 61 around one-tenth less, considering the asset growth from 1944 to 1974, as outlined in Chapter Two, was 2,724% when adjusting for inflation. Figure 3.2 Credit Union Asset Growth (1974-1999) Loan Growth 1974-1999. Loan growth is very significant, since most of the revenue a credit union generates is from loan interest income. As loan growth increases, as seen in Figure 3.3, the revenue for the entity increases, allowing for better services and return to the membership. In 1974 the credit union had $24,344,673,425 loans outstanding to members; this number grew to $279,023,371,926 in 1999. This comes to a real loan growth (adjusting for US Consumer Price Index) of 205%. In comparison with the previous period of 30 years, this overall growth rate in real terms is significantly less. As outlined in Chapter Two, the total real loan growth for the previous era, when adjusting for inflation, was 9,078%, which is 44 times greater in comparison. 0 50,000,000,000 100,000,000,000 150,000,000,000 200,000,000,000 250,000,000,000 300,000,000,000 350,000,000,000 400,000,000,000 450,000,000,000 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 62 Figure 3.3 Credit Union Loan Growth (1974-1999) Total Credit Unions in Operation 1974-1999. One last data point to look at for this period is the total number of credit unions as graphed in Figure 3.4. As with many industries, the business cycle applies, where credit unions saw tremendous growth in the early stages of the industry then leveled out in the maturing and declining stages (starting in the 1970s). As such, consolidation was quite normal and expected. With the new legislation and membership laws, many credit unions merged and the total number of credit unions saw a major decline from 1974 forward. The total number of credit unions peaked in 1969 and totaled 23,866. Looking at this figure from 1974, which saw a small reduction from the peak 1969 numbers, there was a total of 22,940 in 1974. In the next 25 years, a 50% reduction took place in the number of credit unions due to mergers and acquisitions as only 11,016 credit unions remained at the end of 1999. 0 50,000,000,000 100,000,000,000 150,000,000,000 200,000,000,000 250,000,000,000 300,000,000,000 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 63 Figure 3.4 Total Credit Unions (1974-1999) 21 st Century Credit Unions (2000s to Present) At the start of the 21 st century, credit unions and banks were in full battle mode. Neither trusted the other and in the new decade in the history of the credit unions moved away from developing new financial products and services, as they had been in previous decades, towards being involved in lobbying Washington in order to increase their legislative wins and protect their past victories. The days of the small “mom and pop” financial institution were far behind, as credit unions were now fully functioning financial institutions that offered products and services that rivaled local banks. They hired staff from the banking world and developed marketing and business strategies that directly viewed the banks as their competitors and attempted to actively recruit bank customers. 0 5,000 10,000 15,000 20,000 25,000 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 64 In the early part of the century, Hike the Hill, a self-proclaimed “grassroots” effort to provide awareness of credit unions to officials in Washington, began. Organized by the Credit Union National Association (CUNA), each year, credit union officials visit Capitol Hill to influence and lobby congress on the behalf of the movement. Starting in 2001, Hike the Hill has become a popular yearly event for credit union leadership and draws thousands of credit union supportors and leadership from around the United States. Another notable event was the formation of the Renaissance Commission by CUNA. This group was formed to “study federal, state charters and NCUA structure and regulation” to organize efforts to improve the credit union model. This group worked with NCUA to develop new regulations and programs to improve services in the credit union industry. Overall, the early part of the 21 st century signaled a great awareness of the need for lobbying and staying involved in the politics of Washington. The leaders of the movement did not want to be victims again of the American Bankers’ Association getting the upper hand in the legal and legislative arenas - which had been a sore spot for the credit union movement in the 1990s when their membership charters were questioned and even curtailed with strategic banker legislative and legal efforts. Credit unions had begun to fully embrace the new reality that had occurred in most US industries in the late 20 th century. Many industry leaders realized that they needed a strong lobbying effort in Washington, as it was critical and required to ensure favorable legislative treatment in order to support their business objectives and goals. Credit unions warmly embraced their new role as lobbyists and understood the importance of political awareness, and the NCUA and CUNA encouraged board members and senior management to become active in all lobbying efforts. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 65 2008-2009 Financial Crisis In the 21 st century several events would have an impact on the credit union industry, but nothing could prepare the financial sector for the worldwide financial meltdown starting in 2008. During the Great Depression, very few credit unions were dissolved, in fact, the credit union industry actually experienced a growth spurt, while hundreds of banks went under. For instance, in 1931, 512 banks closed, while 30 were formed (Chambers 2009). However, credit unions would not escape the 21 st century financial crisis, which was the worst since the Great Depression. While the industry celebrated the 75th anniversary of the Federal Credit Union Act in 2009, in March, two of the biggest corporate credit unions were taken over by the NCUA. Wescorp and US Central Credit Union had a combined $57 billion in assets and due to the meltdown in the financial world needed to be restructured due to losses. Other corporate credit unions had problems as well, and Southwest Corporate, Members United Corporate and Constitution Corporate also failed later in the year, causing ALL five corporate credit unions to fail and require a bailout. A corporate credit union is an entity that does not serve the public, but rather credit unions as a whole are its members. As such they are owned by credit unions (subsequently these corporate credit unions are actually owned by the millions of members of all participating credit unions) and provide various services such as short term credit, clearing house activities, electronic fund transfers and various ATM network services. The losses of these credit unions led the NCUA, working with credit union leaders and Washington, to create the Temporary Corporate Credit Union Stabilization Fund to protect these institutions. As it turns out, credits unions fell victim to the same conditions of the banking world, as many of the largest corporate Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 66 credit unions in the United States invested in troubled mortgage-backed securities that experienced dramatic, unprecedented declines in value, effectively rendering five of these institutions insolvent, as a result the loss to the U.S. credit union system was sizable. As a whole, the industry survived and it was determined after a 12 month special audit of the NCUA that 96% of the credit unions were “well capitalized” (NCUA.gov) and were able to withstand the mortgage foreclosure and downturn in the global economy. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 335 of the Dodd-Frank Act amends the FCU Act to make permanent the standard maximum share insurance amounts (SMSIA) of $250,000 (credituniontimes.com) which stabilized the industry and provided for a larger safety net for the credit union membership. However, the damage had been done, and after $1 billion was pumped into the corporate credit unions, the US Central Corporate Credit Union was shut down on October 29 th , 2012 (NCUA.gov). In addition, the crisis caused 15 federally insured credit unions to shut their doors in 2009 alone (NCUA.gov) and 52 more credit unions closed from 2010-2014. The loss was devastating to the credit union industry. To put this in perspective, $953 million in NCUSIF losses were realized from 1971 – 2004, which averages to 0.018% of insured shares (Wilcox 2005) or about $29 million in losses per year. From 2008 to 2013, the insurance fund lost a total of $962 million, and an additional $8.1 billion in losses from the corporate credit union failures (Hampel 2010). The graph below shows the current losses in the NCUSIF from 2008 until 2013. The first column shows the average loss of $29 million from 1971 (the inception of the fund) until 2004. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 67 Figure 3.5 NCUSIF Losses (in Millions) In comparison to the 20 th century, the 21 st century has not been kind to the credit union movement. As a matter of fact, it has been unkind to all financial institutions. With bank and credit union failures, it became evident that the industry had evolved into a large global entity, and given the choices that were made by leaders in the late 20 th century, credit unions were now susceptible to the same challenges endured by all financial institutions globally. It seems that the ideas of the founding fathers are well in the past, and new challenges and new opportunities lie ahead for credit unions and all financial entities. $29 $228 $145 $226 $93 $119 $151 $- $50 $100 $150 $200 $250 ‘71-‘04 Avg 2008 2009 2010 2011 2012 2013 ffff 2 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 68 Data Trends (2000 – 2012) The final set of data for the historical performance of credit unions will show a relatively quiet decade as far as growth is concerned. Even though the credit union industry (and all financial industries) suffered, they still were able to grow. From 2000 to 2012, we observe the following metrics, Membership Growth 2000-2012. Looking at membership growth, as graphed in Figure 3.6, which shows the overall size in terms of members, CUNA mutual states that in 2000 credit unions had 79,751,873 and that number increased to 95,968,179 in 2012; the average yearly increase was 1.53%. Beginning with the introduction of the share draft, membership grew around 3.1% a year; Figure 3.6 shows an increase in membership on a year over year basis. Figure 3.6 Credit Union Membership Growth (2000-2012) 0 20,000,000 40,000,000 60,000,000 80,000,000 100,000,000 120,000,000 2000 2002 2004 2006 2008 2010 2012 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 69 Asset Growth 2000-2012. The credit union industry crossed the $1 trillion mark in assets in 2012. By 2000, the total assets in the industry, as seen graphed in Figure 3.7, had reached $449,798,819,390 and this grew to $1,043,086,243,870 by 2012. Overall growth was positive; even with a major financial crisis the assets increased 132%. When adjusting for inflation during this time (using US Consumer Price Index data), the overall growth in real dollars was around 62%. In the period from 1974 to 2000 by way of comparison, the real growth was 265%. Figure 3.7 Credit Union Asset Growth (2000-2012) 0 200,000,000,000 400,000,000,000 600,000,000,000 800,000,000,000 1,000,000,000,000 1,200,000,000,000 2000 2002 2004 2006 2008 2010 2012 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 70 Loan Growth 2000-2012. As pointed out previously, loan growth is a great indicator of success for the credit union business, as this showcases their revenue model. However, interest rates were historically low during this time period, showing how important every loan dollar was for the industry. In 2000, credit unions had $309,367,084,014 in loans on their books. In the troubled twelve years, the overall loan portfolio grew to $614,635,491,204. When adjusting for inflation, the credit union industry saw an increase of 51%. To compare with the previous period, the decades from 1974-2000, the loan growth, when adjusting for inflation, was 205%. Note that during the last few years the data show the loan growth for all financial institutions was naturally stalled due to the financial crisis in 2008. Figure 3.8 Credit Union Loan Growth (2000-2012) 0 100,000,000,000 200,000,000,000 300,000,000,000 400,000,000,000 500,000,000,000 600,000,000,000 700,000,000,000 2000 2002 2004 2006 2008 2010 2012 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 71 Total Credit Unions in Operation 2000-2012. One last data point to look at for this period is the total number of credit unions, as graphed in Figure 3.9. The consolidation that started in the 1970s continued into the 21 st century, and the financial crisis that hit in 2008 seemed to continue this trend. The total number of credit unions peaked in 2000; but since then the number has dropped from 10,684 fell to 7,070. The number of credit unions dropped 34% during this 12 year period. Figure 3.9 Total Credit Unions (2000-2012) 0 2,000 4,000 6,000 8,000 10,000 12,000 2000 2002 2004 2006 2008 2010 2012 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 72 Conclusion With the history of the credit unions outlined above and in the previous chapter, we see a well-conceived concept that was born out of a great need that grew into a highly successful financial alternative for consumers. We saw an industry grow at a tremendous clip. The total amount of all deposits in financial industries in the United States is around $14 trillion; today credit unions have over $1 trillion in assets (CUNA.com), equating to roughly 7.7% of the total market. While the founders originally thought that 80,000 credit unions would be required to serve the United States properly, the model changed and today with mergers and consolidation, fewer than 7,000 credit unions exist today, which is down from 27,000 that existed at the height of the industry in 1965 (NCUA.gov). Comparing data across all years, the rate of membership growth by decade is outlined in Figure 3.10. Figure 3.10 Membership Increase by Decade 5.54% 8.64% 6.06% 6.08% 3.15% 2.76% 1.48% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% 1940s 1950s 1960s 1970s 1980s 1990s 2000s Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 73 The data show a slowdown since the 1950s in each decade in the increase in the number of people who joined the credit union. The baby-boomers are a large part of the story and growth of credit unions, and the credit union members’ average age climbs each year, leading the industry to wonder where and how it can penetrate the younger demographic. As of 2014, according to an NCUA report, the average age of a credit union member is 48.5, which is up from 40 just a few years ago (NCUA.gov). The peak borrowing period is between the ages of 25 and 44, which should sound the alarm for the credit union movement. How can credit unions grow their business when the most important revenue segment is becoming stagnant? Looking at their loan growth from 1944 to 2012, we also see significant slowing in growth. In the mid- 20 th century, after World War II, loan volume, when adjusted for inflation, grew at a 9,078%. In the late 20 th century, loan growth was over 200% before dropping to 58% from 2000-2012. There are only two ways to gather revenue in a credit union: fees from accounts and interest income. As the demographic of the membership shifts to their golden years, their borrowing habits are decreasing and the growth of revenues for the industry will continue to slow down. Credit union leaders are trying to attract a younger market, and one credit union in Panama, Florida has decreased the average age of its members by seven years due to rebranding efforts aimed at a younger audience (thefinancialbrand.com). The Innovations Federal Credit Union have a “2% Refi Rate Drop” campaign that targets members of Generation Y by utilizing marketing techniques “from music and voice to color and tone — that were designed to appeal to two audiences: a Gen-Y market, and those who might not have the best credit scores” (thefinancialbrand.com) In doing this they have “strategically viewed this as a ‘gateway loan’ Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 74 used to attract new members who previously had loans at competing financial institutions” (thefinancialbrand.com). As the industry matured, the original concept of what credit unions offered and who they served changed, but the industry is making adjustments like this above in an effort to capture the younger market. Additionally, in the late 20 th century we saw animosity grow between banks and credit unions, where this ill-will grew into an all-out war starting in the 21 st century. In looking at the differences between banks and credit unions, we could still see differences between the two models, but as industry experts point out, the lines are becoming blurry as larger credit unions are competing directly with banks both in product and service offering, as well as who they are targeting and serving. In the next chapter, the various models of the modern credit union will be evaluated and then in the last chapter, a set of recommendations will be offered as to what a credit union’s model should be as we continue into this century. Do credit unions go back to the original charter? Or should they continue the changes that they saw in the late 20 th century? Or perhaps a model could be developed that embraces both approaches? Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 75 Chapter 4: Strategic Analysis of Credit Unions in the 21 st Century Introduction Now that we understand the purpose, theory and history of the credit union, let us look at the challenges and issues credit unions face in the 21 st century. The small idea that began in a rural German state and migrated to the United States at the beginning of the 20 th century has recently crossed over $1 trillion in assets and attracted over 100 million Americans to become members (NCUA, 2014). While this sounds like an amazing number, banks still hold 93.2% of the total assets in the United States and have over $15 trillion in assets. Figure 4.1 from the Credit Union National Association (CUNA) shows that the growth of assets of the credit union industry has been fairly flat over the past two decades only growing 1.1% in that time period, while banks have grown their total assets at a much better pace. Keeping in mind that credit unions have benefited from favorable legislation and creative interpretations from the National Credit Union Administration (NCUA), as outlined in Chapter Three, which have created very liberal membership policies where anyone living, working or worshipping near a credit union can become a member. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 76 Figure 4.1 Credit Union/Bank Market Share in Total Assets since 1992 (CUNA 2013) Furthermore, one of the core principles of credit union management is being financially sound and protective of member assets, but according to data reported in the NCUA annual reports and presented in Figure 4.2, operational expenses per income for all credit unions have doubled since 1983. In 2015, the ratio of operational expenses to gross income was 66.6% (NCUA Annual Report, 2015, p. 158), while in 1983 the same ratio was 33.7% (NCUA Annual Report, 1989, p. 39). $14.7 $1.1 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Total Assets Sources: FDIC, NCUA, CUNA. In Trillions. U.S. Banks U.S. Credit Unions Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 77 Figure 4.2: Operating Expenses/Income Ratio (NCUA Data, 1980-2013) Additionally, the original mission of bringing financial services to low income families and the underserved has not been as effective as it was in the beginning. According to a survey by the FDIC in 2013, 20% of US households (24.8 million) are underserved today, which is a significant increase over the past few decades. In 1977 the Federal Reserve found that only 10% of Americans did not have a bank account (Belew, 1989) and that number climbed to 17% in 1987. To exemplify this further, the United States has the worst record amongst the developed nations when it comes to providing financial services for the underserved and the poor. According to a study by the World Bank, 26% of US citizens making less than $30,000 do not have a formal account, while only 9% of Canadians, 3% of British and 3% of Australians with the same income level are underserved. With new regulations allowing more services and the ability to attract more members, why have credit unions not improved their growth in assets relative to banks? Why have the operational expenses doubled in the past few decades? Why has the number of underserved in this country grown? 0 10 20 30 40 50 60 70 80 Operating Expenses/Income Since 1980 1980 1985 1990 1995 2000 2005 2010 2015 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 78 Strategic Analysis: Political, Economic, Social and Technological After looking at the history outlined in the previous two chapters and with some of the data mentioned in the introduction above, the natural question is why is the credit union industry responding in this manner? Why are expenses for credit unions increasing? Why is the industry moving away from their core mission as envisioned by the founding fathers to a new profit- driven model? To understand why the industry is reacting in this manner, this section will evaluate the various the political, economic, social and technological drivers that have caused leaders to move away from the original model. Political Drivers First, political drivers have had a major impact on the credit union industry. As the success of the industry grew, the regulatory burden and oversight grew as well. The early successes of the movement led to the 1934 Federal Credit Union Act, in which the federal government became involved and credit unions became non-profits that were subject to regular audit functions and various federal legislation. The federal government determined the types of services a credit union could offer and created the credit union framework that we still see today. For the first 36 years the credit union industry moved at a slow pace, offering a simple savings account and personal lending services to its members. However in 1973, the founding of the NCUA changed the industry dramatically. The NCUA, a federal oversight body, quickly went into action and allowed credit unions to move into transactional checking services called share drafts, and in 1974 they reinterpreted the ‘common bond’ language of the original credit union act, which allowed credit unions to offer services to many different groups of people (not just Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 79 their original membership). The banks responded unfavorably to these actions and filed lawsuits that had an economic and social impact on the industry, mentioned above. The deregulation of the financial industry in the 1980s helped credit unions move into offering more banking products and services that were similar to banks. In the 1990s, the Credit Union Membership Access Act shifted the industry further to becoming a community bank, as the act allowed community charters and commercial banking services. These political drivers pushed credit unions to become more bank-like and increased their costs, as we will evaluate below. Additionally, CEOs and volunteer board members became more involved in managing lobbying efforts in Washington and defending the industry from bank lawsuits while spending less time on the core mission of serving their membership. The industry evolved from a local community non-profit financial provider for low and middle income families into a multi-billion dollar industry that has lobbyists in Washington providing multi-million dollar loans to fund commercial ventures. Economic Drivers In evaluating the economic drivers that are in play, we see that regulatory burdens, low interest rates and the increased costs of serving a community are having a major impact on the net income and the culture of the credit union industry. As the industry changed and began to offer services similar to a bank, the regulatory burdens increased. For instance, in just the past four years, according to a report by CUNA and the Cornerstone Advisors, Inc., the regulatory burden has doubled and the total impact of regulations on the credit union industry is now $7.2 billion per year or .64% on the total credit union industry assets (McCarthy, 2016). To make matters worse, the small credit union has been hurt the most due to the new regulatory Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 80 environment. A small credit union (under $100 million in assets) spends 1.12% of its assets on compliance issues, while a large credit union (over $500 million) only has a .33% burden (CUNA, 2016). Looking at a specific example, Alabama Credit Union, a large credit union with $700 million in assets, reported a $6 million profit in 2015 and spent nearly $3.6 million on compliance related expenses. To put this into perspective, this credit union, with nearly 65,000 members, maintains a $55 cost per member per year for regulatory compliance. Extrapolating from the CUNA/Cornerstone report, this burden four years ago would have been only $1.8 million, or $22 per member. This increased cost has to be absorbed somehow, and credit unions have responded by increasing fees, adding new financial services, such as commercial lending, and reducing infrastructure; in the case of smaller credit unions, they are forced into merging with larger credit unions, which has led to a consolidation of the industry. Another economic driver would be the low interest rates which have put a strain on operating costs. To review: a credit union can only make money in two ways, fees and loan interest income. Loan rates are determined by the Federal Reserve and the market. In the past 20 years, we have seen dramatically low interest rates, which in turn decreases the amount credit unions can offer in a savings product and reduces the operating margins. The spread between loan rates and savings rates has been relatively small in the past few decades, leading the credit union industry to find other sources of income to reduce the strain on net income. In Figure 4.3, the interest rate spread shows that, in 1983, the spread was 493 basis points but has fallen steadily to 285 basis points in 2015. This pressure on net income has again led to an increase in fees and the introduction of new products such as business loans and commercial banking accounts. