Beyond the Boundaries
Just a few months ago the American Bankers Association created an initiative
Credit Unions to try to have credit unions taxed. The centerpiece of their
argument is that credit unions are not what they used to be. As stated in a
cover letter to their members, "Many lawmakers don't realize the extent
to which some credit unions have strayed from their mission. . ."
In their explanatory material called Credit Unions: A Changing Industry, the
ABA describes the change in this way:
Over the past thirty years, changes in the financial marketplace have allowed
credit unions to evolve from niche players into full service retail depository
institutions. . . These morphed credit unions offer the same products as banks.
The new breed of credit union offers mortgages, auto loans, credit cards, checking
and savings accounts, insurance and securities products, and other typical bank
The Market Share Impact
Certainly credit unions have changed. This is what the national policy of deregulation
not only allowed, but also encouraged. All financial institutions were freed
to pursue the needs of their members or markets rather than be relegated to
a predefined niche of product, geography or purpose based on their historical
business patterns. Certainly the banking industry is not the same as it was
30, 20 or even ten years ago, nor is the thrift industry.
As to the bankers' complaints that they have been somehow disadvantaged,
one need only look at the data to see how hollow their rhetoric is. In the last
ten years when the credit union juggernaught has been supposedly tearing away
at bankers' markets, banks have increased their share of depository institution
assets by 4.2%. Credit union market share in this same time period has grown
from 5.7% to 6.4% of total assets or just .7% in ten years.
Looking at financial performance for the most recent years, bank and thrift
earnings have far exceeded credit union earnings. Thrifts hold advantages in
the rate of charge-offs, their productivity and expense ratios; and banks led
all financial institutions with an ROA of over 1.4% in 2003.
One of the most important factors in this same period is that the number of
credit unions has declined by almost 3,500 from 13,000 to 9,500. This decline
is almost entirely in the smaller credit union segment, that is, in those institutions
often trapped in a small market niche without growth opportunities. One can
readily understand the ABA's goal of trying to entrap all credit unions in a
similar "market lockdown" hoping to prevent cooperative, member-owned
alternatives from being available to more and more consumers.
Going Beyond the Boundaries
Credit unions would not be a meaningful alternative if they had not evolved
their ways of doing business. That continued evolution will be even more critical
going forward. In many traditional markets, competition from all sources is
increasing: auto lending, mortgage and home equity loans, and savings options.
The Internet increasingly challenges the advantage of being local. Successful
credit unions today are continuing to go beyond the mental and traditional boundaries
that have defined how financial cooperatives serve their members. The following
are some examples of this continuing evolution.
The Youth Market Ages 0-12
While many institutions have focused on the buying power of the teen and college
segments, few have focused on the youth market. Only an institution that is
prepared to make a long-term investment in its future would focus on opening
accounts for preteens.
But that is the whole focus of State Employees Credit Union in North Carolina.
The credit union's Fat Cat program offers only a single share account for kids
from birth to 12 years old. The account comes with a goodie bag of incentive
items for kids when opened plus a passbook and membership card. Each child receives
the Paw Prints newsletter and a birthday card.
The program has its own Fat Cat website. The focus of these marketing efforts
is the parents. The credit union uses this account as a way to help parents
teach their children the basics of financial literacy: savings habits and the
role of a financial insitiution. The website reinforces these messages with
content focused on the youth market.
In just three years, 70,000 Fat Cat accounts with over $36 million in balances
have been opened. When Fat Cat members are old enough, they are automatically
enrolled in programs for teens called Zard, and later, in programs designed
for the Off to College/Off to Work crowd. What starts as a child's savings account
matures into a lifetime relationship with the credit union.
Obviously few of the current management team will be active when these youth
members are borrowers and become parents using the credit union's full range
of services. However, by planting the seeds of the relationship early in life,
the managers are ensuring that the credit union will be thriving. This is one
of the unique aspects of a member owned cooperative: building the future by
investing in members who are not "profitable" but are essential to
One of the challenges facing credit unions trying to serve members is the business
requirement of third party partners. No where is this more prevalent than in
first mortgage lending where the "conforming" products and processes
for secondary market users are equated with safe practices-even when these requirements
conflict with good member value.
Pentagon FCU and other credit unions have looked for ways to break away from
the commoditized first mortgage process and create products that truly serve
members. The credit union has focused on adjustable rate mortgages because of
their fit with many members' anticipated length of home ownership as well as
the potential savings over long term fixed rate alternatives.
In addition the credit union has attempted to streamline its processes to eliminate
all front-end fees, to provide perpetual mortgage approval and to add features
such as rate locks that exceed conventional practice.*
By focusing on adjustable products, the credit union has also been able to
meet its asset-liability-management goals for managing interest rate risk. The
need for loans that will stay on the books and not be refinanced with every
variation in market rate also minimizes the first mortgage production churn
that has created backlogs in periods of peak demand for many mortgage departments.
By stepping outside the boundaries of conventional mortgage processing, the
credit union has been able to better serve its members and improve its own financial
More than PACS and Lobbying
The challenge of the bankers is not new. Credit unions and their trade associations
have been developing their lobbying skills and growing their PAC war chests
with increasing fervor. By all accounts, these efforts have been effective,
but will they be sufficient?
Credit unions in Alabama have been working on a third strategy that will complement
the two efforts of PAC donations and lobbyists. This program is called CU Vote.
While housed within the League structure, it is a completely separate effort
with its own board and funding. The goals of the program are to:
1) Create member awareness about credit unions as not-for-profit, tax-exempt
2) Educate members about how this cooperative structure benefits them;
3) Engage members in defending the credit union option.
The CU Vote process includes four different credit union benefits including
member education and communication, political consulting, political involvement
including voter registration, and research.
Barely two years old, the effort is run by a veteran political campaign consultant
who uses surveys to benchmark the program's goals. The need for the effort was
graphically demonstrated by a 2002 survey that found that barely 40% of members
were aware that credit unions were non-profit financial institutions and only
19% said that it was a true statement that credit unions are exempt from corporate
income tax (63% were unsure).
Success Requires Going Beyond Boundaries
Credit union success has frequently been based on innovation, doing something
that other financial alternatives cannot or will not attempt. These efforts
are essential for creating member value, that is, a reason for consumers to
select the credit union over other alternatives. Looking for ways to provide
a service or product that is better than the traditional practice will mean
looking outside the normal ways of doing business. Those efforts will create
controversy and challenge, but that is the reason that member-owned cooperatives
exist, to provide a better option than exists in the market already.