America has the largest, and by many measures, the most vibrant economy in the world. Economic growth continues with only infrequent recessionary speed bumps, unemployment remains low, job creation absorbs new workers, and inflation seems to be a distant news story from the early 1980s.
Americans live in a very different economy from 1909 when consumer financial services did not exist or even from 1934 when unemployment exceeded 30 percent during the Depression. Those dates mark the founding of the first state chartered credit union and the passage of the Federal Credit Union Act, which enabled credit unions to be organized in any state.
If the economic circumstances for the average American are so much more abundant in the first decade of the 21st century, is there still a need for credit unions?
Inequality Amidst Plenty
Against almost two full decades of uninterrupted economic progress, some have raised concerns. A primary issue is that economic gains are not shared equally. Federal Reserve Board Chairman Ben Bernanke noted in a February 2007 speech that wealth distribution has been increasingly skewed to those at the top. From 1979 to 2004, the wealthiest one percent of households has gone from 8 percent to 14 percent of total income. In the same period the top fifth of households has seen its share rise from 42 percent to 50 percent. The bottom fifth of households has seen its share fall from 7 percent to 5 percent.
Bernanke’s conclusions about these trends were that unless steps were taken to smooth the effects of a changing economy, people could “become less willing to accept the dynamism that is so essential to economic progress.”
Newsweek columnist Robert Samuelson observed: “No one should be happy about today’s growing inequality. It threatens our social compact, which relies on a shared sense of well-being.”
Both commentators suggest that individual efforts, no matter how earnest, may not be sufficient to assure a fair deal — even in a robust economy.
Plentiful Financial Services
After transitioning the 1980s (or the first decade of deregulation), the financial services industry has been one of the most consistently profitable segments of the American economy.
From hedge funds to subprime lenders, financial services are constantly evolving so that today virtually all economic strata from the poorest to the wealthiest have institutions that target their needs. While the number of charters of depository institutions has fallen, the number of branches continues to increase. Payday lending shops open up where full service financial institution branches are not practical. Moreover, the Internet channel provides options anywhere anytime for anyone who wants to log on.
Most consumers from new immigrants to the older generation living on social security have numerous institutions serving their circumstances. So are credit unions still needed? Are they just one of many choices? Do they have a unique role?
The Dynamics of For-Profit Solutions
The fact that financial solutions are available for all segments of society does not mean that these options are serving the consumer’s best interest. Recent news stories abound with excesses that have accompanied some institutions’ success.
For example, in 2005 the American Banker gave its banker of the year award to Richard D. Fairbank, CEO of Capital One Financial for “making credit more accessible and transforming lending practices” while being paid $248 million. This made him the second highest paid executive in America, according to the Corporate Library. However the lead story of the November 6, 2006, edition of BusinessWeek, titled Cap One’s Credit Trap, described the firm’s practice of offering multiple, low-balance cards to low income borrowers that trapped them in a seemingly endless cycle of fees.
Capital One Financial was not alone. The GAO issued a study in late 2006 titled “Increased Complexity in Rates and Fees Heightens Need for more Effective Disclosures to Consumers.” The study documented the increased use of late and over-limit fees by card issuers to boost card revenue. USA Today attacked the practice in a blunt October editorial: Banks use gobbbledygook to mask sleazy practices.
The newspaper followed this up with a story in December, Credit Card Fees Can Suck You In, showing how an array of extra charges and policies have grown so complex that “even regulators struggle to grasp them.” A New York Times personal business writer chronicled her credit card management challenges in a December 2006 article called In Credit Card Rates, Trust but Verify.
Taking Advantage of the Vulnerable
Credit cards are a highly visible form of consumer confusion but only part of a tendency of firms to take advantage of consumer need. In December 2006, Eliot Spitzer, then Attorney General for New York, announced a settlement with Countrywide Financial in which the company agreed to adopt measures to prevent improper steering of minority borrowers to higher cost loans.
Payday lending firms which have “fees” of $15 per $100 of funds borrowed for a two week “loan” continue to expand across the country. These annual rates of interest can exceed 400 percent or more!
It is not just lower-income segments living from paycheck to paycheck that are vulnerable. Many of the next generation of workers are emerging from their student years with loans that could burden them for the next 25 years. In a USA Today series portraying this, Generation of Debt, there are examples such as the chiropractor who finished school with over $160,000 in loans.
This generation is also confronting another issue that affects many lower income segments — how to find affordable housing. The appreciation of home prices over the past five years has made the goal of home ownership, even if feasible, more onerous and often requiring two income families, longer commutes, and “teaser” starter mortgages. These mortgages carry a short-term benefit but at the risk of a higher long-term cost.
The Credit Union Difference and the Unending Challenge
Credit unions have been a small but influential part of the emerging financial services industry. However they differ in a major way from most institutions. Instead of exploiting consumer need, credit unions lend to empower the individual. Today credit unions hold more than 44 million loans — not to meet some quarterly earnings target or corporate market share goal. Rather, credit unions exist to serve the best interests of the member.
Credit unions have been leaders in financial literacy programs in schools and in communities to teach the responsible use of credit. They have programs to help those with special borrowing needs-whether due to job layoffs or affordability.
Most importantly, they provide a relationship based on trust where a person can rely on the good faith of the institution. Columnist Robert Samuelson described this need in a dynamic economy as follows:
“An intensely competitive economy enhances overall stability by holding down inflation and spreading economic disruption throughout the business cycle. But the solution to one problem creates other, though smaller problems … even good times are punctuated with insecurities, job losses, broken promises and shattered expectations. What may be good for us as a society may hurt many of us as individuals. The unending challenge is to find some system of social protections that help the most vulnerable without frustrating desirable, if sometimes painful, change.”
For almost 100 years, credit unions have been meeting this “unending challenge”-in good times and bad, for all classes of society. Cooperatives provide individuals a chance to share resources for the benefit of the community, not private owners. Is there still a need for credit unions in the 21st century? Just ask the young person starting out on his or her own in the workforce, the person delivering your paper in the morning, the auto worker wondering what industry he will work for in the future and the new American trying to understand our financial system. Credit unions at their best enable each member to achieve a sense of well-being and self-worth. Could there be a greater need?