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 81 Figure 4.3 Interest Rate Spread (1983-2015) (CUNA, 2015) Due to the drivers listed above, credit unions successfully pushed for and received potential relief in the aforementioned 1998 CUMAA legislation. They allowed for federal community charters, commercial loans and banking services. The hope was to increase the reach of the credit union and bring in new membership, but the cost of acquiring new membership was 50% higher than the costs in traditional credit unions, and the average operating expense-to- assets ratio for community CUs was 3.68%, compared with 3.14% for non-community CUs (Harrison, 2011). This increase in costs put more strain on an already tight spread. In summary, with the economic pressure of higher regulatory burdens, low interest rate margins and higher costs for community charters, credit unions have been increasing fee income as a result. Culturally, the economic drivers forced leadership to respond and become more 0 50 100 150 200 250 300 350 400 450 500 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Basis Points Spread Year Interest Rate Spread by Basis Points 1983-2015 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 82 focused on profit, rather than services to the community. Social Drivers Social drivers include the demographic changes in our nation today. From an aging membership to the increase in immigrants from Central and South America, demographics have had an impact on how credit unions operate. According to research by Paul Gentile for the Credit Union National Administration (CUNA), the average age of members has increased from 42 years old in 1989 to 44 in 2000, and has been climbed to 48.5 today (Gentile, 2012). CUNA research shows that out of 26.5 million children of members, only 12.1 million are members themselves. Since the peak borrowing ages are between 25 and 44, the aging of membership is problematic for long term success. In 2014, 35% of credit union members were peak borrowers. This percentage has declined significantly during the past 25 years. In 1989, 51% of credit union members were peak borrowers (CUNA, 2014). The goal of a credit union is to collect savings by the membership and loan it out to others at a relatively low cost, for which the people saving earn money on their investment, and the capital is then used for others to borrow for their personal needs. With this being thrown out of balance, since older people have more savings and younger people borrow at a higher rate, the return on assets and operational efficiency is in decline. As such, the industry is forced to find revenue in other demographic segments, which leads to commercial lending and banking as well as increasing the fee structure. Additionally, the influx of immigrants had led to an increase in informal financial services being used in the United States. The prolific use of pay-day lenders and transmittal services has led credit unions to respond by asking for legislation to increase their reach into these Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 83 underserved markets in order to educate and assist the low income families who are being hurt financially by these expensive financial arrangements. Again, the industry turned to CUMAA. which allowed credit unions to serve entire communities; one of the stated goals of this law was to help provide service to the underserved and bring traditional financial services to these families. This led to increased costs as mentioned above and put more economic pressure on the credit union model. Technological Drivers Last, the technological drivers that affect the industry have been profound. It is quite obvious that since 1934 technology has changed in how we serve membership, and this statement could be true even if we look back just 20 years, before the prominence of Internet tools. Many members have a reasonable expectation that every credit union should offer ATM machines nearby, fast-moving lines at convenient branch locations, a mobile banking application for their smart phone, quick automated loan approval systems, automated phone services, state- of-the-art call center facilities and a fully active social media website. While these seem like reasonable expectations from the membership, the costs for a credit union to offer these services is high, and the burden on smaller credit unions to offer these systems is relativey higher due to their asset size. Credit unions’ technology cost increases are forcing management to increase fee income and lower benefits as a result of these technology drivers. In summary, credit union leaders have had to adjust to the various drivers listed above to continue to move the industry forward and react to the changes in the environment around them. Politically, legislation changes and the reinterpretation of the laws moved them away from their core mission. Economically, the cost of doing business increased as a result of regulations, Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 84 historically low interest rates, and the cost of being a community charter. Socially, the aging demographic and the underserved market has continued to grow in the US, and the cost of technology has challenged credit unions to find ways to increase income while still providing services that are expected in business today. All of these drivers are moving credit unions away from their original mission of helping the low and middle income families towards a more profit- driven model. Frankly put, CEOs and Credit Union Board Members are stuck. The financial model that the industry developed and has used for a century seems defunct and unsustainable, so the industry changed as a result: increasing fees, lowering the savings rates, adding commercial lending and banking services, and pursuing community charters to increase their reach. Additionally, small credit unions are on life support, due to the squeeze of the margins, and are forced to merge into larger credit unions, thereby reducing the democratic reach and diversification that the founding fathers envisioned. Essentially, all of these items listed above show that the credit unions have morphed into banks, and the credit union financial cooperative model is disappearing. Large community credit unions are the only model to survive as they are being built to react to the drivers listed above and compete with banks. Four Core Issues Now that the major strategic drivers have been outlined demonstrating why credit unions are moving away from their roots, we can now focus on the four core issues that are behind this paradigm shift. The drivers above will provide a framework for the rest of this chapter, which will be devoted to outlining the issues that explain how credit unions are on the wrong track and could better serve their membership (and underserved Americans) by staying true to their core purpose and returning to their roots. First we will look at the mission statements of credit unions Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 85 in order to evaluate the formalized and publically-stated purpose of the industry. The second issue concerns how credit unions have lost their identity by morphing into banks, which has caused them to reduce their value to their members (and potential members), with the result that their appeal is waning. The third issue affecting the credit union industry is the fact that banks have been savvy and have made adjustments to their strategies over the past century; as a result, banks have been attracting those who would have been traditional credit union members in the past. And the last issue is the fact that the financial industry has changed fundamentally; we will evaluate the credit union response to these changes. The remainder of this chapter will outline these core issues in detail, and Chapter Five will discuss ways to correct the problems and improve the standing of the credit union industry for the 21 st century. Credit Unions Straying from Their Mission The first issue to consider is how the current credit union mission has changed in relation to the original mission, and this section outlines how credit unions are straying from their founding purpose. Credit unions have been serving the underserved for over 100 years, but recent data suggest they are not staying true to this mission, as the number of underserved people in the United States has doubled since 1977. As mentioned in the previous chapter, prior to the inception of credit unions, access to financial services for many citizens in the early 20 th century was non-existent or expensive, thus creating the need for the credit union movement, and now in the 21 st century, millions of people in the US do not have access to traditional financial services. Credit unions started to appear in the United States in the early 1900s and grew successfully after World War II. As the world developed and technology changed, credit unions Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 86 changed as well. The goal of many of the new initiatives and regulations that the NCUA developed was to increase the reach of credit unions in order to provide more of their services to more people. With the landmark interpretation of the common bond principle in the early 1970s and the deregulation of financial institutions in the 1980s, to H.R. 1191, the development of Credit Union Service Organizations (CUSOs), and The Credit Union Membership Access Act in 1998, credit unions were supposed to become better suited to help their communities, but the evidence is contradictory With growth of new membership of about 1.2% year over year since the start of the 21 st century, credit unions have become stagnant, meanwhile the number of underserved people has grown. The data in this section will clarify how credit unions have strayed away from their core mission. We will first review some of the actual current mission statements in the industry in order to understand the stated intent of credit unions today. Second, after reviewing certain aspects of their mission statements, we will then look at the underserved segment of the United States and examine the various steps credit unions are taking to serve this population better. The paper will examine historical data trends regarding the experiences of the underserved population over the past few decades and evaluate the effectiveness of credit union programs to service this segment. In the third part of this section, we will evaluate the current underserved initiatives being employed by the credit union industry. We will examine results and data to evaluate the effectiveness of credit union industry initiatives in serving the underserved. The last section will look at various operational changes credit unions have made that are contrary to the original intent of the industry. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 87 Mission Statement Review. For the first step of determining whether credit unions are straying from their initial founding principles, we need to actually look at the formal and stated current mission statements and review their intentions. “A credit union is a cooperative financial institution owned and controlled by the people (members) who use its services” (NCUA, 2014, p. 1). This definition summarizes a very simple concept of people helping people in the financial world. The mission of the industry at the beginning of the 20 th century was to create pools of money together in small communities, where banks were not readily available or were unwilling to service the small market at reasonable prices. In some cases banks would charge exorbitant rates that the locals could not afford, thus many of these folks were underserved by the banking community at the time. Therefore, the original mission of the credit union was to provide financial services to like-minded people in small communities, who often lacked access to banking services, in an efficient, cost-effective manner. Ask any credit union executive or board member what the mission of the industry is, and they will all say about the same thing: “we are a member-owned organization that provides financial services, at the best price, for its members.” Looking at various mission statements today, there are definite influences of the original intent of the financial cooperatives. Around the world today there are similar themes, such as: 19 (missionstatements.com). In researching further, let us review a sample of mission statement snippets from various credit unions around the country: - America First Credit Union in Utah: “…this credit union is a unique organization with deep and abiding human value…” Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 88 - Baxter Credit Union in Vermont offers services that have a “mutually beneficial cost structure that encourages growth and development both for Members and the Credit Union.” - University of South Florida Federal Credit Union states that it promotes the “cooperative ideals of the credit union philosophy.” - LA Financial Credit Union in Pasadena, California says that it will “deliver excellence in member service through financial responsibility, convenience and operating efficiency…” - Carolina Collegiate Federal Credit Union in South Carolina states that it is a “member-owned and controlled financial services organization.” - Arrowhead Credit Union in Apple Valley, California mission states “We are dedicated to serving the members’ best interest, to provide value relative to cost, and to earn their trust and confidence by operating in an ethical and financially sound manner.” As suggested by these mission statements, most credit unions state similar themes. In reviewing these themes, it is clear that the stated goals are following the intent of the earliest founders of the credit union movement as discussed in previous chapters. While this finding is contradictory to the thesis of this paper, the data provided in this chapter will show that, while the statements are indeed consistent with the hopes and themes of the founders, the actions and results indicate that credit unions are actually straying from their formal mission statements, and are not being true to their original purpose. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 89 Credit Union Underserved Initiatives Defined and Results. If the goal of the industry is to help those who are not being served by banks the number of underserved people should be falling. However, as indicated above, the number of underserved people as a percentage of US households has climbed from 10% in 1977 to 20% today and mostly includes those who are immigrants to the US and/or those in lower income brackets. During these last four decades, credit unions have been aggressively trying to expand their business, as Congress and NCUA have passed laws that have made it easier for credit unions to offer new services and attract new members outside of their original charters. However, even with these new rules and regulations in place, the number of people relying on the informal financial sector has grown. Since the credit unions’ core mission, both historically as well as suggested by credit unions’ mission today, is to help people like those listed above, let us look at how credit unions are trying to address this problem recently. Reflecting its concern about the growth in the informal financial sector, in the late 1990s the NCUA started to develop underserved initiatives in an attempt to refocus credit unions on their roots to address the underserved problem. As part of this initiative, the NCUA pushed for and the US Congress passed HR 1151, “The Credit Union Membership Access Act” (CUMAA) in 1999. The law allows credit unions to obtain federal community charters servicing large geographic communities, rather than several employee groups. In order to change to this type of charter, the credit union must petition the NCUA, and as part of the approval process, the credit union must show operational and marketing plans for servicing the larger market, including an underserved program to increase access for this segment. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 90 It should be noted that credit unions typically convert to a community charter to increase their potential membership base, expand their reach, and increase their size. When credit unions first originated, the Federal Credit Union Act law stated that they had to have a local affiliation or common bond in order to become a federally chartered credit union. This bond was usually work-related, such as an electrician’s union, an aerospace job or a farming community. In 1982, common bond was then reinterpreted by the NCUA to include “special employee groups” (SEGs), which were comprised of local groups that had a bond that was not directly related to the credit union. For example, Lockheed Federal Credit Union in Burbank, CA could ask the NCUA to include local car dealership employees as potential members, and if approved, they could begin to solicit membership from this source. This was the rule of thumb until banks challenged this ruling, which is why the credit unions pushed for HR 1151, which allows geographical communities, such as counties, to have access to membership. Many credit unions began to convert to this new federal community charter and by 2014, federally chartered community credit unions comprised 28% of all CUs with 38% of the total CU membership (Harrison, 2011). These new federal community chartered credit unions have opened up membership opportunities for these specific credit unions to serve over 50% of the United States’ population, which would have them competing not just with banks but with local non-community chartered credit unions as well. While there was some overlap in potential membership in the past, most credit unions did not compete directly with each other, yet today, with the new law, many credit unions compete for the same members. Many credit unions, with support of the NCUA’s liberal membership policies, have changed to a federal community charter under the guise that they planned to develop programs to Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 91 serve the underserved in their community and help more of these 24.8 million citizens. While this law has been in effect for almost two decades, there has been little evidence to support the premise that the industry has had success in serving this underserved market, as participating credit unions have not seen an increase in membership and, as noted above, the underbanked problem has not been remediated during this timeframe. To illustrate this point further, let us review the last seven years of data for credit unions who converted to a federal community charter. Between 2008 and 2014, 249 credit unions have converted and now have access to a potential 86.4 million members. In these six years, the 249 credit unions added 292,176 members (NCUA Call Reports), which means that only .34% of the potential members were added to these credit unions. Table 4.1 below shows the total number of credit unions that converted, the total number of potential members the new charter has access to, and the membership totals both before the conversion and at the end of 2015 (Appendix B identifies each credit union that converted during this period). Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 92 Potential Membership before Membership Net Year # of CUs Members Conversion Today Change 2008 41 14,824,450 338,064 375,841 37,777 2009 30 7,584,595 327,838 390,794 62,956 2010 27 10,855,124 330,999 357,444 26,445 2011 39 10,474,860 497,987 562,537 64,550 2012 31 10,617,866 361,830 398,549 36,719 2013 40 15,955,254 471,844 512,858 41,014 2014 41 16,163,639 439,000 461,715 22,715 Totals 249 86,475,788 2,767,562 3,059,738 292,176 Table 4.1 Federal Community Charter Conversions by Year (2008-2014) In adding only .34% of the potential membership available to them due to this new law, federal community credit unions spent almost 50% more per member than non-community federal credit unions to attract and retain new members. During that period, the average operating expense-to-assets ratio for community CUs was 3.68%, compared with 3.14% for non- community CUs (Harrison, 2011). The extra costs of opening new branches, hiring more personnel and increasing marketing costs to attract new members are a burden to the credit union and its membership and are a clear violation of their stated mission of being “operating efficient” and “cost-effective.” As mandated by the NCUA, they must build a facility to service designated underserved areas in their community within two years (NCUA IRPS 06-1, 2006). Despite these extra costs, the credit unions are getting little member growth as the data above illustrates. