Selling the Credit Union Short

Philosophical arguments against conversion should be complemented with—or even secondary to—cold hard dollar estimates of the value of membership.


The word satisficing is a fusion of two other words: satisfying and sacrificing. In the study of how people make decisions, satisficing describes our human tendency to select the first acceptable solution to a problem, even if it is not the best possible solution. This happens because we humans generally do not have the time, information, or emotional control to elevate all of our decisions into the realm of optimal and completely rational.

A recently announced credit union conversion got me thinking about this phenomenon. In the pending transaction, the acquirer will pay a premium over the credit union’s capital. The premium will be distributed to members based on share balance as of a record date. A member with a share balance of $1,000 on that day would receive a payment in the neighborhood of $150.

Most everyone I know would be happy to receive $150 completely out of the blue and not likely reject it in lieu of uncertain future benefits. This bird-in-the-hand thinking is human nature, but for the typical credit union member, it’s completely irrational.

Calculating the Value of Membership

A rational approach to valuing credit union membership is to estimate the value today of the benefits that the member will receive from the credit union in the future.

One issue is clear right away: the value of membership varies from member to member, since members do not participate identically in the credit union.

An even bigger issue is calculating the value of future benefits of membership, because it requires a lot of estimates and inputs that few members would have. But let’s give it a try.

Consider a hypothetical, moderately-involved credit union member who will:

  • Be a member for the next 25 years
  • Maintain an average share balance over that period of $5,000
  • Take five consecutive five-year car loans
  • Revolve an average of $2,000 on his or her credit card

Doing some quick math, we can quantify the benefits that this individual will derive from credit union membership:


Estimated average credit union/bank rate differential over period*

Lifetime benefit from differential

Present value of differential**


CU is 20 basis points higher



Car loans

CU is 80 basis points lower



Credit card

CU is 240 basis points lower







* Assumes that past historical average differentials will persist in the future.

**Using a riskless discount rate of 5.25%.

This data tells us that the value in today’s dollars of this member’s financial participation in the credit union is nearly $1,400. Bear in mind this number does not account for intangible benefits that many credit unions offer, such as shared branch and ATM networks and financial education, and other difficult-to-estimate financial benefits like lower account fees or low- or no-commission investments and insurance.

Leaving Money on the Table

Satisficing means we gain something, but leave something on the table too. In this example, a member who accepts a payment of anything less than $1,390 might be satisfied with the cash, but is ultimately short-sighted in selling credit union membership for a price less than its true value.

In a truly fair conversion, individual members will have a framework to evaluate the adequacy of the offer to buy their membership rights. Credit unions considering conversion should look for creative ways to help members make the most informed possible decision.




July 24, 2006


  • As one stapled to the status quo you no doubt believe the "most informed possible decision" is to reject a conversion, regardless of the benefits. Using your flawed averages thinking and the "sky is always blue at a credit union philosophy", one could just cash out and move his business to another credit union - until those members in your view fail to make the "most informed possible decision" and vote to liquidate. Look, best practice if a credit union faces undue constraints is to face reality - look into the future and flee the status quo. It is also the American way. Why fear conversions - go with the flow and prosper.
  • From the author: Thanks for sharing your thoughts. If you reread the article, I believe you will not find a call to reject conversion proposals on principle. The point is rather that members (i.e. owners) of converting credit unions are entitled to fair value in exchange for their ownership interests. Picking up on your theme, the American way is characterized by transparency, fairness and democracy. If members have had the opportunity to estimate, demand and obtain fair economic value for what they own, in a process that embraces these qualities, then convert and prosper. As for the methodology used to estimate membership value, feel free to make suggestions on alternative approaches. Cheers.
    Melanie El-Sabaawi
  • A very insightful article followed up by an excellent response from the author. Cheers to you!
  • A member’s “ownership interest” is pure fiction if the credit union trade associations, complicit regulator and you succeed in stopping conversions. The members you claim as the “owners” which are “entitled” to certain things have taken no risk in the credit union risk / reward equation. Their ownership is un-perfected. Why do they deserve a windfall? Why are they “entitled” to anything, other than good service which they bargain for as any customer does and continues to do after conversion? In contrast, after converting to a mutual and issuing stock whether through the mutual holding company or full stock conversion, the member is faced with risk along with possible rewards if he steps up to the challenge and exercises his subscription right by buying stock in the IPO. Participation, action, and risk are all part or true cooperative ownership of a business enterprise. So requiring members to step up and exercise their subscription rights and take risk is perfectly consistent. Your formula (along with its myopic input assumptions) for valuing a “fictional ownership interest” just perpetuates the myth. Once in stock or mutual holding company form the marketplace can put a value on the enterprise using sound market driven assumptions. By the way, just admit that you are against any conversion instead of hiding behind pious platitudes in an effort to discredit those that go down the conversion path.
  • Great article. We have been talking about lifetime value for our members recently. About 1/3 of our membership leaves our branch network in Germany every three years for another military base in the US. One of our challenges is communicating the value of SCU to keep members with the credit union as they move throughout their career. It is useful to see how you describe lifetime value.
  • A genuinely fair conversion proposal would not go through the interim step of MSB, but directly from CU to stock-owned. Further: a. At absolute minimum, 50% of the net equity of the converting CU would be given to existing CU members in the form of stock shares not redeemable for at least 2 years (to prevent a mass sell-off of shares). An example of how this might work: each member automatically receives 10 shares, plus 1 additional share for each year of membership tenure. A three-year member would receive 13 shares, a twenty-five year member would receive 35 shares. b. Additionally, at conversion at least 20% of total members' equity should be paid out as a bonus dividend. The bonus dividend should be paid BOTH on total share deposits AND as a partial rebate on year-to-date interest paid on loans. c. The CU's board should host at least one town-hall meeting with members to outline the proposal and outline the basis for same; AND d. A "debate" should be hosted if there is significant interest, presided over by a respected and disinterested party (i.e. a non-credit union member who is a mediator or judge) to publicly argue about the merits of the conversion e. The credit union's CEO, executives, and directors should be barred from participating in the IPO and barred from purchasing or being granted the new CU's stock for at least one year after the IPO.
    Ron from Seattle