The Great Recession renewed a nationwide effort to support local businesses. For financial services, the localist movement was evident in the rallying cry of the Occupy movement and Bank Transfer Day, which promoted credit unions and community banks as depositories that put local money to work in the local community.
In addition to financial services, there are similar localist movements that support farms as well as food ventures that source from nearby farms. Localist support here comes not only in the form of purchasing product but also in providing loans to fund development. For example, the Slow Food movement started in the late 1980s as a counter to the proliferation of the fast food industry. From the Slow Food movement grew the Slow Money movement, which takes the view that community impact and need are just as important as financial return when gauging investments and capital. Slow Money is not based on a top-down, Wall Street-like approach that allocates capital depending on where it can earn the best returns; instead, Slow Money is based on a ground-up approach that strives to support the long-term health of a community.
The parallels between Slow Money and the credit union business model are striking. Credit unions have been living a number of Slow Money values for more than a century. These values manifest themselves in the strategies, decisions, and outcomes credit unions juggle every day. Because these values are so ingrained in the credit union approach, they might not always be evident to the causal observer, but I'd like to highlight a few of the fundamentals that I see stand out when I am on-site at a credit union for a planning session, giving a speech, or just conducting my own financial affairs.
Business Success Is Tied To Community Success
The idea that something greater than shareholder returns should drive an organization is not new. Many non-profits, including cooperatives, use a triple bottom line that measures financial, social, and environmental returns. In a speech at CUNA's Governmental Affairs Conference in February, NCUA board member Rick Metsger urged credit unions to "measure their performance against a double bottom line — the bottom line of their members as well as their own bottom lines."
Credit unions share a responsibility to support their members and the communities they serve, regardless of whether they define "community" by geography or sponsor organization. For credit unions, their external rate of return (ERR) should be as important as their internal rate of return (IRR), and their external accounting, which considers the costs and benefits to the members and community, should be on par with their internal accounting, which measures the costs and benefits to the credit union.
External Rate Of Return (Err) In Action
State Employees Credit Union ($27.1B, Raleigh, NC)
Published a report in 2011 that outlined the financial benefits of SECU membership.
BECU ($11.9B, Seattle, WA)
Incorporates sustainability measures into its organizational scorecard and publishes an annual sustainability report.
This Slow Money philosophy is in contrast to organizations that reward financial performance over everything else. For example, Bank of America CEO Brian Moynihan earned $14 million in 2013.
Shareholders were pleased with the bank's $10 billion in earnings, the highest since 2007, and stock prices that reached 2010 levels. Yet the bank also continues to make headlines for legal woes and layoffs, among other negative actions. In March, it reached a $6.3 billion settlement related to mortgage-backed securities it sold to Fannie Mae and Freddie Mac. And over the past few years, the company has reduced its employee headcount by more than 40,000 and closed more than 700 branches, nearly one-third of which were in low-to moderate-income communities, according to The Charlotte Observer. Unfortunately, these losses don't seem to factor into Moynihan's compensation.
Although it is not unprecedented for a credit union to close a branch, the considerations in doing so go beyond the bottom line. In many cases, the credit union tries to meet member needs through shared branching and mobile services or by turning over its member relationships to a credit union that is able to serve them. And there are still credit unions that are willing to serve a community after the sole financial institution departs, as Hope Credit Union ($186.7M, Jackson, MS) and NorthCountry Federal Credit Union ($435.3M, Burlington, VT) have done in recent years. These credit unions might not realize the IRR on such efforts for years, but the ERR is evident immediately for the affected communities.
Growth is an integral objective for any healthy institution. When looking at credit union asset growth, which has averaged 7.7% annually since 1985, the long-term relative consistency is striking. In the past 28 years, the industry has posted only six years of double-digit growth and its slowest annual asset growth rate was 3.2% in 1995. Over the same period, membership has increased 92% and loans have increased eight-fold. Capital is nearly 15 times higher than it was in 1985. So why is it rare to see large swings in asset levels?
The growth trend of credit unions reflects a fundamental aspect of their business model that is in line with the foundation of Slow Money — the long-term view. Credit unions exist to serve members, not to meet a quarterly earnings target. Credit union growth largely reflects that of the employee and community groups they serve, for which it is unusual to see large swings in economic growth. Therefore, credit unions must be patient while their growth objectives, including individual member relationships, mature.
Additionally, credit union members tend to be more financially conservative than the average consumer, and they often seek long-term financial stability over short-term rewards. Credit union boards reflect this mindset by watching capital levels and managing growth and the risks that come with it. These factors act as a governor on credit union growth while also helping credit unions maintain their ability to serve members even through strong economic headwinds. The past five years have been a litmus test of this approach, and three years of record loan originations along with continuous increases in capital are a testament to the benefits of the model.
Local Insights Support Better Decisions
A credit union's community ties are a key element in how it serves its members. Loan decisions typically consider more than a borrower's credit score, and initial declines based on quantitative measures often warrant a second look at the driving factors to determine if an approval is possible. In this way, credit unions are emphasizing one of the traditional "Cs" of lending — character. In small business lending, credit unions often personally know the business owner and can see the impact their company has in the community. These loans are often too small to garner the assistance of a larger bank and too big for microfinance, yet they are the lifeblood of local economic growth and job creation.
This community connection, which offers credit unions firsthand knowledge of its borrowers and local business ecosystem, is a fundamental tenet of the Slow Money movement. In fact, one North Carolina Slow Money group that lends money to food-related ventures specifically identifies three benefits of its lending initiatives:
We know people.
We know the local players in our community.
We understand business in our county.
Local decisioning also brings with it the advantage of faster feedback. In a smaller community where information flows quickly, credit unions have the ability to quickly move on new opportunities as well as mitigate potential problems. Throughout the lending program, relationships are a critical and fundamental success factor.
Rewarding Long-Term Relationships
Credit unions are recruiting younger members to become the next generation of borrowers and savers, yet credit unions are also rewarding loyal, long-term members. Many credit unions include membership tenure along with product and service usage when creating incentive programs to bolster activity in the cooperative. Such a metric is an appropriate measure for organizations that value a long-term, relationship-focused approach. It is also counter to the Wall Street fast money approach in which the average holding period for stock is now seven months — that's more akin to a rental than an ownership stake.
The velocity with which money enters and moves around local communities is often much slower than it is at and between the mega-institutions that drive today's global financial markets. But there is value in that community stability just as there is value in credit unions. The capital that supports credit unions is built on generations of member involvement. The long-term members of yesteryear invested in an institution that in turn supported the needs and desires of new members, just like today's long-term members are passing down a financial legacy to new members. Much like in a community, credit union capital is patient.
A Different Approach
The values inherent in both credit unions and the Slow Money movement stand out in our global economy that demands growth and scale. Slow Money values are an important element of local economies and complement, not subvert, the relentless, fast pace of the broader economy. "We are not trying to reign in or correct or punish capitalism," says one Slow Money supporter. "We are trying to complete it."
Credit unions, too, have a distinct and important role in their communities. They might not be able to solve every need of the community, but they can respond and adapt in ways that larger organizations cannot or will not. It takes more patience — maybe even more strength — to achieve their objectives, but the returns on their investments resonate for generations.