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 93 In addition to the costs, the overall culture of serving the underserved is not being embraced. Ray Burnett, CEO of Mid-Minnesota FCU and chairman of the National Association of Community Credit Unions stated, “Our mission isn't to serve the underserved,” and that “poverty is not a good common bond” (Freeman, 2002, p. 1). In these two statements, a prominent leader of the community credit union industry in Minnesota has contradicted the many stated formal mission statements of his peer credit unions, not only in Minnesota but nationally. The NCUA and credit unions pushed for CUMAA because it would allow them to grow their services and reach a new audience. The goal of the law was, as NCUA Chairman Dennis Dollar stated, “to allow community charters to adopt underserved areas” (Burger, 2006, p. 2). However, in looking at the data, credit unions that have applied for and received this charter are not realizing this goal, since, as pointed out above, the underserved population continues to rise. Bob Hoel of the Filene Research Institute says, “if credit unions are ‘doing the right thing for the wrong reason,’ they could be in for a surprise” (Freeman, 2002, p. 2), referring to getting a larger charter without an active plan or mission to serve those of lesser means. In summary, the data are clear that NCUA underserved initiatives, such as CUMAA, has not been effective in alleviating the underserved problem the US faces. The data show that the number of underserved Americans is rising, despite the new community charters and proposed outreach to this segment. Additionally, credit unions who choose to reach out to this sector in the form of a federal community chartered institution have seen little growth, proving that their efforts to reach out are ineffective and failing. Operational Changes. To further clarify how credit unions have strayed from their mission, it is useful to look at a few operational decisions that demonstrate how credit unions are Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 94 drifting away from a focus on the underserved population. As noted above, the number of underserved households has been growing, and while the credit union industry has tried to respond, the data show that their underserved initiatives are not as effective as they could be. When looking at some of the major emphases in what credit union leaders are actually doing today, it should not surprise them that they are failing to serve this segment. A few examples of where credit union leadership is not focused on their original mission include member business lending programs, financial literacy programs, and employee compensation. The Credit Union Membership Access Act of 1998, in addition to liberalizing membership requirements and allowing federal community charters to help serve the underserved communities, also allowed credit unions to offer member business loans (MBL). “An MBL is any loan, line of credit, or letter of credit used for an agricultural purpose or for a commercial, corporate, or other business investment property or venture” (Getter, 2003, p. 3). Since this act liberalized membership restrictions, many credit unions could offer a commercial loan to anyone that worked, lived or worshipped in their geographic boundary. Additionally, a credit union could partner with any other credit unions in the United States to help fund a member business loan. In other words, a Kansas credit union could potentially lend money to members in credit unions in 49 other states. In order to minimize risk to the membership, the law put limits on commercial lending such that credit unions were allowed to offer only up to 12.5% of their total assets in their business loans portfolio. While this seems like a great service to offer members, MBL is not a financial product that usually is utilized by underserved families, underscoring, again, how credit unions are abandoning their core purpose. The underserved need Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 95 retail lending services to help them with their personal financial needs, and are not involved in building apartments or funding a small business. Regardless, the lending program was very successful and grew rapidly. Between 2007 and 2014, total lending climbed from $26 billion to $50.9 billion (CUNA, 2014), and today total business lending consists of 7% of the total credit union loan portfolio. The growth of this business came at the expense of auto loans which held 16.7% of the loan portfolio in 2007 and now comprises only 10.8% of total credit union lending (CUNA, 2014). Due to this rapid success, many credit unions loaned their maximum amount and then asked the US Congress to allow for an increase in the business lending limit. Since 2003, the NCUA has lobbied Congress to pass the Credit Union Regulatory Improvements Act (CURIA) which would allow this limit to be raised to 20%. Senators Bachus in 2003, Lieberman in 2008, and Schumer in 2009 have all sponsored this legislation that has not passed. In 2013, Senator Mark Udall sponsored The Small Business Lending Enhancement Act of 2013, which went farther than previous bills and more than doubled the lending limit to 27.5% of all credit union assets, but as of 2015, this law has not made it out of committee. In 2008, in the middle of the biggest financial crisis since the Great Depression, credit union leaders bragged about their record in safe and secure lending, and urged Congress to pass the law that would raise the business lending limits. CUNA President/CEO Dan Mica stated, "Credit unions have weathered every financial storm since the Great Depression without ever costing the American taxpayer a dime in any bailout" (Wolff, 2008, p. 1). However, this statement, while accurate at the time, would not continue to be true. Just as the banks had failures during this crisis, the credit unions had failures as well, resulting in taxpayer dollars Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 96 being used to bail out many credit unions to the cost of $30 billion dollars in 2009 alone (NCUA 2009). Since 2008 MBLs have resulted in more than $300 million in direct losses to the Share Insurance Fund and led to the failures of consumer credit unions with combined assets of more than $2 billion (NCUA, 2013). In 2009 the leadership of Texan’s Federal Credit Union, in Richardson, Texas, was replaced by the NCUA due to business loan delinquencies in which the credit union lost $36 million. Charles Idol, a credit union consultant stated, "Business lending activity at Texan’s really flew off the chart, and due to the riskiness in the business loan portfolio, it's coming home to roost" (Case, 2009 p. 1). In 2010, the Apple Valley, CA credit union High Desert cost taxpayers $24 million dollars because of member business loans that became delinquent, and the NCUA had to bail out this credit union. In 2012, AM Community Credit Union in Wisconsin was liquidated, as “June 2012 financials showed nearly $5 million of the credit union's $9.65 million in delinquent loans were business loans” (Samaad, 2012, p. 1). In March of 2012, Telesis Credit Union in California, once a $626 million credit union (now $318 million), was taken over due to MBL bankruptcies. Telesis lost money for five straight years, and reported $9.9 million in MBL charge-offs for 2011 (Solnik, 2011). While small businesses could benefit from credit unions’ business lending service, the track record of credit union commercial lending is spotty. Looking closer at the failed credit unions listed above, we see many business loans that did not benefit the underserved or the local community. For example, Texan’s, whose original members where Texas Instrument Employees, changed to a community charter to serve the local community in Richardson, Texas and utilizing the new charter became involved in risky MBL lending and had to charge off a $31 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 97 million loan to a condo development in Telluride, Colorado. Telesis Community Credit Union, which serves members in San Fernando and Santa Clarita valleys in California, had business loan write-offs from a California resort project, a Memphis historic development project, an Orlando, Florida shopping mall and a downtown Portland redevelopment effort. To be clear, not all credit unions have to fail in order for this type of loan to be contradictory to the core mission of credit unions. Examples of member business loans from credit unions that have not failed include financing for a luxury golf and condominium resort by Spire Federal Credit Union in Minnesota, and Bethpage Federal Credit Union in New York lent $16.5 million to a shopping center in Philadelphia, Pennsylvania. Credit unions are not only making bigger loans with bigger risk, they are not utilizing opportunities to help those in their local communities. For credit unions in California, with an NCUA approved community charter, investing in businesses in Orlando and Memphis is not the best way to serve local members and help the local underserved, and shows instead how credit unions are focusing on the big profits rather than on serving the local community and staying true to their core mission. With these failures in mind, the NCUA continues to push to increase the limits on the volume of MBLs. In 2015, NCUA Board Chairman Debbie Matz stated, "My intent in modernizing our member business lending regulation is to essentially remove all limits on MBLs except for those limits that are imposed by statute" (Ballasay, 2015, p. 1). In another example of credit unions losing focus on their mission, financial literacy, once a cornerstone of the credit union movement, has not been emphasized until recently. Credit unions have only reported data since 2009 on their activities in financial education, and Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 98 according to the first credit union survey by CUNA, 24.3% of credit unions had a formal financial education program and only 12.9% offered some type of financial workshop in 2009. This number rose to 32.1% providing financial education and 18% offering financial workshops in 2013 (CUNA, 2009, 2013). As mentioned in Chapter Two, according to Niefeld, the third factor of success for credit unions is to offer financial education to promote thrift among their members. Credit union founding fathers emphasized the importance of financial education, and while credit unions have been making improvements over the past few years, all credit unions should offer members workshops on financial literacy. One last issue that shows credit unions are straying from their mission is a question about their fiscal soundness in regards to employee compensation. In the past, credit unions were run by unpaid volunteers. While that model has changed, current credit union mission statements often use the words “financially efficient” and “operationally efficient.” Being responsible stewards, and ensuring operational efficiency, credit unions kept expenses as low as possible in order to serve the members. However, this model has changed as credit unions are dipping into the member-owned profits and giving out larger salaries and benefits. In Figure 4.4, using data from the Bureau of Labor and Statistics and a recent D. Hilton Salary Report on Credit Unions, the difference in pay increases of employees of credit unions versus employees from the service sector from 2001 to 2013 shows that credit unions have been increasing the salaries of their employees at a faster rate year over year. The aggregate effect of this behavior is part of the reason that the operating to expense ratios mentioned above have nearly doubled in the past few decades. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 99 Figure 4.4 Credit Union vs. Service Sector Compensation To summarize, as pointed out in the introductory chapter, credit unions were created to help those with lesser means and those who are underserved. This objective is covered in the “human value” and “trust” aspects of their mission statements. From the evidence presented above, it appears that credit unions have strayed from this mission. The data from the past few decades show that credit union market share growth is nominal, the underserved market is growing, and the informal financial sector has expanded, especially among the poor and immigrant communities. While this is happening, credit unions continue to try to appeal to bank customers and business owners, rather than staying true to their roots and serving the poor and middle class families who were the foundation of their success. The goal of many leaders is to increase asset 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Credit Union Compensation vs. Service Sector Compensation (Increase Year over Year) US Service Sector Employee Credit Union Employee Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 100 size and volume of services, rather than staying true to the original intent in the founding of the financial cooperative. Credit unions are merging together, creating larger entities, while smaller credit unions are being eliminated and the total number of credit unions decline quickly each year. As mentioned above, the founders of the credit union movement thought that 50,000 credit unions would be needed to serve the United States (Niefeld, 1939). With consolidation and culture change, the number of credit unions is falling dramatically, and today there are fewer than 2,700 credit unions operational in the country. Couple this with the failed initiatives implemented by industry leaders, and credit unions have not just contradicted the founding fathers’ intent, but are contradicting the industry’s current stated mission. Credit unions were formed to be the beacon for those who lack access to financial services, but the actions taken by leadership is causing the credit unions to stray from their original intent. In Chapter Five, we will look at ways credit unions can refocus on their original core values, help lower their costs, and serve the people that financial cooperatives are intended to serve. Credit Unions’ Lost Identity The second problem area for the credit union recently is the fact that the industry seems to have an identity crisis. In an extreme example of this, since 1999, 38 credit unions have actually changed their charter to become a bank (Credit Union Financial, 2014). Credit unions are morphing into banks and in some cases are acting like a bank. In this section, we will look at information and data that outline how credit unions have lost their identity. First we will look at the new products and services that have blurred the lines between banks and credit unions, then Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 101 we will look at the new fee philosophy credit unions are employing recently, and finally we will look at changes in the value offered in credit union savings and loan rates in the past few decades. Product and Service Offerings. What is the difference between a bank and a credit union? Fifty years ago, the answer would have been easy, as credit unions were non-profit, local financial intuitions, offering savings and personal loan services to members with a common bond, with better fees, higher savings rates, and lower interest rates than banks. However the differences are not as clear, as legislation and interpretation of laws since 1973 have led to numerous new service offerings, such as checking accounts, brokerages accounts, insurance, and commercial banking; additionally, credit unions can apply for and receive a community charter to service an entire county or counties with millions of potential members. As pointed out in Chapter Three, starting in 1998, credit unions were given the right, by the National Credit Union Administration, to create Credit Union Service Organizations (CUSOs) (wholly owned subsidiaries of credit unions) that allowed them to begin offering a wide variety of services that were already being offered by banks but which were not allowed by their original charters as outlined in the 1934 Federal Credit Union Act. Trust accounts, retirement counseling, brokerage services, insurance services, income tax preparation, consulting services, accounting services, employee leasing, financial counseling services, data center operations, real estate brokerage, loan origination services, and many more have helped blur the lines between banks and credit unions (a complete list of CUSO services is described in Chapter Three). In addition to CUSOs, the Credit Union Membership Act went farther to blur the lines between banks and credit union with regards to who can become a member. Credit unions once had to Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 102 have a common bond, such as similar employment or union, but this law allowed them to target any member in a geographic area, thus directly competing with community banks. In addition to changing membership rules, this law allowed credit unions to offer new commercial services. Commercial banking and lending services are now offered to members that include deposit accounts for companies, business lending and commercial lines of credit. As such, there are very few services that are offered by banks that are not also available to credit union members, and with the ability to take as a member any person living, working or worshipping in a relevant geographic area, credit unions now look very similar to local community banks. Today, the difference between a bank and credit union is not obvious, other than the fact they are not-for-profit, and overseeing regulatory institutions are different, credit union management reports to the members rather than to bank stockholders. Thus, from a product and service standpoint, credit unions have morphed into banks and have lost their identity. Fee Structure. The second indication that credit unions have lost their identity is demonstrated by the change in their philosophy with regards to their fee structure. Credit unions once differentiated themselves by being a lower cost choice for consumers than banks. While they still offer a better value with regards to fees charged to their members, that value is decreasing year over year. Today credit unions are increasingly reliant on charging their members more in fees than ever before. The fees have increased on individual services such that the total fee income collected each year in relation to total income generated by providing credit has been raised to a level that is comparable to banks. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 103 Credit unions can generate income in only two ways: 1) interest charged on loans, known as interest income, and 2) fee income. Historically, credit unions have charged little to their member in fees, but as indicated in Figure 4.5 since 1984 credit unions have become increasingly more dependent on fee revenue. In 1984, just 7.6% of all income generated by credit unions came from fee income, but today that number is now up to 50%. Figure 4.5 CU Fee Income as a Percentage of Total Income (CUNA, 2015) The increase in total fee income has occurred due to an increase in many different fees and as well as new fees being implemented by credit unions. One of most common fees charged is for Insufficient Funds (NSF), which accounts for 60% of credit union fee income. This fee is charged when a member overdrafts their checking account either by check or by electronic means such as a debit card charge. The credit union fee has been rising at a faster rate than at banks recently; since 2009, credit unions have raised their NSF fee by 14 percent to a median fee of $28.50 in 2014, while banks have raised their fees only 3 percent over that same time period 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Credit Union Fee Income as a Percentage of Total Income (1984- 2014) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 104 to about $30.00 (Leggett, 2014). In addition to the past five years, credit unions have been raising this fee faster than banks for a few decades. The difference in the NSF fee between a bank and a credit union is nearly non-existent, as shown in Figure 4.6, which indicates the narrowing of the gap in NSF fees between credit unions and banks. Figure 4.6 Insufficient Funds Fees (1996-2014) If we look at the variance since 1996 as indicated in Figure 4.7, credit unions are now charging nearly the same as banks. The difference was on average $6.31 in 1996, and this rose slightly to $8.43 in 2002, but the difference today is down to $1.50 (NCUA Report 1996 – 2014, Bankrate.com 2014). $- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 1996 1997 1998 2002 2009 2010 2011 2012 2013 2014 Insufficient Fund Fees 1996 - 2014 Banks vs. Credit Unions Bank Credit Union Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 105 Figure 4.7 Insufficient Funds Fee Variance (1996 - 2014) In addition to increasing existing fees, credit unions have started to charge new fees to members for services that were once free. In one such example, credit unions are now charging fees for overdraft protection. This service is set up to allow the member to have a check or debit charge paid, if they have a line of credit or a savings account in the institution that has funds available to cover the charge. In 2002, 72% of the credit unions offered this service free, but that number has dropped to just 34%, with most credit unions now charging a small fee, averaging $3 per overdraft. In other words, if a member writes a check for $101, and has $5,000 in his or her savings account but only $100 in a checking account, the credit union will automatically overdraft $1 from savings to cover the check, but it will charge a $3 fee for this service. The philosophy about charging members fees has changed in the past few decades, closing the gap in value credit unions once offered their membership and further demonstrating that credit unions are morphing into banks. $6.31 $6.60 $7.34 $8.43 $4.00 $5.00 $5.00 $2.18 $2.00 $1.50 $- $2.00 $4.00 $6.00 $8.00 $10.00 1996 1997 1998 2002 2009 2010 2011 2012 2013 2014 Insuffient Funds Fee Variance Over Time Banks vs. Credit Unions (1996 - 2014) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 106 Savings and Loan Rate Issues. Lastly, credit unions often boast that they offer better savings and interest rates for their members than banks. Again, overall, credit unions still hold an edge in this area in relation to banks, but the difference is narrowing. Table 4.2, demonstrating changes in the one-year certificate of deposit (CD) savings rates shows that in 2003 the difference on average between a credit union and a bank rate was 35 basis points in favor of credit unions. Over 10 years, the difference between the two rates have converged and today credit unions on average can only offer a seven basis point improvement. One Year CD Rates Banks vs. Credit Unions 2003 - 2014 Year CU Rate Bank Rate Variance 2003 1.62% 1.27% -0.35% 2004 2.22% 2.03% -0.19% 2005 3.62% 3.34% -0.28% 2008 2.93% 2.26% -0.67% 2009 1.43% 1.12% -0.31% 2010 0.87% 0.68% -0.19% 2011 0.62% 0.45% -0.17% 2012 0.46% 0.23% -0.23% 2013 0.41% 0.35% -0.06% 2014 0.43% 0.36% -0.07% Table 4.2 One Year CD Rate (2003-2014) In looking at five year CD rates, Table 4.3 shows a similar narrowing. In 2003, the difference was 35 basis points but by 2014 that had shrunk to 23 basis points in favor of credit unions. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 107 5 Year CD Rate Banks vs. Credit Unions 2003 - 2014 Year CU Rate Bank Rate Variance 2003 3.43% 3.08% -0.35% 2004 3.97% 3.61% -0.36% 2005 4.58% 4.13% -0.45% 2008 3.81% 3.12% -0.69% 2009 2.76% 2.38% -0.38% 2010 2.22% 1.80% -0.42% 2011 1.79% 1.41% -0.38% 2012 1.42% 0.84% -0.58% 2013 1.31% 1.12% -0.19% 2014 1.41% 1.18% -0.23% Table 4.3 Five Year CD Rate (2003 - 2014) Charges in savings rates have closed the value gap between credit unions and banks, but loan rates have not met the same fate. Today, credit unions provide rates that offer nearly the same advantage as they have in the past. Table 4.4 shows changes in rates for a 36-month, non- secured loan. Credit unions, on average, offered a 91 basis point benefit to members in 2003, and today that has actually improved to a 102 basis point benefit. Changes in rates for a 48 month auto loan show similar results. In 2003, credit unions on average had a rate that was 133 basis points better than banks, and in 2014 that increased to 215 basis points. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 108 36 Non-Secured Loan Interest Rates Banks vs. Credit Unions 2003 - 2014 Year CU Rate Bank Rate Variance 2003 11.11% 12.02% 0.91% 2004 10.82% 12.04% 1.22% 2005 10.97% 12.50% 1.53% 2008 10.60% 12.47% 1.87% 2009 10.62% 12.48% 1.86% 2010 10.49% 12.22% 1.73% 2011 10.22% 11.61% 1.39% 2012 9.94% 11.74% 1.80% 2013 9.60% 10.51% 0.91% 2014 9.39% 10.41% 1.02% Table 4.4 36-Month, Non-Secured Loan (2003-2014) On the whole, credit unions offer the same products and services as banks do. They have increased the fees charged to their membership at a faster rate than banks have raised theirs, to a point where 50% of their total income is now generated from fees. In some cases, fees have increased to a point where the difference between the two is marginal. In addition to charging members higher fees, the advantage credit unions once had over banks in savings rates has also been reduced to a point that banks and credit unions differ minimally. While loan rates continue to offer a similar advantage over banks, credit unions overall have essentially morphed into banks, moving away from their initial purpose and losing their identity as a financial alternative for the poor and middle class. