Paying More and Strengthening the Credit Union

We are presently in a "flight to quality" environment. Money is coming in, away from the scary stock market and equity mutual funds.


We are presently in a ''flight to quality'' environment. Money is coming in, away from the scary stock market and equity mutual funds.

But what do you suppose “quality” means to members? They might say “not volatile like stocks and mutual funds;” they might say “insured.”

In fact, it means more than both of these. For one, it means something that may shock them, that they wouldn’t readily believe, although as credit union members they should, it being our duty to keep reminding them. “Quality” when referred to in the credit union context means the members themselves.

Credit unions are not safe and sound, growing, vibrant, dependable and helpful institutions because the federal government insures their deposits, or because the federal government helps run a regulatory agency, or because credit unions do not speculate in certain financial instruments. They are all the above good things because members are disciplined savers and disciplined borrowers. Credit unions are sound because members pay back loans consistently and regularly. And those members accept a savings rate that is slightly lower than the rates at which they borrow, allowing funds to run the credit union. This relationship between credit union and members needs to be stressed over and over. Never let your members feel that a credit union is a bank. Credit unions are a community of members. Their strength is in themselves.

Paying More than We Have To

Accordingly, now would be an excellent time to demonstrate the credit union relationship. The present ''flight to quality'' environment, that is, removing money from volatile instruments and depositing them in credit unions, is readily understandable. Stocks stink — at least at credit unions, principal is not going to decline.

We have the opportunity at the moment to accept deposits and to pay very little back in the form of dividends. Banks, you will note, are paying exceptionally little on savings. Rates are low, and banks are taking every advantage to hold wide their spread between lending rates and savings rates.

But people are hurting, especially people who have to depend on income from savings to live on. They have seen that income decline significantly.

I propose paying not what we can get away with on savings but more than we need to. And telling members so. Telling them that in these troubled times we are stretching, in order to help them. Because we are one side of a relationship that is grounded in helpfulness. And because likely in the environment we have today, credit unions are somewhat better off than the collective body of members.

Some time ago, rates began to fall. Credit unions lowered the rates they paid on savings, but did not work as hard lowering borrowing rates. In addition, they had high-producing loans in their portfolios. The result was a kind of windfall for credit unions.
Now is the time to give some back. We will not act as banks; we will do more than is expected of us.

Stress the Relationship

But at the same time, we should be sure that members get the message that they are partners in this effort. It is they that make the credit union strong.

We should be telling them that we will be with them in the long run if they will be with us in the long run. There is room for creative thinking here. We might offer even higher rates to members who bring their mortgages over to the credit union, or offer a five-year CD With a rate bonus higher than the norm if they bring in their five-year car loan.

It is all too tempting to try all sorts of marketing and publicity. What we really need to do is keep telling members that we can help them only to the extent that they can help us, that quality loans result in quality rates on savings.

This environment of very low rates and of moving money out of stocks and into insured products is a temptation to pay only the bare minimum. It is also an opportunity to both put needed money into the pockets of members and also to reinforce the notion of the credit union relationship. The credit union is members, and is only as good as members. The one will help the other, and the other has to understand how that help is supplied.

When both sides understand the relationship, both the credit union and the members benefit.




Jan. 5, 2003


  • Interesting. We have borrowers and depositors, and it seems to us that the two have differing views of the rates.
  • I read the article “Paying More and Strengthening the Credit Union” by Ed Callahan, published January 6th, 2003. While I can applaud Mr. Callahan’s altruism, I perceive current credit union reality somewhat differently.

    Credit Unions are experiencing margin compression like never before and I do not believe paying even higher premiums fosters member loyalty. Ever-expanding FOM’s and SEG’s have numbed the sense of privilege and exclusivity that used to accompany credit union membership. Where I live, anyone who “lives, works or plays’ in the area can now join a county credit union. What’s special about that? Before I digress further, perhaps I should just bullet my thoughts:
    1) When it comes to non-maturing deposit accounts (with the exception of the recent “hot” money parked by investors), most members are not rate sensitive. I strongly believe this, especially in today’s economy. Will they really move a $2,500 average balance savings account because of a 75 basis point reduction in dividend income? That means a sacrifice $1.56 per month, which might cover the fee of one foreign ATM transaction. I would much rather my Credit Union use that 75 basis points to increase profits so they can better serve my needs, such as expanding the free ATM network or introducing online banking and bill pay or minimizing fees. And further, why do I want my credit union rewarding new “hot” money deposits with higher-than-market rates that squeeze profitability and then leave when the investment markets turn bullish?

    2) If the strategy is to reward members with premium deposit rates so they in-turn will be loyal when they need a loan, then I am skeptical at best. When it comes to loans, today’s better-informed members will take the best deal put in front of them, regardless of the source. As a case in point, research shows the credit union share of new auto loans is down dramatically in the past six months, but total auto loan originations are up. Apparently 0% APR’s can quickly overcome loyalty.

    Credit union executives experiencing margin compression should not pay up to strengthen member relationships. Instead, they should remind members that they have a fiduciary responsibility to stabilize net interest margins. Not doing so affects the rates and fees that can be offered on loans. It affects the investment that can be made in infrastructure to make the credit union more convenient for members. It affects the ability to keep pace with technology. It may even affect the credit union’s ability to survive (I would leave this last point out of my shareholder newsletter).

    The strategy should be to battle margin compression, not succumb to it. If rates stay flat another year, can you really afford to pay up and then play options to maintain margin? I hope you have a crystal ball.

    Rather than paying up on deposit accounts why not measure non-maturity account behavior over time? You may be surprised to find (with the exception of the “hot” money parked by investors) these deposits are loyal regardless of rate and behave more like long-term fixed-rate money than short-term rate sensitive money. You may be able to confidently leverage these deposits beyond the three-year safe harbor guidelines to invest in mortgages or mortgage-backed securities. You can then reinvest the cash flows from these assets to hedge against future rate increases, thereby stabilizing margins now and maintaining acceptable spreads going forward. Of course, this strategy only makes sense if rates paid on shares are reduced below current borrowing rates! (Sorry, I got off-track again.)

    I, for one, would remain much more loyal to an institution that looks after all my banking needs, not one that offers a token, unwarranted rate premium in a flat market. Tend to your margins and reinvest in the credit union, and I will reward you with loyalty based on the non-financial influencers (conve
  • This article sends the right message at the ideal time. Credit Unions have a unique opportunity to explain the difference in the relationship that exits between their credit union and its members and a typical bank and its customers. Bravo Ed!
  • I like the unity concept. Trying to sell it, can be a challenge.
  • I appreciate hearing something that reminds us how CUs are really different from banks and how we can put our money where our mouths are!
  • came across your excellent site whilst reaseaching credit unions in ireland - studying co-operative organisation at university college cork - congrats!