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 109 Banks’ Adjustments to Industry Changes This section address the changes in the overall financial market which have changed the landscape for the credit union movement and made it more difficult to compete in the financial industry. As outlined in Chapter Two, credit unions were created because banks simply ignored the smaller markets. As mentioned previously, rural areas, African Americans, and small businesses simply could not get decent access to financial services. As a result, the movement was born and grew to help serve underserved communities at the time, but credit union growth has been hampered as banks have changed policies and culture to cater to middle and low income families. At first, banks simply ignored the credit union movement. It was taking only a small market from the larger banks and community banks, so there was no need to bother with it. As outlined in this chapter, legislation and interpretation of membership rules allowed credit unions to begin to offer more services that directly competed with banks. Originally, the concerns were met by the bankers with lawsuits aimed to curtail credit union membership initiatives and lobbying efforts with the US Congress. In addition to these efforts, banks simply adjusted their model and began to offer services to people in all income brackets and to attract the retail market in earnest. Rather than just aiming for the top 5% of the market, many banks began to market to the masses, realizing that a profit could be generated from this segment of the marketplace. Banks have increased the number of their branch locations, lowered interests rates dramatically, created free checking options, improved their customer service, and developed outreach programs to the low-income and underserved communities. The fees and costs of using a bank are still higher, but due to their size and marketing efforts, banks are seen by many as the most Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 110 convenient and therefore best choice. Many banks have programs designed to reach out to underserved people and to younger customers and it is a strategy that is working. Banks’ Branch Deployment. First, the number of branches banks offer has contributed to their large market share in the retail banking market. As seen in Figure 4.8, a recent survey by Community Bankers of America indicates that only 21.4% of 18-35 year olds prefer a credit union as a primary financial institution, while 35.4% prefer a large bank, 18.4% prefer a small bank and 28.3% prefer a community bank. To put it in more stark terms, younger consumers prefer a bank 78.6% of the time! Figure 4.8 18-35 Year Olds - Banking Preference (Kuehner-Herbert 2006) 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 35.4% 21.4% 18.4% 28.3% 18-35 Year Olds' Financial Institution Preferences Large Banks Credit Unions Small Banks Community Banks Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 111 What did the banks do differently to help them overcome the enormous value proposition that credit unions offer? Consider the reason people choose a financial institution in the first place. At the end of the 20 th century, it was found that 50% of consumers pick a financial institution based on convenience of branch and ATM locations. A survey by Maritz Marketing in 1997 showed that 50.5% chose their financial services this way, and another survey by Market Force came to a similar conclusion in 2014, indicating that figure had fallen slightly to 45.9%. With this in mind, it is notable that banks have built 94,725 branches in the United States (FDIC 2014), compared to only about 21,000 Credit Union branches (NCUA.gov). To complicate matters for credit unions, a survey by Compete Marketing in 2008 showed that only 14% of the respondents choose their financial institution because of interest rates. As pointed out above, credit unions consistently offer better rates. Younger customers, who are part of the digital age, have not moved away from choosing a financial institution with a brick-and-mortar presence, even though branch traffic has declined dramatically since 1995. According to a Bank 3.0 survey, the average number of visits to a branch per customer was 2.21 per month in 1995, but in 2012 that figure was down to .26 visits per month (King 2013). While the number of branch visits is down, it seems contradictory that people choose their financial institution due to branch convenience. It seems that branches are more about brand recognition and marketing, as many of banks are known, since they are seen in so many locations. In Chapter Five, we will look at ways to raise the branding awareness of credit unions in order to be appealing to consumers. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 112 Bank Loan Rates Lowered. Second, bank loan rates have decreased dramatically to be competitive. At the beginning of the credit union movement, banks often charged 20% or more for personal loans to the general public, while credit unions at this same time offered the same loan at 13% (Neifeld 1939). As outlined in great detail in Chapter Two, the expensive cost of capital for borrowers is what spurred the movement and the banks responded by lowering their rates, although not to the value offered by credit unions. Average loan rates from banks are between 100 to 200 basis points higher than those at credit unions today, and savings rates are 10 to 30 basis points lower than at credit unions. In the mortgage market, banks and credit unions offer roughly the same rates. If banks had not lowered their rates, the credit union movement may have grown bigger and faster, but as the survey mentioned above indicates, interest rates are not usually a primary factor when determining a financial institution. Banks’ Free Checking Products. Free checking is another tactic banks have created to attract the retail market. Even though these checking products come with higher minimum balance requirements, more expensive NSF fees and low balance fees, consumers are willing to pay more for a “free” checking account. Banks charge on average $218 in annual fees for a low-balance checking account as compared to $85 for a credit union account. Regardless, free checking is often identified in surveys as a primary reason for choosing a bank, as seen in a 2013 survey by Market Force Information, in which 45.9% of the respondents specified free checking as the reason they chose their institution (King 2013). Bank Customer Service Improvements. In addition to lowering rates and increasing the number of branches, banks have realized that they must develop better customer satisfaction. Twenty-one years ago, the American Bankers Association started conducting the American Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 113 Customer Satisfaction survey of banking customers, and every year since then, credit unions have been rated the highest. However, banks have had a steady increase in these satisfaction surveys since 1995, and overall they have improved their rating by over 5% (American Satisfaction Survey, 2014). These numbers have improved due to an increase in fee satisfaction and fewer customers experiencing a problem or having a complaint. Additionally, the survey shows that bank customers are happy overall with mobile and web services offered by their bank (American Satisfaction Survey, 2014). Banks' Initiatives for Serving the Underserved. The last area to cover is how banks have begun to reach out to those not served by a financial institution. While this is a requirement of the Community Reinvestment Act (CRA), it is still an effective way to improve banks’ service offerings to the public. Banks have begun to team up with local community organizers and are helping improve financial literacy and financial services. One such example of an approach banks are using to reach underserved people is Operation Hope. Founded in 1996 in Los Angeles, it is described by its founder as “a cross between a traditional branch and Kinko’s for empowerment” (Bryant, 2006). Operation Hope is focused on the low and moderate income neighborhoods in Los Angeles and it has had success in teaching the basics of financial literacy to the local community. Wells Fargo, Citizens, Bank of America, Hawthorne Savings and Union Bank are on the list of banks who have worked with Operation Hope, helping their low income customers secure $100 million in real estate loans in 2003. Interestingly, it was the first non- profit to sell its services to banks, and since its inception, Operation Hope has educated 222,000 youth and 42,000 adults on financial literacy (Byrant, 2006). The program has been so Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 114 successful for banks that 10% of Union Bank’s 30,000 accounts opened in 2001 were Operation Hope “customers.” In 1997, the New York State Department of Financial Services created Banking Development Districts (BDDs) that are designed to help banks reach out to underserved people. The program provides banks in New York with incentives, such as real estate tax relief, and $10 million in government deposits at below-market rates (Osuri, 2014). As of today, 38 districts were created in New York State and have opened up over 60,000 accounts and funded over $530 million dollars in loans (Kim, 2015). Another example of serving the underserved market is Bank of America, one of the largest US banks. Initiatives to provide services to the Hispanic community have been launched by Bank of America. Bank of America claims that 75% of Hispanics live in communities its branches serve and it spent $40 million in multi-cultural advertising in 2005. Bank of America also has literacy programs that provide Spanish-speaking customer service, websites and collateral material (FDIC, 2005). All-Access National Savings Program is an interest-bearing, federally insured account linked to a prepaid debit card. Since its launch, it has attracted 20,000 new customer accounts, with $5 million in deposits. Once an account is established, cardholders can add funds to their savings account via free transfers from their prepaid debit card. This program is aimed at helping the underserved gain access to traditional financial services, and is ideal for those who distrust banks or have documentation concerns. By using the pre-paid card, which is a service underserved people use regularly, and linking it to a traditional savings account, it could Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 115 encourage them to save some of their money in a traditional manner. This in turn will build trust with the financial institution and begin to establish a relationship to traditional financial services. Finally, other examples exist where banks provide specific services for the underserved people. Banco Popular has a 50% Hispanic base, and it specializes in providing services to the Hispanic market. The First Bank of America has a 90% Hispanic base. Arvest, located in the Midwest, has a 20% Hispanic market and has designed programs to meet the needs of a large Latino-immigrant market. In each of these cases, the banks have made it a priority in their organizations to serve a traditionally underserved market segment. There are many other banks offering products to the underbanked market, showing that banks are trying to serve this market. In many cases, as shown above, some banks are doing a great job at penetrating this market. As detailed above, banks have been moving to protect their turf by hitting credit unions where they are strong. Lowering interest rates, offering better customer service, packaging their free checking accounts through creative fee structures, and reaching out to the underserved are all effective tools for banks. Credit unions have not responded to these changes effectively, and they are growing more slowly and reaching out to fewer people today. With the ability of banks to open more branches and advertise on a grander scale, credit unions may have to rethink their current strategies and initiatives. The World Has Changed: Financial Industry The last issue to be evaluated in this chapter is how credit unions are responding to the dynamic world we live in, where technology has shifted how the financial industry delivers its products and services. Obviously, technology is the key component of world change, both in Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 116 personal lives and professional services. The improvement in communication tools and technology has led to a dramatic shift in how people do business with retail institutions, including banks or credit unions. For instance, customers from banks or credit unions can do transactions while traveling on a commuter train to work, or in an airplane on a Wi-Fi network, and never need to set foot inside a bank or credit union branch. By taking a picture of a paycheck or any personal check with a smart phone, it can then be forwarded to a financial institution and deposited utilizing mobile banking services. With a routing number and bank account, anyone in the world can be paid through services such as PayPal and Google Wallet. Simply put, brick-and-mortar financial institutions have had to make adjustments, as competition can be located anywhere and delivery systems are being updated and simplified to meet the needs of a mobile society. Simply put, similar to how the automated teller machine changed the world in the 1980s, smart phones and communication improvements are changing the industry further, allowing for greater access and convenience. With such amazing changes in technology, the financial industry adjusted to the technological developments to meet the expectations of consumers (especially the millennials). With raising costs of technology and operational expenses, mergers were encouraged to create economies of scale and improve efficiency and as such, the number of credit unions declined by 16,000 institutions in the last 40 years. The first part of this section will look at how the industry has been affect by this consolidation. In the second part of this section, the focus is on how new technologies are being applied to the financial industry by disrupting the traditional services creating new ways to conduct financial business. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 117 Industry Consolidation – Creating Economies of Scale. Consolidation has been a big part of the world of business for some time now; after all, as the saying goes, “bigger is better.” Credit union leaders have tried to achieve economies of scale through mergers, as it was deemed that smaller credit unions could not offer the same services as banks and were therefore unable to compete. Additionally, it has been assumed by industry leaders that rising costs in technology would also make smaller credit unions obsolete, and that larger firms could best develop and utilize 21 st century technology, thus providing better services at lower costs for the members. In the 20 th century, business theory stated that bigger was better, and achieving economies of scale, which allow larger firms to produce at a lower average cost than smaller companies, was paramount to increasing shareholder wealth (Shepard, 1979). With this economic theory in place, credit union leaders naturally began a consolidation process that continues today as a way to compete in the new economy. In 1969, which saw the peak in the total number of credit unions, 23,866 existed in the United States, but since then the number has fallen to just 6,671 in June 2014 (NCUA Call Report, 2014). Figure 4.9 provides the total number of credit unions from 1939 to 2014, showing the rise and then subsequent consolidation in recent decades. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 118 Figure 4.9: Number of Credit Unions Graph (CUNA, PACA Facts Data, 2014) In less than 40 years, 17,000 credit unions were absorbed and their affinity with their membership was lost. Before World War II, Germany had 50,000 credit unions, so the founding fathers of credit unions envisioned that 100,000 credit unions were needed to serve the United States properly (Bergengren 147). At the beginning of the credit union movement, the leadership envisioned small, nimble credit unions that catered services to their specific members’ needs. Small credit unions, usually defined as holding under $50 million in assets, are an important part of the movement, and as such, CUNA created a task force in 1999 that outlined several reasons to support small credit unions: 1) Political strength and democratic model: 55,000 volunteers exist in small credit unions, giving the movement a larger voice in grassroots legislation lobbying; 2) Preservation: since credit union charters are difficult to create, preserving those in operation is critical to the overall movement; 0 5000 10000 15000 20000 25000 30000 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 History of Credit Unions Total Number Credit Unions (1939 - 2014) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 119 3) Member choice and Diversification: it is important to have many different credit unions to keep the movement flexible, as too many large credit unions would create a less robust system; 4) Support to sponsors: most small credit unions only have one sponsor, (a sponsor is the primary membership employer) which provide valuable financial services (CUNA, 2009). The new vision embraced by credit union leadership in the early 2000s is one in which large credit unions acquire smaller credit unions, create community charters, and grow as large as possible to compete with banks and improve economies of scale. However, due to the concerns that banks grew so large they were considered “too big to fail,” scholars began to question the popular and readily accepted theory about economies of scale, which can be applied to the credit union consolidation trends. In a 2011 report, Does Size Matter? Economies Of Scale In The Banking Industry, authors Stimpert and Laux evaluate this premise and discover that diseconomies of scale can happen to the banking industry at certain sizes. They concluded, “The relationship between size and firm performance is complex. We find that while costs decline and profitability increases as bank size increases, these relationships do not hold indefinitely and diseconomies of scale are experienced by larger banks” (Stimpert & Laux 2011). This study, using data from 2007 (before the “Great Recession” of 2008) found that “profitability begins to decline as bank size increases. When size is measured as total assets, medium-sized banks appear to suffer performance declines” and “when size is measured by total deposits, very large banks experience declining levels of net income” (Stimpert & Laux 2011). Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 120 With this study in mind, should credit unions continue to follow the path of consolidation to improve so-called efficiencies, or return to providing specific services that benefit their specific membership needs in smaller, more responsive credit unions? The new vision of an industry dominated by a few large credit unions is problematic. Many leaders thought they had to merge in order to offer more services with technology improvements, but the benefits of a small credit union listed above would be lost, and the credit union industry would lose many volunteers, lose many charters and become inflexible. Today’s Alternative Lending Models. Some alternative lending models are being launched in the modern world today, and some of these models reflect a mission that is similar to what was developed by cooperatives in the 19 th and 20 th centuries. In some cases they may use 21st century technology, but the concepts and intent are rooted in the values and vision of the credit unions’ original mission. As such, credit union growth is being affected by this new movement and technology as people are turning to alternative lending models. This section will review two such models: Grameen Bank and Peer to Peer lending. The first alternative to consider is the Grameen Bank lending model. Nobel Laureate Muhamed Yannus did not know he would start a bank years ago, but this is what he did and it became quite successful. His bank, Grameen Bank, “creates economic and social development from below” (Grameen 2012) by offering lending to poor, rural peoples. This mission is nearly identical to that outlined by Hermann Schulze-Delitzsch in Germany in 1850 and Alphonse Desjardins in North America in the early 1900s. The bank started in 1976 in Jobra, Bangladesh and created programs to offer “micro-loans” of $50 and above to poor people in order to provide the ability to start and expand small businesses in their country. The success of micro-lending is Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 121 astounding; as a result of the program, “nearly 2 million Bangladeshi households involved in microfinance - including nearly 10 million family members, on net - raised above the $1.25 a day threshold between 1990 and 2008” (Microcredit Summit 2009), bringing these folks’ daily income above the poverty line in their country. If Mr. Yannus had not started this bank, many of these people would have not have improved their financial standing. When evaluating the work of Grameen, it seems familiar to the plight of African Americans or rural famers in 20 th century America that were underserved until cooperatives were introduced in their communities. While the modern credit union does not participate in such small lending, a lesson can be learned in working with lower income families. Underserved people has lesser lending needs, and a model similar to this, adjusted for the US cost of living, could be developed as credit unions could reach out to these communities in a similar manner. Another alternative lending model that is working today utilizes the Internet and social media to create direct peer-to-peer (P2P) lending. In this lending model, the middleman is eliminated (i.e., banks and credit unions) and people can loan money directly to others through various websites via an eBay-like auction model. The program is simple: users who need a loan post their financial need, while investors, who can be anyone with Internet access, bid to provide a portion or the entire loan amount. The investors view the applicant’s credit history and credit score to determine the risk factor. Once this information is posted, an auction helps determine the terms of the loan, based on individual investors’ risk tolerance. This personalized lending approach has been quite successful, providing over $1 billion in loan origination since 2005 (Paulson 2010). Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 122 Two of the largest peer to peer lending companies in the United States, both founded in 2006 and headquartered in San Francisco, are Prosper and Lending Club. Prosper boasts that it has originated $4 billion of loans (Schicktanz 2015), and according to Bloomberg Finance, Lending Club, the largest P2P lender, surpassed $13 billion in loans as of September, 2015. In the United Kingdom, Zopa, which was the first P2P lending company founded in 2005, now has originated over $1.5 billion in loans in ten years (Zopa.com, 2015). To summarize, P2P lending in these three companies have originated $18 billion in just ten years. P2P lending appears to be a market that is here to stay, as this burgeoning concept has seen tremendous growth and poses a serious threat to the traditional financial marketplace. Some would argue that the people utilizing P2P lending sites would not make ideal credit union members or bank customers, since they are seeking money in such an unconventional manner. However, in looking closely at the profiles of P2P lending, the average borrower is 36 years old and has a $68,000 yearly income (MoneyCoach.com 2010); in contrast, as mentioned above the average age of a credit union member is 48.5. This statistic should raise an alarm for credit union leaders, as the age of P2P borrowers is a demographic “sweet spot” for credit unions (and banks) since the peak borrowing period is between the ages of 24 and 44. The aging demographic of credit union members creates a potential threat to the long term viability of the industry since one of the main income streams for credit unions is interest income, and losing these younger borrowers will hurt their revenue streams in both the short and long term. What is the appeal of the P2P lending model? Simply put, the rates of return for the investor are higher than for banks or credit unions since these P2P firms have low overhead and minimal regulations. Returns for peer-to-peer investors are around 10% (Business Wire 2010), Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 123 and when comparing this to today’s interest rates at a traditional financial organization, savings rates are below 2%. Another appealing feature of the P2P lending model has to do with trust and ethics of traditional financial firms. According to a Forrester Study before the financial crisis of 2008, “most people believe their banks put their own interests ahead of consumers and a majority do not think their financial institutions have strong ethics” (Slavin 2007). This survey shows an opportunity for credit unions to take advantage of, since they could state that they are member- owned, non-profit organizations that are available to serve the membership. P2P lending is similar to the early days of the credit union movement, when like-minded people worked together to help everyone improve their standing. “People-to-people lending - It's an old idea that's new again,” is the motto of Prosper.com, which mimics the original mission for credit unions. When an upstart competitor is using credit unions’ past to promote its future, one has to ask if that industry is still serving its membership effectively. While the operations of these P2Ps are good, credit unions offer similar services to their membership, and offer better rates for investors. Recommendations in Chapter Five will outline ways to market and brand credit unions to show that while P2P lending is a great concept, it is a concept that credit unions invented over a 100 years ago and still offer today. The fact that the world is changing does not necessarily mean that credit unions are obsolete. Industry leaders have tried consolidating smaller credit unions into larger ones to meet these challenges, but as the evidence presented above suggests, this not working as costs have doubled, membership growth is stagnant and the underserved population is growing at a rapid rate. Meanwhile, there are millions of people seeking alternative sources of lending, some Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 124 turning to alternatives provided today through the use of new technologies that could easily be offered by credit unions, with the failure to do so costing them members and potential revenue. Chapter Five will outline potential ways to meet these new challenges. Conclusion No one could have predicted that the idea of the financial cooperative that started in 19 th century Germany by Friedrich Wilhem Raiffeisen would have created such a successful world- wide movement for cooperative credit. Perhaps an early sign of its potential should have been recognized since the early movement was so successful in Germany. From 1848 to 1888, when Raiffeisen died, 428 credit cooperatives existed throughout Germany (Bergengren 145). In just a short time the model was quite successful in Germany and then spread throughout Europe and then Canada and eventually the United States. There are many reasons the movement succeeded, but one main factor in the cooperative’s success was its mission of helping out people of lesser means. As outlined above “ordinary people lacked access to reasonable credit” (Barron 396), and the credit union was the answer for these people. The industry has over $1 trillion in assets and continued consolidation creates larger credit unions, but even the largest credit union is not as big as a moderate sized community bank. Since the 1970s, the NCUA has created policies to help credit unions compete with banks and spur growth, but the market share has only increased by 1.2% since these changes and banks now have over 93% of the financial services market. During this time, operating expenses have dramatically increased, doubling since the early 1990s; and members are not getting additional value, as rates and fees are less advantageous today in comparison with banks. Other changes Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 125 were made with the express intent of better serving the underserved, but these initiatives have not resulted in helping this segment, and tens of millions of Americans are still unbanked. The industry is stagnant, and the aging membership is a sign that at some point the movement will decline if changes are not adapted. The attempt to become the financial beacon to the underserved in not as effective as intended, nor being pursued in earnest. . In outlining the issues with credit unions, this chapter has identified six areas that have caused challenges for the financial cooperative. Credit unions need to (1) return to their roots, (2) find their identity, (3) outline their value to their current membership and the community, (4) embrace and utilize the new technologies offered today, (5) understand and react to the changing industry, and (6) counter the changes banks are making. The chapter has analyzed all the challenges credit unions face today, and the next chapter will define specific programs, initiatives, and changes industry leaders need to undertake in order to return to the root mission of credit. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 126 Chapter 5: Recommendations for Returning Credit Unions to Their Roots In Chapter One, this paper referenced Frank Capra’s film “It’s a Wonderful Life”, wherein Bailey Savings and Loan is the financial alternate choice to Mr. Potter’s bank and George Bailey personally helps hundreds of people in his community who often had financial challenges. In that movie, we see how different the world was when George wished he did not exist; Mr. Potter controlled the town, and many people who were serviced by Bailey Savings and Loan were destitute, because they had no alternative, no choice. To borrow from this movie again, imagine a world where banks had no alternative? Imagine a world where only a few people held the keys to financial instruments and the average person did not have access to something readily taken for granted today – financial services. Sadly, we don’t have to imagine this, since we have history to review. As pointed out in Chapter Two, before credit unions, many people were underserved and unbanked, and interest rates were exorbitant as the bankers had no competition and could set the rates as they desired. People of color and women were disenfranchised, and farmers were left behind or given loans they could not repay due to usurious lending practices. Credit unions were born out of necessity and the courage of the few to help each other by pooling their local resources. Now, however, credit unions are disappearing at an alarming rate, being swallowed up by larger credit unions that just mimic a bank. Since 1967, over 20,000 credit unions have closed and on average, since 1998, over 200 more are closing their doors each year (CUNA 2015). As pointed out in Chapter Four, the credit unions that are left standing have absorbed others and merged into giant credit unions that think and act like banks and are charging fees to their members that are similar to the fees banks are charging today. What will the future look like if this continues? Credit unions have strayed from the Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 127 mission for too long and are morphing to look and act like banks. Credit unions had once offered a much better value proposition to people, and if they return to their roots and return to the core purpose of their existence, the financial industry will be better off and the life and viability of the credit union will continue. This chapter will recommend ways to return to these roots and to serving the kinds of customers that credit unions had in the past, staying true to their intent and the original purpose of the 1934 Federal Credit Union Act. This section offers recommendations for three distinct areas of credit union management and leadership that need to be addressed going forward. These three areas are not independent of each other, and the recommendations are intended to be taken as a whole as they are intended to reverse the course of the last several decades. The chapter and recommendations begins with the “10,000-foot view” strategic level of the industry and each subsequent section will drill deeper and finish with specific recommendations for credit union operations and marketing efforts. In the first section, we look at the highest level view as the focus is on credit union legislative, regulatory, strategic and cultural recommendations. This area affects all stakeholders, such as NCUA policy makers, board members, credit union employees, and members. Recommendations in this area center on the overall nature of the credit union movement, from specific laws and regulations to the boardroom leadership and strategic direction of the industry. This section provides an understanding and review of the credit union’s overall place in the financial marketplace and provides for a foundation for the other recommendations in the chapter. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 128 The second and third sections of this chapter are operational in nature. Specific credit union recommendations are outlined in order to implement the strategic changes referenced in the first section along with other recommendations which suggests ways to improve operations for a better return on assets and operational efficiency. The third and final section focuses on the marketing and branding of the financial model to ensure that it is representing the correct image and reaching out to the right members. The recommendations offered in this chapter are innovative and perhaps controversial in the minds of leadership in the credit union movement today. However, it is without reservation that these dynamic paradigm shifts in thinking should be made in order to correct the actions of the leadership over the past 30 years, which have created the current credit union culture. Legislation, Regulation, Strategic and Cultural Recommendations To begin the discussion on recommendation, we start with the highest level – legislation, regulation, strategy and culture. Starting here allows us to create a foundation for the subsequent sections and their recommendations. Once the regulatory system is reformed, then board members and senior management can create strategies to serve their members, and operations can be crafted by credit union management to best carry out these changes. Legislation began with the 1934 Federal Credit Union Act, which Franklin Roosevelt signed into law during the Great Depression. The intent of the law was simple: make credit available through a system of non-profits to provide services to low and middle income families, as pointed out in Chapter Two, new credit union laws have been passed over the years that have changed many aspects of this legislation. This paper does not recommend that we return to 1934 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 129 law, but as seen in the data in Chapter Four, much of the recent legislation is not having the desired effect, so these laws should be reviewed and rewritten. This paper recommends that the legislation pertinent to the following subjects should be updated and/or repealed: community charters, underserved initiatives, member business lending and commercial accounts. National Credit Union Administration Recommendations. As the data clearly point out in Chapter Four, community charters are not succeeding in driving more members to credit unions, and in some cases credit unions are actually losing membership. The recommendation is that the provision in the HR 1151 Law, known as the Credit Union Membership Access Act (CUMAA), passed in 1998, which allows for the National Credit Union Administration (NCUA) to grant federal charters that include wide-spread community charters should be removed. The previous system allowed individual employee groups to join a credit union locally if the employee group was not currently being served by another credit union. It is recommended that credit unions return to this approach to grow their membership and serve their community. This update to the law would allow for more credit unions to be founded to serve the local interest of the members and have smaller, more nimble financial cooperatives. Over 11,000 credit unions existed before the 1998 legislation was passed and signed into law. Today there are fewer than 6,600 credit unions. CUMAA was a boon to larger credit unions that could expand their charter and grow rapidly, but smaller organizations who had little infrastructure could not take advantage of this new approach to membership. To illustrate this point, since 1998, 3,700 credit unions worth less than $50 million dollars merged with larger credit unions (CUNA, 2015). The NCUA’s strategy in the past few decades has been to grow the overall size of the industry at the cost of the smaller credit unions. The thought is that larger Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 130 credit unions could better compete with banks and provide economies of scale, making the industry more efficient and better able to serve large memberships. In Chapter Four it was argued that the “bigger is better” myth has been challenged. Larger credit unions economies of scale do not necessarily improve operational efficiency; with this in mind, if legislation were crafted and the NCUA embraced the fact that the founding fathers envisioned 100,000 credit unions to service the United States, more and smaller credit unions should be founded. Embracing this concept as originally envisioned would allow smaller credit unions to become local again and therefore become true partners in their communities, as was intended when the credit union law was created in 1934. Therefore, the recommendation of this paper is that legislation be drawn to honor the intent of what credit unions stood for - and could stand for today - by eliminating federal community charters and promoting locally driven, common bond credit unions. Additionally, the intent of HR 1151, as touted by the proponents of the law, was to return credit unions to their roots and to help them serve the underserved market. As data show, the underserved population in the United States has grown in the past few decades, and credit unions are not doing a good job of reaching out and adding these people to their membership, so it is clear that this law does not help this group. As such, legislation needs to be developed to help credit unions truly return to their roots by holding accountable the NCUA and credit unions that do have community charters and have made a commitment to underserved neighborhoods. A law similar to the banks’ Community Reinvestment Act, which “is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations” Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 131 (Federal Reserve 2015, p 1), would be a good model to use when developing a credit union law of a similar nature. Legislation allowing credit unions to expand their charters under the guise that they will help the underserved population but then do not take action to serve this market should be eliminated. Data shows that with all the legislative and regulatory support, credit unions are not adding significantly more members, and not solving the underserved problem in society. Congress should act and put in real measurements to keep the NCUA and the credit unions honest in their attempt to serve people who are currently underserved. Third, credit unions are not banks, and do not need to be involved in businesses’ operations to be successful. The hopes of the NCUA and intent of the legislation to allow credit unions to offer business lending and commercial accounts were to enable them to offer small, local businesses financial business services. While some credit unions have done this without going bankrupt, data outlined in Chapter Four show that many have lost billions of dollars as a result of risky business lending processes and are not serving the local communities. The industry boasts that not one credit union went under in the Great Depression, however, the same cannot be said about the Great Recession of 2008, when many credit unions were forced to close or merge due to business lending practices that went awry. While the merits of helping local businesses are noble, credit unions should stay in the retail banking space. Community banks are in the perfect position to be the provider of these services, and credit unions do not have the expertise or the history to serve this market effectively. Legislation should be passed to preclude credit unions from having these types of financial business services. The NCUA is the federal administrative regulatory body that oversees credit unions; its purpose is to interpret legislation and regulate the credit union industry and lobby for legislative Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 132 changes. As such, the NCUA audits credit union performance and identifies credit unions that are at risk, often facilitating a federal takeover of a credit union or coordinating a merger with a larger organization. Credit unions at risk of being acquired tend to be identifiable by the following characteristics: “low profitability, low capital, high liquidity, low loan/deposit ratio, low efficiency ratio, and low information technology usage” (Goddard, McKillop, & Wilson, 2009 p. 14). While this is a sound practice, it is recommended that the NCUA change its liberal approach and discourage credit union mergers. The NCUA should continue to monitor these key elements to ensure proper management of credit unions, but the rush to merge should be slowed. Research at the Colloquium at Berkeley in 2012 show that “while it might seem logical to assume that mergers always drive cost-reducing efficiencies of scale, the reality isn’t quite that straight” (Wilcox, 2011, p. 8). The data show that smaller credit unions merging into larger ones may see short term improvements, but over the long period of time it is at best a break even gain or even an increase in cost for the new institution (Wilcox 2011); as such, these mergers are not necessary and may not be the only way to improve profitability or fix any capital issue at the smaller credit unions. Rather than force a merger, the NCUA should first focus on the incompetence of management and board governance and then provide counsel to save the credit union so it can better serve the local community. Merging into a larger credit union is not having the desired effect and does not serve members, as they lose their credit union and become part of a larger credit union which may or may not have expertise or the local understanding of their needs. Since the NCUA buys into the fallacy that bigger is better, it must recognize that this is not true, and moreover, the credit union movement’s best approach is to include more of the Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 133 smaller, niche-oriented credit unions. It should take a public posture to encourage that credit unions solve their problems internally, without merging with another credit union. The NCUA should also offer assistance to help find operational efficiencies. Later in this chapter, recommendations will be made to help smaller firms, who may not have the best infrastructure, to survive while helping them offer all the modern day technology and services of any large credit union or bank. The NCUA’s goal should be to promote credit union’s efforts to serve the underserved market by encouraging more credit unions to open in low-income areas and creating metrics to measure activity and success in these communities. The NCUA should provide more training to board members and senior management on how to serve the underserved. Additionally, the NCUA should not encourage federal community charters and ask Congress to remove this ability as dictated by the CUMAA. Another recommendation involves the Credit Union Service Organizations (CUSOs). Some of the services CUSOs offered should be eliminated, as these services do not conform to the original roots and purpose of credit union cooperatives. CUSOs’ services that should be discontinued include business loan origination, business counseling and consultant services, fixed asset services, and insurance brokerage. Overall, the NCUA sets the tone for the industry and interprets and enforces the law Congress creates. The NCUA should stop lobbying Congress to increase the business lending limits, and instead should ask Congress to revoke the law that allows member business lending and commercial banking. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 134 In summary, it is recommended that the NCUA hold credit unions to the industry cause of helping low and middle income people by regulating and auditing their underserved initiatives, and the NCUA should facilitate growth of credit unions by encouraging better penetration in credit unions’ current target communities, not by granting them access to more potential members in large, unwieldly community charters. In concert with that, the NCUA should encourage the formation of more credit unions, with mergers becoming the last tool used to save a floundering credit union. The NCUA sets the tone for board members to follow, and these changes will help encourage a return to the roots that made credit unions so powerful in the 20 th century. Volunteer Membership Boards Recommendations. Moving into recommendations for the culture, a first focus is on at the volunteer board members and their role in credit union leadership. Volunteer board members oversee credit union strategy and define the culture of the organization. This section focuses on board officer education and how officers can set the cultural tone of an individual credit union. Since board members set the cultural tone and strategic direction of a credit union, the first recommendation address the issue of board selection and composition. Over 77% of board members agree that “the nominating committee at our credit union always re-nominates any incumbent who would serve another term” (Hoel 2011, p. 36). This suggests that the board composition does not readily incorporate new blood or ideas that could be necessary to create a board that challenges status quo or that holds management to the highest standards. Rubber stamp boards lead to stagnation of thought. The board of any credit union should have some turnover, and should encourage younger people to become involved in board activity. The Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 135 recommendation is for credit unions to rewrite bylaws to include term limits, and also to create innovative ways to elect new members to their boards of directors. The goal of board composition is to create what Dr. Robert Hoel identifies as a “challenger board,” which, as outlined in Figure 5.1, provides for the highest amount of advice and coaching, as well as monitoring and controlling. Hoel’s research suggests fewer than 25% of credit union boards offer this type of effort to leadership, which leads to complacent management. Creating bylaws that have training requirements and term limits would help alleviate this issue. Figure 5.1 Types of Credit Union Boards (Hoel 2011, p. 6) Hoel also found that credit union leadership should not focus on traditional metrics such as return on assets (ROA), but should look at “building meaningful membership metrics” (Hoel Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 136 2011, p. 7) that better assess the true relationship with the members. This recommendation is supported here, and while ROA should be monitored, members’ satisfaction is critical for long term success. Perhaps more formalized monitoring tools should be put in place, such as a Net Promoter Score (NPS), which is a simple measurement of customer satisfaction and asks one question: “would you recommend the credit union to a family member or friend?” Research has shown that “banks with higher NPS scores have superior profits and greater growth” (Hoel 2011, p. 8). Deploying formalized metrics is highly recommended and would provide a tool that can measure the success of a credit union beyond the balance sheet and asset size; focusing on members is the goal, and ensuring good membership satisfaction will drive profitability and help create a sustainable financial model that serves the members. Culture is a big part of what a board can affect. Understanding that the underserved market is a critical component of a credit union’s mission, boards should not only support initiatives and marketing geared towards this demographic group, but should be involved and immerse themselves into the communities they want to serve. According to an FDIC survey in 2011, 29% of the underserved population does not trust or like a bank. As such, this is an opportunity that should be seized by credit unions. Credit unions must become involved in the local community to introduce themselves, build trust and service the local area. Being involved in local organizations, donating to local charities and creating an overall commitment to the community could become part of a larger corporate social responsibility program (CSR). Another recommendation is for boards to educate themselves on the value raised by truly embracing a CSR culture. As shown in Figure 5.2, as companies develop a true value-based program, the results can bring in new markets and partnerships. Directing management and Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 137 leading the way by getting involved would enhance the credit union’s standing in the community, build trust, and then drive underserved customers to open accounts with the cooperative. Figure 5.2 Corporate Social Responsibility Value Curve (Pohle and Hittner 2001, p. 4) It is also recommended that credit union board members and management find strategic local community partners to join forces with in underserved areas; for example, a local check cashing company and a credit union could work together to provide services to the underserved, where both organizations can benefit while providing financial access to the unbanked. In addition to developing strong CSR and underserved programs, the board should set up strategic goals to attract younger customers to the credit union. Millennials, who are ages 18 to 34, represent 25% of the US population, yet the average age of membership today is 48.5. Recommended marketing strategies will be detailed later in this chapter, but the board must set the tone and direct management to create products and services that appeal to this generation to Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 138 ensure future growth. Not only should boards create strategic direction to get younger members, it is recommended that the board itself should add younger people to better represent and eventually promote the credit union to a younger group. Since 77% of board members are 50 years or older (Hofheimer 2012), finding new younger members is recommended in order grow membership and pass the credit union concept on to the next generation. Attracting a younger clientele and embracing the underserved community are key recommendations for the board, but the board should also learn about data that show the danger in business lending and instruct their management to stop offering these financial services. The myth about economies of scale should also be understood so that boards can stop the incessant drive to compete with banks by grabbing large community charters that do not grow the firm in ways intended. Boards should understand that smaller, nimble credit unions should focus on their current membership and create retail products and marketing strategies to reach more of their local community and increase penetration in their current potential communities. The recommendation to focus on serving the underserved and offering the best retail financial services possible will drive up the NPS scores and thus improve the overall standing of the credit union. Focusing on ROA, while important, as the only goal, misses the point as defined by the founding fathers. Serving the financial needs of membership in a sound and safe way, and being providers of financial services to the entire community, especially low and middle income families, should be the priority. To summarize, boards, legislation and the NCUA should embrace the credit union mission of the past that focuses on serving low and middle income families by offering retail products and services. The movement leadership must refrain from offering bank-like products Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 139 and services, such as business lending and commercial accounts, and credit unions should not be offered large community charters to solve their marketing problems. Having access to more members served by larger credit unions does not help the cause of the financial cooperative. Credit unions should embrace the small, niche-oriented strategy and support the founding of more credit unions, not the consolidation of the current ones, to ensure that we are penetrating and serving the communities to the fullest extent with fairly priced retail financial services. Operational Recommendations The paper now shifts focus from strategic and cultural change to specific operational recommendations that are available to support the concepts raised in the section above. The next two sections focus on operational changes and marketing improvements that can be made which will provide a sustainable model to help credit unions in the current marketplace. It might seem that if the recommendations made in the previous section were implemented, the industry would lose revenue since they would decrease the potential number of members, as federal community charters would be eliminated and income from business financial services would be lost. In both cases, while the idea that revenue would be lost seems logical, the data in Chapter Four contradict this notion. The actual increase in membership from the community charters overall was negligible, and the operating expenses are higher at community credit unions. With regards to losing business lending, the credit union industry as a whole lost billions due to member business loans defaulting, which would not have occurred if credit unions had stayed true to their original purpose. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 140 The purpose of credit union management is to be stewards of the members’ deposits and operate a credit union in the most effective and efficient manner to improve the return on their assets. Today, credit unions are increasingly relying on fee income to ensure they can provide a sustainable model. As Chapter Four data indicated, the fees that credit unions are charging are becoming increasingly aligned with bank fees. The credit unions of the past offered a value to members that exceeded the bank in the form of lower fees and better rates. As Figure 5.3 shows, since 1993 credit unions are becoming reliant upon fees and other income (such as CUSO activities) to offer a sustainable model. As such, the goal in this section is to put forth recommendations to reduce costs in order to return value back to members in the forms of fee relief and better rates. The focus in this section in on three areas: branch strategies, membership strategies and back-office strategies. In the last section, with regards to marketing recommendations, the focus will shift to revenue generating concepts. Figure 5.3 Reliance on Fee Income (CUNA, 2010) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 141 Branch Recommendations. Branches are considered the cornerstone of any financial institution. Look at the average bank: it is built with marble floors and stone walls to show the consumer that the foundation, literally and figuratively, is strong and your money is safe. Credit unions have followed this same model, but today credit unions need to evaluate how branches are structured. The recommendation for branch strategy is to closely evaluate the size and number of branches and reduce these dramatically to save money. In a 2014 study by Ernst and Young, weekly channel use, derived by evaluating all transactions conducted via mail, phone, branch and Internet, in a branch is just 24% and mobile and Internet banking is now 57%, with the remaining 19% mail correspondence. As a result of this information, the financial industry is changing: Bank of America has closed 20% of its branches in the past five years (Huffman 2015), and the industry as a whole closed 1,467 branches in 2013 as it moves to focus on mobile banking (Huffman 2015). To underscore this point further, it costs a financial institution $203.54 to open a checking account at a branch versus $48.75 at a phone center or online system (Prunty, 2011). Furthermore, 93% of the total cost of a credit union comes from branches (Prunty, 2011). The myth is that people want the personal touch, however, research found that members who open share draft accounts at a branch are no more likely to open additional accounts or loans than members who open them online (Prunty, 2011), and data show that members who utilize an online channel are 35% more profitable (Colloquium in Chicago, 2012). According to Google, there has been a 2000% increase in mobile searches for banks since 2011 (Payton Dobbs, Google 2014). Simply put, branches are more expensive and are less important today, and credit union management should embrace this fact and dedicate its energies to digital channels. To further this point, the Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 142 operating expense as a percent of assets at ING Direct, an online bank, is .72%, while it is 3.68% at the average community credit union (Williams 2010); therefore, driving more members online is important to improve ROA. The recommendation for branch strategy is to close unprofitable branches and focus on growing profitable or near profitable branches, while increasing efforts to move members to online and mobile channels. In order to understand which branches should be closed, the next key recommendation for branch strategies is to create meaningful metrics to measure individual branches’ performance that are required when reporting financial information to the NCUA. While some credit unions are looking at branch profitability, it is not a standard practice. By looking at each branch as an individual business unit and calculating its ROA, which is calculated by taking the net income and dividing it by total assets, branch performance can be graded individually. In looking at each branch as an individual unit, management would then have the ability to evaluate problem areas and address these by closing, fixing or growing the right branches. In addition to the branch recommendations above, additional measures should be required by the NCUA to ensure that the remaining branches are more efficient. Credit unions should evaluate the average size of deposits per branch, total existing accounts’ services and average transactions per teller as compared to peer credit unions in their area to determine the efficiency of their branches. Again, some but not all, credit unions are tracking these measurements. The recommendation is to have a new NCUA requirement to track these metrics for each branch. In evaluating the performance against top peer performers, credit union boards would have information that could be used to challenge credit union management to develop efficiencies in Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 143 areas such as new member processing and increase back-office support via document imaging or intranet technologies. The last two areas of recommendation for the branching system center on the core of credit union revenue generation: consumer and mortgage lending practices. Creating a sales culture in the branch is a good step to improving revenue. A sales culture in a credit union is a bit different than any other retail space, as the credit union is a non-profit organization that is there to serve its members, not accumulate profit for shareholders, so the goal of a sales approach would be to educate members of the value in using their financial services. While the sales approach would help generate more revenue, it would be done in order to help members save money. More on the specifics of the value proposition to members is offered in this next section, along with as industrial marketing plan to educate the public on the value offered by your local credit unions. In addition to creating a sales culture, branches need to improve their efficiencies in the lending process, which would save the credit union money, in turn leading to better rates. With the sales culture in mind, it is recommended that credit unions embrace dashboard metric, which is a system that can measure and display to board members and staff various metrics, such as total number of deposits per week in a branch, or total number of new car loans, etc. The metrics would have the ability to view induvial employee’s results and those with lower scores can be offered additional training. The recommendation is that improvements in auto-decision loan organization models for consumer lending should be embraced to reduce the time and energy required to underwrite and Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 144 approve a loan. An auto-decision tool is an application that automatically reviews incoming loan applications by evaluating the income to debt ratio, pulling the credit history and FICO scores, and sorting the applicant into three areas: approved, review or denied. These tools help streamline the process of approving and denying loans, as these are handled automatically. However, the reviewed applications then need to be handled by an employee, because there are anomaly is the application, can take several more days to render a decision manually. Most credit unions have this type of tool in place already, but the average credit union has only 20% of its loans automatically approved (with 30% denied and 50% reviewed manually), while high performing credit unions approve 35.5% (William, 2010). The reasons some credit unions have lower scores include a lack of trust in the decision system and very conservative lending policies. The streamlining of the consumer loan process will create efficiencies, as less loan application would need to be reviewed, which in turn would provide greater satisfaction to the consumer as loans would be approved faster and members would receive their proceeds more quickly. Additionally, the manual review process would have less applicants, and allow for the credit unions to streamline their staffing in this area while not reducing member satisfaction. In order to streamline the process of lending, there needs to be a paradigm shift to move away from reliance on FICO scores alone. But moving away from overreliance on these scores requires more data to be available to make a loan decision. Credit unions that succeed in improving their automated loan decision models are incorporating a different set of information as they are utilizing data mining techniques that take into account various levels of member information. FICO has been used by many institutions as the gold standard to determining risk, but there are many reasons this score will not work for credit unions. First, the FICO score Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 145 relies heavily on credit cards, yet 36% of millennials do not have a credit card and underserved people have no cards at all (Clements, 2015). Second, cash flow matters in paying off a loan, and FICO scores only evaluate past payment history, not the ability to pay a future loan. Lastly, FICO scores penalize people for outstanding medical bills, which proves to be a problem. Today over 43 million Americans have outstanding medical bills, because many doctors hand over bills to a collection agency before the insurance pays the claim (Clements, 2015). As such, the scores of millennials and the underserved population will be lower, and these two large demographic segments of potential credit union members will be denied a loan based on this information alone. Since the credit union goal is to provide financial services to those who are underserved, which can entail attracting younger members, utilizing a score that bankers use to indiscriminately deny loans undermines the identity of the movement, which helps explain to the popularity of alternative lending models discussed in Chapter Four. With many underserved people having either low FICO scores or no FICO score at all, the current risk-based lending model would reject many loan application for them. As such, in addition to improving the approval process, it is important for credit unions to embrace this shift in criteria for lending approval, as many low-income families would be better served, thus benefitting the credit union mission as a whole. Thus, it is recommended that credit unions gently push their members online to process loan applications electronically for both consumer and mortgage lending. Credit unions that are high performers have 24% of their consumer loans originated online, while the average credit union sees only 13% of its loans being originated in this manner. On the mortgage lending side, credit unions that are performing at a high level have 55% of their mortgage loan applications Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 146 received through the internet, where only 25% of the average credit union’s mortgage loans come though this electronic channel (Willams, 2010). Improving the infrastructure, discussed later in this chapter, will help drive people to online and mobile banking channels, which will lead to improved efficiencies in consumer and mortgage lending operations. Membership Recommendations. The second set of recommendations involves membership strategies. Credit unions must drive customers to use their services or be purged out of the system. While this may sound counter to serving those who are underserved, an estimated 20-30% of members of a credit union are not active (CU Insight, 2015) but are still being serviced by the credit union. For example, if someone opened an account to get a good rate for an auto loan, and after paying off the loan still has an account open, regardless if they are actively using their account, they still receive a monthly statement. The expense to mail monthly statements is costly; as such, the goal is to engage the member first to see if the credit union can offer them other financial services, and if they are not interested in the services their accounts should be closed to reduce the servicing costs for the active membership. More members is not necessarily better, and having tens of thousands of members does not necessarily mean that a credit union is successful, since data shows most of the net income derived from 20% of members, it is recommended to make the credit union more efficient by focusing on the members that are actively using the credit union such as using their checking accounts, a debit card or any type of consumer loan. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 147 Figure 5.4 The Profitability Problem (Colloquium in Chicago, 2012) The figure above shows the membership profitability in 10% increments, showing that many members in credit unions are not active and are not using the credit union as their primary financial institution. As a result the bottom 40% of the members are not profitable, and the last 10% of the membership reduces profits by over 10%. It is recommended that credit unions encourage use by pointing out the value their products and services can offer to the member and drive more business into the credit union. In the section on marketing recommendations, more strategies will be identified for making improvements to the financial offerings in the industry that will drive more members to use credit union products, and for creating marketing campaigns that will help create more awareness for the value credit unions offer to both existing and potential members. Operational Recommendations. The last set of recommendations in this section focuses on operational efficiencies in the current business model of credit unions. Most credit unions Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 148 operate at 20% to 30% capacity and could as much as triple their business volume without investing in additional fixed costs by expanding facilities (Muckian, 2014). One goal, as discussed in the next section, is to attract more customers, including those who are underserved, to utilize this excess capacity. While some approaches for doing this were discussed in the branch recommendations, this section looks at ways credit unions can consolidate efforts and utilize back-office cooperatives and shared network/branching systems in order to maximize efficiency and/or consolidate operations to either use or reduce this excess capacity. The first set of recommendations centers on information technology (IT) efficiency. According to Cornerstone Advisors, 47.5% of the total expenses of credit unions are information technology costs (IT). Technology is expensive, but this should not inhibit credit unions from pursuing technology to meet the needs of the members. Back-office technology systems could be shared among credit unions to consolidate operations. Two, six, eight or hundreds of credit unions could join together and hire one technology team to manage their infrastructure. It is recommended that credit unions’ back-office functions become consolidated to offer the best services while remaining low in cost. This concept of a cooperative back-office is in step with the overall movement’s cooperative nature. For example, in Rancho Dominquez, CA, Schools Credit Union and Shell Southwest Credit Union share the same building, therefore, these two organizations could easily hire one IT team to manage both operations. In Torrance, CA, Parishioner’s Federal Credit Union, Calcom Federal Credit Union, Torrance Community Credit Union, and South Bay Credit Union are within 2 miles of each other. In Manhattan, NY, there is one block where 8 eight credit unions operate. Some would argue that is possible only in large urban areas. What about rural credit Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 149 unions? In Manhattan, KS, two credit unions are located on the same street, and these two organizations could share services. While it is convenient to have close proximity, it is not required. Technology is not limited by distance, so a credit union in Illinois could easily be serviced by a credit union in Florida. This is being done today for some credit unions, for example, Wescom credit union, headquartered in Pasadena, CA, started sharing their technology services in the late 1990s and now has over 70 credit unions that share technology. This model could easily be replicated in other locations around the US. The consolidation of infrastructure will not only save money, but will also allow credit union management to focus on the core competency of offering the best retail financial services to its community. This seems like a simple fix, but it is not being embraced by credit union leadership because many leaders mistrust the motives of larger credit unions who wish to grow their credit unions through mergers. This is natural, considering the current culture in which the NCUA promotes mergers and is pushing initiatives to help larger credit unions succeed. While this is a reasonable concern, leaders of smaller credit unions should realize that consolidation is happening anyway, because the NCUA expects certain profitability goals, and as the cost of technology increases, credit unions are unable to keep up. The trust level must be addressed by the NCUA, and contracts could be created between organizations that disallow the active pursuit of poaching each other’s members. The benefits of consolidation are too great to allow these types of issues to stand in the way. The credit union model is disappearing as costs rise, so in order to meet the needs of the membership, credit unions must embrace this strategy. Once past the trust issues, consolidating offers tremendous opportunity for participating credit unions. The technology services that would be available due to sharing resources would Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 150 dramatically increase services to members. Credit unions could consolidate their resources and begin to personalize web experiences, create intranet tools for fraud protection and various branch operations automation, develop engaging content online to attract online and mobile users, deploy and develop automated loan decision models (mentioned in the discussion of branch recommendations above), and implement imaging systems to help with archiving and retrieving membership information more effectively. The costs of these systems are all quite prohibitive for the individual credit union, but as many smaller credit unions pool their resources, they could offer state-of-the-art services at a reasonable cost. As such, the savings would allow management to focus on providing value to members in the form of better rates and lower fees. Another area where credit unions can find back-office efficiency is by utilizing and promoting various existing credit union networks. Credit unions offer a shared branching model that allows participating credit unions to utilize another credit union branch to do all of their services. This is not well known, as only 6.8% of all transactions are done in this manner (Davis 2014). Over 1,800 credit unions participate in this network, and over 5,000 shared branches exist throughout all 50 states (CO-OP Financial Services 2015). In comparison to the bank with the most branches, Wells Fargo, which has 6,314 branches (Hess 2015), credit unions can boast that their reach is nearly as large as any major bank. While the previous section argued that branches are less important, utilizing this network would be an inexpensive and excellent way to close branches, and even though it was recommended that credit unions move these members to online and mobile banking, another alternative is to direct those who often use branches to a shared branch, minimizing the impact of contracting branch operations. A study by Raddon Financial Group found that shared branches households’ profit is $90.25/year versus $7.07/year Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 151 for other households (Davis, 2013). The increase in profit is due to the fact that the share- branching costs are significantly less than a credit union-owned branch. With this in mind, credit unions should be pushing the use of shared branching and marketing efforts should clarify that using this service is seamless, similar to the CO-OP ATM network, where credit unions share 30,000 ATMs worldwide that charge no fee to participating credit unions. Mobile technology could be developed to identify shared branches and ATMs that are near the member, thus increasing the reach and value to the member while keeping costs minimal. Another shared network credit unions could utilize is MyCUAccess. This is a service offered for 35 cents per text (CUNA, 2011) that allows members to use text messaging for banking needs. Infrastructure costs are minimal for this service as no costs are incurred to set up or use this service. It is recommended that credit unions that do not have mobile capabilities utilize this system at minimal expense and zero capital outlay, while providing state-of-the-art services to their membership. In addition to technological sharing, credit unions should look at other opportunities to create back-office efficiencies. For every $180 million in assets, a credit union has a full-time marketing employee, and for every 72 staff members one full-time human resources staff member is utilized (Williams 2010). It is not recommended that marketing and human resource management services share in the same manner as IT, but there are ways to create efficiencies in this area as well. In marketing, utilizing interns and bringing desktop publishing in-house could reduce outside production costs. Human resource departments should leverage self-service intranet training tools and information for benefits to reduce the need for full-time staff. With Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 152 improved infrastructure both of these options are available and it is recommended that these savings be realized. Utilizing and creating cooperative services among credit unions to increase their efficiency would be a major step in cost reduction. Since the goal of leadership is to offer the best return to membership on their deposits, these recommendations would help improve rates and take the pressure off the need for fee income, thereby improving the credit union value proposition. Marketing Recommendations In this last section on recommendations for the credit union industry, the focus is on various marketing strategies to improve the overall standing of credit unions in the marketplace through promoting the credit union and rebranding the financial cooperative, developing better products and pricing of credit union services, and defining the place where members conduct their financial transactions. Promotion. The first recommendation for credit unions in marketing focuses on the promotion of credit union products and services. First, two different surveys show that awareness of credit unions by the public is low. A survey taken in 2015 by Opinion Research Corporation shows that 65% of Americans do not know what a credit union is (Freeman 2015), and another similar survey taken in 2014 found that 58% of non-members had very little or no knowledge of CUs (Reed, 2014). The first step in the promotion process is developing industrial brand recognition. It is recommended that credit unions must begin a national branding campaign that outlines what a credit union is and the benefits of using a member-owned financial Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 153 cooperative in one’s local community or employee group. Industrial marketing campaigns similar to a “Got Milk?” campaign, which has a 90% awareness (Steinbach, 2014), or “Beef. It’s What’s for Dinner,” which is a digital advertising campaign, are good examples of what could be created by the credit union association to enhance awareness at the national level. Doing this type of campaign could further help with subsequent recommendations offered later in this section. Credit union leadership should work together as a whole to provide the message and improve awareness that credit unions are financial cooperatives and a better alternative to banking. A second problem area and thus an opportunity for improvement is credit unions’ penetration in both their community charters and their special employee groups (SEGs). Figure 5.5 shows that, as credit unions added more potential members over the past several years, the penetration rate is dropping. In the past, before community charters, credit unions also Figure 5.5 Membership Penetration (Cole, 2010) struggled to penetrate their special employee groups (SEGs), serving only about 20% of the potential members. Thus it is recommended that credit unions aim to improve market penetration by focusing marketing and member development efforts in their own communities. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 154 As pointed out in Chapter Four, for example, when credit unions began to participate in funding business loans out of state, the efforts, resources and financial losses for these activities could have been utilized in other ways that are more beneficial to the membership and long term success of the credit union. The monies invested and lost in these areas could have been used to market and offer products to members who are in the credit unions’ own back yard, or dedicated to a marketing campaign to attracting new members to join the credit union, thus increasing their membership penetration rate, that, as pointed out in the above graphic, have fallen dramatically in the past two decades. The recommendation here is to develop a solid member development plan to educate potential members and promote the local credit union. Utilizing a retail marketing approach by personally reaching out to local SEGs to emphasize how credit unions can save members money and are just as convenient as any bank in the area, and dedicating staff to this function, would drive more business into the credit union. In addition to SEGs, these member development staff members could also spearhead efforts in the underserved communities, and helping coordinate management activities and getting involved in the neighborhoods that credit unions should be serving. As outlined in Chapter Four, the demographic characteristics of credit union membership are skewing older, and credit unions have left behind the underserved population. Attracting younger members is a priority, and serving the underserved population is the credit union industry’s stated mission. The good news for the movement is that these two goals are not mutually exclusive. Developing a true local and community driven credit union that returns to the roots of helping people is a story that the younger generation will understand and support as “37% of millennials say they are willing to purchase a product or service to support a cause they Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 155 believe in” (Fromm and Garton, p. 187, 2013) and 75% of millennials rank company ideals and efforts as fairly or very important (O’Connell, 2015). A marketing campaign can tap into this attribute of the younger generation, by outlining how credit unions, which are owned by average people like themselves (not Wall Street stock holders), can help people of lesser means have better access to financial services in their local community. This campaign, which should also be part of the industrial marketing efforts mentioned above, would be very effective and powerful and would attract a younger audience that takes social responsibility seriously when choosing a brand. Currently, 74% of millennials use a bank as their primary financial institution (Shivlin, 2012), representing a large opportunity for credit unions. They can develop and deliver a message that explains how credit unions fit this generation’s cause-driven approach better than banks. Educating young people and promoting the differences between banks and credit unions would increase membership growth among this demographic group, and bringing in younger people to participate on the volunteer boards, where they can actually participate in the change as they help steer the credit unions’ management, is highly recommended, as only 1% of people under age 30 participate in credit union boards (Hofheimer, 2012). If they are not interested in volunteering actively in managing the credit union, promotional efforts should concentrate on explaining how simply joining and using credit union services helps other people, as their deposits and participation help fund other people’s financial needs. In other words, it should be explained to those who are not familiar with what a credit union offers; as mentioned in Chapter One, a members’ deposit is not just sitting in the vault, it is funding others members’ car loans or Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 156 mortgages. In the marketing campaign, focusing on key words such as cooperative and participation in the branding efforts would appeal to the millennial’s cause-driven ethos. However, in order to attract this audience, a good message is not enough. Credit unions must embrace and actually commit to serving the underserved fully. Chapter Four explained how credit unions are stating that they are helping the underserved, but the data show that this segment of the marketplace is growing and not being served effectively by the credit union industry. As outlined above, board members, management and employees must be committed to serving the underserved, by immersing themselves into the community to build trust. Products and services, which are detailed below, must be developed for the underserved. Reaching out to the millennials to enlist their help in relieving the unbanked from usurious lenders or unsafe and costly financial products by volunteering, selecting and trusting a local nonprofit credit union would be a tremendous step in returning credit unions back to their initial purpose. Creating campaigns similar to “TOMS Shoes: One for One Campaign”, or “Avon: Breast Cancer Crusade,” where the product is secondary to the cause, is recommended. Credit unions should embrace this approach, as their cause of helping people with financial needs is not any less important. To put it simply, credit unions must do the job they were created to do: help people. If they stick to their roots, they will help the underserved and attract a younger audience, provided they properly promote their cause. Since millennials represent the largest generation in history, with about 25% of the US population that spends $200 billion annually and is very responsive to cause marketing (Fromm and Garton, 2013), this could drive growth for credit unions for several decades in a similar manner to the growth the baby boomers provided in the middle of the 20 th century. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 157 Having a good program for the underserved population is good start, and will help attract the younger generation, but other changes must be adapted to reach this audience. In order to do this properly, technology, as outlined above, must be updated and credit union marketing culture needs to change. A virtual presence must be created to appeal to the younger group, and credit unions should invest heavily in social media since over 50% of millennials seek out information on social media to help them choose a brand (Fromm and Garton, pg. 39, 2013). Additionally, younger people view friends’ recommendations as a key reason for choosing a company, so developing a strong social network presence to link people together is critical to reach this audience. Simply having a social media site is not enough; credit unions must be active and must participate daily in this new form of media to stay current. Research shows that credit unions that dedicate more than eight hours per week to social media have higher success rates in reaching their membership via social media (Colletto, 2014). The last promotional recommendation offered, which should be integrated with the other promotional campaigns mentioned above, involves educating members about the value proposition a credit union offers. Credit unions can and do save people money. It is recommended that credit unions embrace this message and advertise this on every street corner. Even though the gap is closing between banks and credit unions when it comes to fees, savings and loan rates, the overall costs to use a credit union are lower still. Simply put, overall the credit union industry still offers a better value than banks. A reversal in the trends of raising fees and rates would be helpful, as discussed in Chapter Four, but the focus here is on the difference in value, even with the recent drift away from the past, between banks and credit unions. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 158 A value proposition is what a firm can offer its customers for a certain price, including convenience and services offered. In this case, credit unions’ value proposition is detailed with better rates, lower fees, and better customer service as well as more access to more fee-free ATM machines, and shared branching in all state. Even the smallest credit union can be as convenient as the largest bank if it utilizes all the shared services offered by the credit union industry. As pointed out above, credit unions should educate their members through a national campaign that they are the most reasonably priced financial institution option available. According to Filene Research data, the average fees (which include low balance and NSF fees) for a bank checking account are about $218 per year which is more than double the cost for an average credit union checking account $80 per year (CUNA 2013). Along with the financial benefits a credit union offers to its membership, it can offer better lending access to the underserved population. A major problem for the underserved is that these people are denied credit for many reasons. According to the Home Mortgage Disclosure Act (HMDA) data, credit unions have a higher approval rate with people of modest means. Credit Unions have consistently offered more lending options to those who are underserved; even during the financial crisis of 2008, when overall lending was drastically reduced, credit union approval for low income mortgages was reduced slightly but still was higher than other lending institutions. In 2008, credit union approval to low-income families was around 57% compared with 47.3% for other institutions (HMDA, 2009). While it is not a hard sell to explain the benefits of credit union membership, data indicates that awareness is a challenge for credit unions, so credit union marketing efforts have not been successful to date. As such, focusing credit union marketing on the benefits of Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 159 membership and educating both young and old on the value proposition will improve penetration rates and help the overall cause of the credit union industry. One last point on promoting the credit union today is warranted. Millennials are savers, as 46% of this demographic group hold their savings out of the stock market (McGee 2014). It seems that the great recession of 2008 has left a mark on this generation and they are looking for places to conservatively save their money. As such, the industry is positioned to experience new growth with this new generation, as it offers safe and secure savings for members that is free from the concerns that “too big to fail” banks created in the psyche of this generation. The potential for better rates and lower fees in a cooperative and participatory financial system is a message that will resonate with this new cause-driven generation and help steer the credit union back to its roots. Product and Pricing. Another set of recommendations is based on creating products and pricing that will return credit unions to their original purpose by improving the use of credit union financial services from existing members. To begin, credit unions must develop products that are useful to the underserved market. One characteristic of this group of people is they generally mistrust financial institutions, especially back-loaded account costs. As such, it is recommended that credit unions develop a prepaid card product that is a good balance between cash and a traditional credit card. This card will help build trust with underserved members, which could then lead to other traditional service offerings in the future. Due to the mistrust, it is also recommended that credit unions develop highly transparent basic accounts that have simple fee structures. Another two products credit unions should offer are payday lending programs and wire services that are less expensive than check cashing firms and banks. Since trust is a big Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 160 issue and concern for this group, getting involved in their community and offering low-hassle and transparent banking services will improve trust. This cannot be done overnight, and a methodical, consistent approach must be developed to build a relationship with the community. In looking at the current product line for members, there is a major opportunity for product penetration. Improving credit card penetration, which is currently around 15.3%, and ATM/Debit Card Penetration at 73% (Callahan and Associates, 2013), must be a goal of credit unions. Adoption of the marketing suggestions offered above can help improve penetration, but the recommendation here is to simplify the products offered, provide incentives to utilize multiple product lines, and improve the sales culture in the credit union. First, it is recommended that credit unions simplify their product offerings. Research from an online grocery store found that a reduction in the assortment size increased sales by 11%, with 75% of the customers spending more (Chernev, 2012). Members who are offered many choices often become confused looking for the “ideal” fit, and often take the default selection. By simplifying their product offerings, credit unions also simplify their marketing message. Second, credit unions should increase the number of products per member, as the average member utilizes 2.5 products (Morrison, 2014). Increasing the number of products each current member uses will drive growth. As stated earlier, the bottom 10% of the members cost credit union up to 10% of their profits. Thus, increasing their level of activity will improve profitability overall. In order to do this, it is recommended that credit unions offer incentives for each product a member uses. For example, if a member uses three products, such as a checking Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 161 account, a credit card and an auto loan, a member could get a 25 basis point reduction for their auto loan. The more financial products you use, the greater your benefit and savings. Third, credit unions must educate their members on the benefits of using its services. As mentioned above, developing a sales culture will help, and this will require sales training and employees who are engaged in this process. Employees who are engaged in the mission of the credit union can be the voice for this message, however, a recent survey by Gallup found that 52% of all U.S. employees are disengaged from their work. Ensuring that employees are engaged and are educating the members on the benefits is an important step in improving product penetration and growing membership. Another recommendation is to offer free checking, period. A study by Acton Marketing Intelligence in 2011 found that 67% of checking accounts will be closed if credit unions eliminate free checking. Since the credit union value proposition is based on saving people money for utilizing services, and since banking relationships start with a checking account 64% of the time (Poquette 2011), credit unions should do a better job explaining the benefits of using credit unions’ free checking. Furthermore, underserved members do not trust banks, and millennials are frugal as a whole, so creating a free checking account is a great marketing tool to appeal to both of these groups. Another recommendation regarding products is to get creative by finding market niches where credit unions know about the needs of their communities. One example is providing green lending to members who are improving their homes with solar or other energy efficient products. A credit union that offers teachers loans at the beginning of the school year to help offset the Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 162 costs of getting a classroom ready is another good example of credit unions listening to their specific members and offering financial products to fit their needs. Place. The last few recommendations center on the way customers interact with a credit union. Whether a member contacts a credit union in person at a branch, via the phone in a call center or online, customer satisfaction is key. For the past 21 years, credit unions led banks in customer satisfaction. In a recent Gallup poll, 71% of respondents were "very satisfied" with their credit unions, while 63% were "very satisfied" with their banks and 58% were “very satisfied" thrift customers (ncua.gov, 2014). People have consistently felt credit unions provide better service. One member was quoted in this poll as saying, "A bank won't make a $400 emergency loan if your boiler breaks. They'll refer you to a credit card company where you'll pay 20 percent interest” (Said, 2003). In general, credit unions have historically fared better in their customer service ratings than banks. However, this long-term trend has declined in recent years. In 2010, credit union customer satisfaction declined sharply from the previous year (Fornell, 2010). Reversing this trend and finding ways to provide the best service are important for long term success. It is recommended that credit unions “double down” on member satisfaction. Management should create meaningful metrics and provide front line employees with the ability to solve member problems without going through layers of management. Employee training programs should be developed to create a culture of sustained member service, and employees should understand that they should be involved in local community programs to promote the credit union and provide good service to its community. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 163 The New Business Model Evaluated The recommendations listed above outline a new business model, and to ensure that this model is sustainable, the major recommendations offered by this paper should be evaluated. What would happen to the industry’s bottom line if credit unions eliminated community charters, lowered fees and removed business lending operations and reverted back to a model that was present before CUMAA? As mentioned above, these new income streams have helped deflect the growing costs of increased regulations, lower interest rate spreads and the higher costs of running a community charter. With this in mind, by removing these income streams, is the model proposed sustainable? In order to demonstrate the likely effect of these changes on the industry, let us look at a typical credit union and analyze the impact the suggested changes would bring. Simply put, this paper recommends that credit unions return to their roots, but if they implement these changes, can the industry’s financial model still be sustainable with the economic and political drivers that have moved the industry to the point it is today? Can a credit union return to its roots and still be the viable option to a bank? In answering these questions, data used in this section are from an actual federal community chartered credit union in the Southern California region, which has about $350 million in assets and over 30,000 members, was founded in the mid-1930s, and converted to a community charter in the mid-2000s. The data analyzed will be from the April, 2016 financial statements. This credit union has had to manage the challenges that have been outlined above and over the past few decades has converted to a community charter, increased fees, and began to participate in business lending. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 164 Figures 5.6 and 5.7 are used for comparison purposes; Figure 5.6 shows the average loan portfolio breakdown when looking at all credit union lending activity as reported by CUNA in the April 2016 report, and Figure 5.7 is the loan portfolio breakdown of our sample credit union. This sample credit union has 18.5% of the monies lent to businesses, which is more than double the average of 7.4%. Vehicle Loans are near average for Credit Union X, while mortgages, credit cards and lines of credit lag behind the average. Figure 5.6 Average Credit Union Portfolio (CUNA, 2016) Credit Card, 6.1% Line of Credit, 4.4% Vehicle Loans, 32.8% Mortgage Loans, 50.7% Member Business Loans, 7.4% Other Loans, 1.2% Average Credit Union Portfolio April 2016 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 165 Figure 5.7 Sample Credit Union Loan Portfolio, April 2016 In looking at the current situation, Table 5.1 shows the simplified income statement of this credit union in April 2016 and shows a net profit of $169,143 for this month. April 2016 Credit Union X Income Statement Revenue Interest on Loans $ 2,912,057 Investment Income $ 535,256 Less Interest in Borrowed Money $ 290,789 Total Interest $ 3,156,524 Fee Income $ 1,300,057 Net Income $ 4,456,581 Less Total Operating Expenses $ 4,287,438 Net Profit (Loss) $ 169,143 Table 5.1 Sample Credit Union Income Statement, April 2016 Credit Card, 3.2% Line of Credit, 2.5% Vehicle Loans, 30.6% Mortgage Loans, 44.1% Member Business Loans, 18.5% Other Loans, 1.1% Credit Union X Loan Portfolio April 2016 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 166 Now let us apply the new business model to this credit union. The major recommendations would be to eliminate community charters, remove the business lending program and lower fees to give a benefit back to members. Table 5.2 shows the modified income statement using the April 2016 data with the following changes: (1) lowered fee income by 20%, for example, a $25 NSF fee would now be $20, (2) decreased interest income due to the loss of business loan interest, and (3) lowered the operating expenses by 17.2% to reflect the savings realized as as a result of the lower expense for a non-community chartered credit union. In doing this, the revenues of the credit union decline, but are still in the black to $107,840. Income Statement Revenue Interest on Loans $ 2,373,326 Investment Income $ 535,256 Less Interest in Borrowed Money $ 290,789 Total Interest $ 2,617,793 Fee Income $ 1,040,046 Net Income $ 3,657,839 Less Total Operating Expenses $ 3,549,999 Net Profit (Loss) $ 107,840 Table 5.2 Modified Sample Credit Union Income Statement, April 2016 (with Recommendations) This modified income statement only applies a few of the major strategic changes that are outlined above. What would happen if many of the marketing and operational recommendations suggested were applied, such as improving operational efficiencies by eliminating low performing branches, or developing a new sales focus? Or what if the credit union partners with Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 167 other local credit unions for some basic infrastructure cooperative arrangements, such as a shared technology center. From a marketing standpoint, credit unions can reach out and develop relationships with millennials by creating a compelling cause-marketing campaign that both explains the benefits of a using a non-profit financial cooperative and shows how they can support the local community by simply joining and using credit union services. With younger members, the number of retail products would increase, as the prime borrowing years are 25 to 44. Additionally, if this credit union eliminated business lending and focused on increasing the number of members using their credit card products, debit cards and/or lines of credit, the bottom line would improve as income would increase. With these recommendations in place, Table 5.3 shows what a potential income statement could look like in 2019. This includes a 10% increase in interest income, as more millennials are brought into the fold and there is a push for credit cards and other lending products. We also are reducing overhead by a modest 3% to account for sharing IT services and improving branch efficiencies. In order to return the benefits of being a credit union back to a member, this scenario also lowers fees again by 10%, so the share draft NSF fee would be $18. This lower fee would also be a potential marketing tool, as the credit union would use these lower fees to continue to attract low and middle class families, thus growing its business further. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 168 Potential April 2019 Income Statement Revenue April 2016 Improvement April 2019 Interest on Loans $ 2,373,326 10% $ 2,610,659 Investment Income $ 535,256 $ 535,256 Less Interest in Borrowed Money $ 290,789 $ 290,789 Total Interest $ 2,617,793 $ 2,855,126 Fee Income $ 1,040,046 -10% $ 936,041 Net Income $ 3,657,839 $ 3,657,839 Less Total Operating Expenses $ 3,549,999 -3% $ 3,443,449 Net Profit (Loss) $ 107,840 $ 214,340 Table 5.3 Potential Sample Credit Union Income Statement in 2019 The savings could be deeper and the increase in retail lending could be much higher, but this scenario shows that credit unions can return to their roots and still be a viable alternative to banks. Final Thoughts In conclusion, the credit union industry is at an important crossroads. In Chapter Two and Chapter Three, the illustrious history of the credit union industry was told. From the humble beginnings in Germany to the Credit Union Access Act in 1998, the industry has grown to become a true alternative to banks. However, the model is drifting from its core purpose, and as the data presented in Chapter Four indicated, credit unions are leaving behind the very members they were created to serve. Millions of people are underserved and this number is growing, not shrinking, as such credit unions are abandoning their original purpose. In this chapter, many recommendations were offered to help return credit unions to their roots. The next three tables summarize the recommendations offered. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 169 Strategic Recommendations National Credit Union Administration Recommendations #1 NCUA should eliminate the Federal Community Charter, located in HR1151 #2 NCUA should promote and champion more smaller, local credit unions #3 NCUA should create audits to measure and focus on underserved initiatives at local credit unions #4 NCUA should disallow business lending and commercial banking products #5 NCUA should discourage mergers between credit unions to solve financial issues #6 NCUA should provide and require more training to volunteer board members #7 NCUA should eliminate the following CUSO product offerings: business loan origination, business counseling and consultant services, fixed asset services, and insurance brokerage Volunteer Membership Board Recommendations #1 Boards should improve board selection through credit union bylaws #2 Boards should encourage "challenger" board activity #3 Boards should focus on "membership metrics," not just traditional metrics #4 Boards should focus on underserved initiatives and become involved in communities #5 Boards need to develop, embrace and champion corporate social responsibility programs #6 Boards need to encourage partnerships with local organizations who support the underserved population #7 Boards should include younger members, and encourage branding efforts to millennials and underserved markets Table 5.4 Strategic Recommendations Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 170 Operational Recommendations Branch Recommendations #1 Credit unions should evaluate the size and number of branches and adjust according to metrics #2 Credit unions should drive membership to online channels #3 Credit unions should create meaningful branch metrics and monitor these at the branch level #4 Branches need to measure: average deposits per branch and total existing account services to determine efficiency #5 Branches should develop a sales culture focus #6 Branches should utilize dashboard monitoring tools to develop a branch sales culture #7 Branches should utilize new auto-decisioning tools to improve loan process Membership Recommendations #1 Credit unions should embrace up and out strategy with membership #2 Credit unions should improve product penetration amongst current members to improve profitability per member Operational Recommendations #1 Credit unions should utilize shared technology operation centers to spread out costs #2 Credit unions should embrace and trust infrastructure sharing #3 Credit unions should utilize existing credit union network systems, such as shared branching, ATM networks, and MyCUAccess #4 Credit unions should evaluate other opportunities to create back-office efficiencies Table 5.5 Operational Recommendations Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 171 Marketing Recommendations Promotion #1 Credit unions should embrace a national credit union awareness program #2 Credit unions should increase membership penetration amongst current eligible members (community charters are not the answer) #3 Credit unions should focus on membership development in local community and Special Employee Groups #4 Credit unions should get younger, adding millennials to their membership #5 Credit unions should develop corporate social responsibility programs and promote this to attract the cause-driven millennial generation #6 Credit unions should rebrand and focus on "cooperative" and "participatory" activities #7 Credit unions should commit to serving the underserved and get all employees involved locally #8 Credit unions should develop branding by bragging about the differences between banks and credit unions and focusing on the reasons credit unions were created #9 Credit unions should promote and utilize new technologies, including social media #10 Credit unions should brand themselves utilizing the value proposition offered to members #11 Credit unions should outline how they serve low-income families better than banks Product and Pricing #1 Credit unions should develop products that help the underserved population, such as prepaid cards #2 Credit unions’ product costs should be transparent to build trust in underserved communities #3 Credit unions should provide incentives for each additional product a member utilizes to encourage product penetration #4 Credit unions should simplify products that are offered #5 Credit unions should implement a comprehensive training program for staff #6 Free Checking must be FREE #7 Credit unions should get creative in product offerings - example: green lending Place #1 Credit unions should open branches in local communities and measure their success #2 Credit unions should measure and improve customer satisfaction #3 Credit unions should provide employee training to create a culture of sustained member service Table 5.6 Marketing Recommendations The recommendations in this chapter are intended to help the leadership of the credit union movement refocus on being true to the financial cooperative model developed by a mayor Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 172 in a small rural town in Germany in the 19 th century to help farmers. Credit unions should focus on getting the message out to everyone that they are the best alternative to a bank. Reaching out to millennials, showing them the value credit unions offer their communities, and helping the underserved should be the main focus of industry leaders today. If these recommendations are followed, a new era in the credit union history will start, and if done properly, credit unions can once again become the financial beacon to low and middle income people that brought them success in the 20 th century. To move forward into the 21 st century, credit unions must return to their roots. Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 173 BIBLIOGRAPHY A Theoretic Framework for the Analysis of Credit Union Decision Making. (1984). The Journal of Finance 39.4, 1155-68. Adams & Donald (eds.) (1983). Rural Financial Markets in the Developing World World Bank, Washington. An Organizational Analysis of Organizational Theory. (2000). 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Retrieved from http://www.microcreditsummit.org/resource /185/number-of-microcredit-clients-crossing.html Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 207 Appendix A United States Credit Union Statistics (CUNA, 2015) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 208 Table A.1 US Credit Union Totals (1939-2014) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 209 Appendix B Federal Community Charter Conversion by Credit Union (NCUA Call Reports, 2008-2015) Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 210 Table A.2 Federal Community Charter Conversion by Credit Union 2008 Potential 2008 2015 Net Charter Credit Union Members Members Members Change 5554 Michigan Columbus 100,545 6,016 4,529 (1,487) 12912 Cheektowaga Central 94,019 1,107 1,133 26 7276 Leo XIII K C 307,377 3,049 3,108 59 69640 First United 574,335 6,408 4,793 (1,615) 15324 Churchville 61,170 1,618 2,094 476 13802 K G C 7,589 1,708 1,767 59 1669 Sarco 71,329 748 692 (56) 17464 Peoples Advantage 402,978 6,738 8,102 1,364 18242 Susquehanna Valley 509,074 6,714 6,351 (363) 21789 Cornerstone 219,260 9,411 10,691 1,280 19228 Cross Valley 560,625 18,931 22,013 3,082 5856 Riverfront 373,638 21,685 22,046 361 19185 Seaport 6,810 4,094 5,209 1,115 12456 Partners Financial 806,313 14,727 11,002 (3,725) 7160 Wyo Val West School 44,510 1,758 1,342 (416) 11440 Middletown City 354,992 2,162 1,648 (514) 20824 Greater Abbeville 25,935 2,132 3,124 992 2459 Mutual* 455,054 3,764 - (3,764) 1047 Seminole Schools 365,196 658 517 (141) 6435 Horizon One 998,820 11,624 10,826 (798) 12568 HMC Employees 120,031 1,967 2,124 157 21853 Labor Management 8,392 1,718 2,064 346 11962 R G 654,880 10,898 8,118 (2,780) 20972 Dow Louisiana 705,973 19,293 25,545 6,252 13486 Armstrong 103,733 1,174 1,596 422 17224 Rapid City Medical 88,656 2,994 5,037 2,043 5198 Rapid City Telco 141,895 6,420 4,883 (1,537) 8858 Pamcel 22,744 2,114 1,647 (467) 5484 Shell Western States 45,156 3,821 3,781 (40) 20111 United America West 97,300 757 525 (232) 6407 Ypsilanti Area 322,895 6,439 6,400 (39) 14388 Hartford 1,148,618 13,284 16,657 3,373 68641 Cornerstone Financial 1,194,157 20,007 26,167 6,160 68646 Financial Plus 608,278 38,898 49,727 10,829 1476 Erie 371,209 32,729 52,554 19,825 23101 Martin 1,644,561 18,588 13,185 (5,403) 14874 Services Center 18,989 6,204 6,662 458 2585 Red Crown 859,532 20,241 21,450 1,209 4020 Members Financial 237,132 4,423 5,418 995 24769 Empowerment 57,929 353 776 423 1938 Ashby 32,821 690 538 (152) Totals 14,824,450 338,064 375,841 37,777 * Credit Union Inactive in 2009 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 211 Table A.3 Federal Community Charter Conversion by Credit Union 2009 Potential 2009 2015 Net CharterCredit Union Members Members Members Change 24293 Rheem Arkansa 115,071 1,032 1,196 164 11786 Hurricane Creek 83,529 4,372 3,799 (573) 3212 Aneca 375,965 4,397 5,875 1,478 9873 Knoxville Firefighters 382,032 1,806 1,671 (135) 12407 Beacon Mutual 155,084 2,727 2,063 (664) 1364 US #1364 652,682 8,221 9,175 954 12383 East Alabama Medical 54,997 3,545 3,960 415 20904 Financial Members 40,285 1,142 1,015 (127) 17630 Vantage Point 40,298 3,626 3,525 (101) 24313 DuPont Fibers 806,313 21,275 24,052 2,777 5234 Cedar Point 331,000 29,370 42,426 13,056 15101 Mcintosh Chemical 18,097 1,837 2,355 518 14725 Chatanooga First 312,905 2,195 2,472 277 11533 Knoxville Law Enforcement 430,019 1,977 1,962 (15) 23376 Doe Run Employees 26,359 953 1,519 566 17665 Compass 122,377 4,269 5,425 1,156 18022 Fingers Lake 155,187 14,921 14,672 (249) 3285 Niagra Regional 219,846 2,202 2,471 269 8116 Teachers 2,676,750 203,262 243,860 40,598 8110 New Cumberland 585,799 14,709 17,301 2,592 2099 Citadel 3,849,647 117,040 170,804 53,764 1352 Century Heritage 1,281,666 14,565 13,197 (1,368) 11273 Sterling United 224,305 8,817 10,948 2,131 5741 Chivaho 73,345 2,700 2,543 (157) 23949 Signet 120,510 16,392 17,861 1,469 60 Souix Falls 14,681 22,207 26,866 4,659 3458 Souix Falls Bell 172,412 5,132 10,023 4,891 13591 Cherokee County 30,000 4,207 4,212 5 2403 Hawaii 876,156 13,045 14,038 993 19608 Tri-Cities 235,841 3,326 5,088 1,762 Totals 7,584,595 327,838 390,794 62,956 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 212 Table A.4 Federal Community Charter Conversion by Credit Union 2010 Potential 2010 2015 Net Charter Credit Union Members Members Members Change 22566 Money 732,117 4,095 4,132 37 24523 Blackstone River 291,832 4,083 4,689 606 2760 Nassau Educators 2,676,750 152,413 161,481 9,068 4731 Framingham Municipal 674,209 8,813 8,393 (420) 3741 A & S 181,412 2,489 2,665 176 15185 DPL 468,922 8,919 9,348 429 20476 Mack Printing 66,092 1,269 1,049 (220) 7821 West Branch Valley 120,000 6,711 5,470 (1,241) 15209 Call 888,553 31,471 30,236 (1,235) 9555 NJ Suburban 219,210 2,744 1,664 (1,080) 2657 Axton 41,566 1,758 1,607 (151) 13137 Coastland 748,034 8,130 8,775 645 16351 Lufkin 80,130 6,484 4,541 (1,943) 12015 Cicost 110,595 2,937 2,723 (214) 11520 Weber State 531,488 9,187 9,201 14 24826 Pyramid 1,012,018 8,011 15,394 7,383 65857 Oahu 643,412 4,857 4,195 (662) 18068 Mt Ranier 131,534 1,303 1,224 (79) 9148 River-Rail Community 135,554 4,238 5,270 1,032 14098 Community Focus 372,584 4,931 4,610 (321) 10794 The County 19,849 16,416 17,702 1,286 7921 Riverview Community 164,235 3,017 3,739 722 8936 Sebasticook Valley 29,029 9,584 10,911 1,327 9821 Desert Communities 185,030 1,867 2,249 382 871 Zellco 91,446 10,013 8,964 (1,049) 167 Dakotaland 196,417 13,521 25,113 11,592 4951 Norstar 43,106 1,738 2,099 361 Totals 10,855,124 330,999 357,444 26,445 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 213 Table A.5 Federal Community Charter Conversion by Credit Union 2011 Potential 2011 2015 Net Charter Credit Union Members Members Members Change 13475 Grand Island Central 18,621 1,130 1,550 420 4787 Tandem 695,668 3,148 2,969 (179) 17341 MPO 341,367 4,085 4,049 (36) 24793 Settlers 23,207 3,145 3,402 257 10220 Lyell 744,344 1,922 1,732 (190) 10687 Horizon 157,226 9,928 10,203 275 3655 Clarion 150,208 7,152 8,477 1,325 8687 North East Welch 64,062 1,391 1,662 271 23054 Habersham 65,374 2,576 3,529 953 489 WGE 118,769 19,271 17,337 (1,934) 13352 Rose City 109,472 8,294 8,881 587 1344 Burlington Northern 97,478 1,557 1,484 (73) 10353 Access of Louisiana 183,577 5,392 5,125 (267) 24843 Arbuckle 95,438 1,003 1,122 119 11685 Arkansas Superiror 96,180 9,946 10,398 452 24501 Wave 513,679 7,807 7,161 (646) 24645 Alliance Blackstone 621,602 4,124 3,582 (542) 10083 Limestone 76,252 3,921 4,109 188 20943 Clinton County 178,725 15,334 16,261 927 19776 Bay Winds 195,361 25,927 29,676 3,749 15619 Acadia 71,870 8,535 10,479 1,944 7465 Onaway Community 185,278 9,697 11,543 1,846 2508 Crossroads Community 441,640 5,963 7,791 1,828 24187 SPE 189,608 11,196 11,060 (136) 18175 Henrico 1,238,196 20,150 27,193 7,043 11154 Buckeye Community 107,010 9,206 9,331 125 20641 Lake Chem Community 68,679 7,832 10,215 2,383 475 Integrity 541,781 4,541 5,508 967 8715 First Community 199,847 21,513 23,458 1,945 4365 Black Hills 10,110 52,236 58,660 6,424 5400 SAC 829,702 68,521 96,124 27,603 24304 Border 193,058 21,799 24,355 2,556 5023 Hermantown 279,771 12,320 16,491 4,171 12082 Red River 139,517 10,547 10,172 (375) 9093 Roswell Community 157,980 1,794 2,224 430 20727 Campco 65,809 10,740 11,744 1,004 16476 Nuvista 68,395 6,229 7,647 1,418 1733 Hickham 953,207 50,262 45,925 (4,337) 199 Members Choice 186,792 27,853 29,908 2,055 Totals 10,474,860 497,987 562,537 64,550 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 214 Table A.6 Federal Community Charter Conversion by Credit Union 2012 Potential 2012 2015 Net Charter Credit Union Members Members Members Change 11470 Sweet Home 122,365 2,745 2,973 228 5748 Menominee County 65,778 9,863 10,076 213 4103 Southwest Michigan 948,965 4,835 4,278 (557) 5439 Ahherst 261,237 4,009 4,143 134 9943 KSW 194,671 8,170 9,009 839 9518 Eastmill 193,174 4,314 4,089 (225) 15386 Westar 86,531 2,589 2,759 170 9348 Kathahin 186,641 7,324 7,245 (79) 24705 Stamford 722,062 4,708 5,091 383 23938 WJC 73,120 553 760 207 11951 Norfolk Municipal 242,143 3,600 2,857 (743) 5900 Roanoke Postal 308,707 10,188 13,471 3,283 3278 Southwest Communities 135,213 2,360 2,350 (10) 11111 Freedom First 308,707 44,333 45,964 1,631 477 The Atlantic 1,320,468 18,411 18,852 441 5569 Dixies 205,566 6,458 7,005 547 20707 First Reliance 192,541 2,383 2,680 297 4884 St. Josephs Canton Parish 375,586 5,421 6,435 1,014 24812 Tulsa 937,478 55,368 55,745 377 5493 T & P 35,012 1,247 1,225 (22) 6986 Nothern Hills 160,589 6,440 8,546 2,106 5291 Hastings 57,337 6,440 6,179 (261) 8801 Avanti 48,541 2,306 2,399 93 9090 First Oklahoma 673,370 3,691 3,891 200 2874 Sioux Empire 13,965 10,222 10,660 438 10283 The Focus 1,252,987 10,369 10,916 547 687 Laramie Plains 62,245 4,984 5,849 865 17990 Wauna 107,310 17,183 21,564 4,381 15741 Trona Valley 179,572 18,759 18,742 (17) 24839 Hawaii Central 953,207 12,101 15,506 3,405 2191 Fibre 192,778 70,456 87,290 16,834 Totals 10,617,866 361,830 398,549 36,719 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 215 Table A.7 Federal Community Charter Conversion by Credit Union 2013 Potential 2013 2015 Net Charter Credit Union Members Members Members Change 22883 Allegany County 48,946 2,119 2,103 (16) 8709 Lakeshore 172,188 2,900 2,828 (72) 11470 Sweet Home 195,933 2,799 2,973 174 7219 St Francis X 94,773 7,279 7,786 507 12 Franklin Trust 894,014 5,772 6,671 899 5742 SIR 254,211 10,545 10,621 76 11979 Northland Area 182,343 37,793 41,209 3,416 6870 Financial Trust 919,086 7,464 8,608 1,144 19776 Bay Winds 289,985 27,490 29,676 2,186 13601 Shrewsbury 333,756 9,101 8,653 (448) 10362 Northern Redwood 133,058 1,729 1,929 200 24542 San Fransisco 1,523,686 31,662 38,464 6,802 17464 Peoples Advantage 1,258,251 7,475 8,104 629 17395 IRCO Communitiy 694,739 8,329 8,810 481 11150 River Trace 949,765 1,347 2,370 1,023 12643 Corry 58,226 5,455 5,712 257 21930 Cinfed 1,171,241 30,686 31,688 1,002 24078 Advance Financial 660,348 19,088 16,469 (2,619) 6859 Artesian City 144,542 2,378 2,515 137 23949 Signet 223,541 16,982 17,861 879 15942 Lake Community 375,087 3,562 3,638 76 24720 Diebold 375,586 3,195 3,304 109 19508 Quest 100,531 12,399 13,019 620 616 New Horizon 541,786 2,128 2,161 33 13762 Diamond Lakes 196,619 10,283 10,934 651 17999 Kearney 144,712 5,437 9,690 4,253 14734 La Joya Area 774,769 16,431 16,881 450 8715 1st Community 510,809 21,745 23,438 1,693 11067 Nascoga 120,877 5,961 6,311 350 12697 Complex Community 400,913 37,025 40,917 3,892 12890 Rolla 94,480 4,480 5,737 1,257 11678 Timberline 154,624 8,761 9,019 258 4122 Highmark 240,062 9,311 9,911 600 5029 Red River Employees 746,618 67,675 75,465 7,790 11030 McCone County 23,848 2,611 2,577 (34) 9644 CIT-CO 37,881 1,855 1,979 124 644 Northwest Resource 748,031 6,025 7,763 1,738 7101 Cheney 43,413 4,769 4,912 143 13865 Alps 72,913 3,147 3,230 83 19564 Latah 49,063 6,651 6,922 271 Totals 15,955,254 471,844 512,858 41,014 Running Head: EXAMINING THE FEDERAL CREDIT UNION MODEL IN THE 21 st CENTURY 216 Table A.8 Federal Community Charter Conversion by Credit Union 2014 Potential 2014 2015 Net Charter Credit Union Members Members Members Change 13682 Brewer 155,604 7,748 7,871 123 22754 C C S E 78,892 4,557 4,630 73 10939 Bangor 247,149 14,557 13,927 (630) 1594 Generations Family 200,169 3,757 3,766 9 3036 Vermont VA 217,595 2,618 2,951 333 16408 NYMEO 239,582 22,998 24,058 1,060 479 Parkview Community 804,551 6,471 6,493 22 19433 Softite Community 155,973 2,868 2,968 100 294 CME 1,836,536 28,371 30,652 2,281 12143 One Community 147,879 7,157 7,240 83 4024 10973 166,492 13,195 16,597 3,402 15209 Call 1,258,251 29,055 30,236 1,181 1649 Equitable 198,549 2,782 2,834 52 8540 R-S Bellco 170,614 2,505 2,571 66 10973 UFCW 562,037 19,984 20,711 727 11170 First Service 1,836,536 16,144 16,664 520 24841 Clarksburg Area Postal 69,099 1,154 1,203 49 6878 New Generations 948,965 13,558 13,573 15 3711 Omega 781,158 12,892 12,519 (373) 9189 Toledo Metro 436,393 5,661 6,000 339 19867 URW 234,493 16,137 19,196 3,059 6079 Johnson City 309,544 7,790 8,185 395 18515 Ferguson 12,929 3,649 3,984 335 22005 Red River Mill Employees 110,512 862 964 102 9643 Lafayette Schools 466,750 2,288 3,238 950 12176 Catoosa Teachers 65,311 2,288 3,238 950 16373 Windthorst 47,400 2,463 2,549 86 5286 Kellog Employees 789,342 2,944 3,142 198 7641 Popular Bluff 138,601 8,374 9,551 1,177 11670 Texoma Educators 193,315 7,512 7,571 59 24626 Trustar 32,804 14,086 14,529 443 9741 Edtech 230,455 4,755 4,720 (35) 20194 Mid Minnesota 213,894 37,950 37,570 (380) 7916 Neches 571,705 43,627 48,360 4,733 2730 St Helens 189,661 15,564 15,510 (54) 5924 Mantanuska Valley 392,535 39,519 40,912 1,393 17164 Victor Valley 328,990 947 880 (67) 24729 Amicus 527,753 1,090 1,070 (20) 7260 Stockton Community 360,866 664 664 - 13790 Desertview 41,097 5,275 5,228 (47) 24492 Delta Schools 393,658 3,184 3,190 6 Totals 16,163,639 439,000 461,715 22,715
Abstract (if available)
Abstract
The paper will examine the credit union model today as well as review the origins of the industry. The question at hand is whether credit unions, as bound by their original mission, are still viable today. Chapter One outlines the various research questions that will be raised as well as the purpose for the study. Chapter Two begins by looking at the origins of the credit union movement and explains the purpose of the financial cooperatives as well as introducing the concept of being underserved, which is someone who has little or no access to traditional financial services. Chapter Two ends with a review of historical data that outlines the growth of the cooperatives. Chapter Three then looks at the various legislation that took place in the late 20th century
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Asset Metadata
Creator
Magro, Michael W.
(author)
Core Title
Examining the federal credit union model in the 21st century
School
School of Policy, Planning and Development
Degree
Doctor of Planning and Development Studies
Degree Program
Policy, Planning, and Development
Publication Date
08/05/2016
Defense Date
06/10/2016
Publisher
University of Southern California
(original),
University of Southern California. Libraries
(digital)
Tag
analysis,business model,credit unions,Financial institutions,financial model,leadership,Magro,Management,non-profit,OAI-PMH Harvest
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application/pdf
(imt)
Language
English
Contributor
Electronically uploaded by the author
(provenance)
Advisor
Robertson, Peter (
committee chair
), Coudriet, Mark (
committee member
), Myrtle, Robert (
committee member
)
Creator Email
magro@usc.edu,mwmagro@hotmail.com
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https://doi.org/10.25549/usctheses-c40-298981
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UC11281228
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etd-MagroMicha-4752.pdf (filename),usctheses-c40-298981 (legacy record id)
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etd-MagroMicha-4752.pdf
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298981
Document Type
Dissertation
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Magro, Michael W.
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(contributing entity),
University of Southern California Dissertations and Theses
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The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the a...
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Tags
analysis
business model
credit unions
financial model
Magro
non-profit