The Credit Union Difference!
Posted by Doug Williams on January 29th, 2008
The Aite Group LLC reported that 33 percent of credit unions with over $100 million in assets are planning to convert to mutual savings banks. Likely these converted credit unions will ultimately become for-profit, stockholder-owned financial institutions.
One-third of this class of credit union represents $193.8 billion in assets, assuming the 33 percent of converting credit unions is spread across the 1200 representative credit unions in this class evenly. In turn that represents over a quarter (27 percent to be exact) of all credit union assets. One-quarter of the money in credit unions is on its way out the door.
In 2006, fee income exceeded return on average assets (page 4 of the 2006 report, if you’re interested) credit union-wide for the first time ever as CUs looked for ways to replace money drained away by compressed interest margins. Banks are using the same tactic.
At the same time, Nobel Peace Prize winner Muhammed Yunus is considering starting a credit union in the U.S. There are movements of varying size and momentum, but movements nonetheless, to provide alternatives to banks through such things as peer-to-peer lending, democratically-run, socially responsible banks, and account aggregation and financial planning using social networks.
Isn’t the message credit unions preach differentiating themselves from banks now even more relevant – even hip?
So, then…why leave?
Why leave? Well, there will always be “alternatives to banks”, but I don’t necessarily believe that all credit unions are relevant in this space.
The movements that you mentioned deeply distinguish themselves from banks in how the lend, who they lend to, and how they serve. Can this be said about many credit unions that have over-reaching fields of membership, bloated bank-like services, and little community impact?
(I’m talking about the status quo cu, there are definitely standouts to which the above does not apply.)
If you are a relevant alternative to a bank, how in the world could you even imagine yourself becoming one? It would have to represent such a shift in culture, services, structure, and soul that it could not be possible. Wouldn’t it?
I’ve mentioned before that I don’t think most credit unions are any different than banks to the end user. Could I really be just 18% off? ;)
Also, looks like the numbers part of this discussion may not be as cut and dry as they first appeared. Here’s a follow up article in the cu times:
http://www.cutimes.com/article.php?article=36251
(Found this via cjsteven’s twitter feed. Great find by Christopher.)
Doug I think it is interesting to see some in the system thinking a for-profit, stockholder evolution is necessary. First, any insider (senior management or director) should not be able to profit from this change. To me that would be like stealing from the CU and who likes thieves? Secondly (and there are a ton of things running through my head at the moment on this subject) let’s get some discussion going about the value of the goodwill of the credit union making this move. How much is that CUs goodwill worth and how will the current owners (members) be compensated for this and other assets with their equal ownership (one member-one vote)? Not that it is the same but remember the articles on what the Coke or Apple brand is worth. Surely each CU, as it moves to become a for-profit institution would understand the need to pay the current “shareholders” the necessary value. Right? And don’t forget if there are fewer CUs in the long run the value of a credit union charter must have increased. And to those that have given up on the CU system and are adamant they become banks——don’t let the door slam you too hard in the ass when you leave! or some other parting words – The toilet did need flushing. (Yes I do take this a little personally).
I am yet to hear a fair method of disbursing a credit union’s assets upon conversion. Disburse based on previous year(s) dividends earned and you’re making the rich richer (most wealthy wealthier?)...and opening the door for possible insider trading (member-owners are voting on the conversion, by the way). Base payout on length of membership and you risk being agist.
I agree with Gene. Good riddance to credit unions who want to become banks! They’ve been hurting good credit unions’ image for long enough. My caution, however, is to make sure the industry holds these institutions accountable for how they decide to divide up the institution’s assets. Executive management and volunteer boards should not be able to convert as a get rich scheme.
Greed is a powerful thing. I despise the fact that some cu’s are converting to banks, but if they can make that transition without a mass exodus of members were they really a credit union anyway?
I know if my CU tried to go bank, I’d protest the change. If it went through I’d leave. Simple as that. I belong to a credit union because of the non-profit, democratic set-up. Once that’s gone, there would be no reason for me to keep my account. If I wanted to join a bank, I’d join a national institution.
I’ll stand by my Tweet from yesterday regarding this article. “The group only asked one question related to conversions, inquiring of the survey participants if they worked at CUs that planned to convert to mutual banks.” They asked one question of survey participants and the answer was based on whether or not that person “thought” that their CU was planning to convert to a mutual bank. It sounds too much like hearsay to me.
If they were actually to do a more in-depth study with further clarified parameters, I think the results would be different. This seems like an awfully big claim to make based on one slightly vague question asked of 100 survey participants.
Mike makes a good point. It would make a great survey topic and I’d love to see a better instrument. I don’t buy that 33% of CUs will move to be banks.
But if that’s indeed true, I’m with Gene.
Following up on Mike’s comment – Do we think that NCUA would allow a 33% cu to bank conversion? Don’t the regulators get involved in this process? I just looked on the NCUA site and indeed a regulation went into effect last year to provide for their oversight of this process. It seems to me if there were indeed that many cus who had actually begun this process the red flags would be going up for NCUA. Who is the Aite Group LLC? Do they have anything to do with banks or bankers? Here’s what they say about themselves on their site: “It was founded by leading industry experts in Banking and Securities & Investments. Aite Group brings together a team of business strategy, technology and regulatory experts to deliver comprehensive, timely, and actionable advice to financial institutions and technology vendors.”
Mike, Trey and the Skeptic (this could also be the name of a jazz fusion trio): I agree that the numbers are skewed based on their methodology. Thanks for the link, Skeptic.
Even with the skewed numbers, doesn’t this indicate that a significant numbers of CUs are not focusing on being a banking alternative and, instead, considering actually becoming banks? All at a time when there’s a groundswell of support for banking alternatives. A groundswell to the point of “it’s actually happening” whether CUs are on board or not.
The blanket statement that most credit unions aren’t any different than banks to the end user exasperates me because it’s license for apathy, and credit unions were NOT founded by apathetic people. Day-to-day, most peoples lives aren’t terribly different under Republican or Democratic administrations. So why vote?
Because there are times when those differences come through. Universal default is one. Fees are another. Service is a third. My credit union, Oregon Community, returns dividends to me in the form of its Remarkable Checking. My other, DATCU is patient with me as I work out the titling issues on my motorcycle loan. And both have, on several occasions, prevented or helped me recover from ID theft. I’ll trust one of them with a mortgage that’s hopefully in my future because, if they’re not the cheapest, they’re predictable and up front…and there’s real value in that.
My wife can’t manage to get someone at Citibank to talk to her about a fee. It’s a Premium Gold Account that comes with white glove treatment.
And these alternatives to banks – good or bad – have to compete against other banking alternatives (payday lenders, pawn shops) without a significant infrastructure in place. Success isn’t guaranteed.
I see your point that CUs do get bloated, and I argue that credit unions should be who they are and focus on serving their membership. It’s a niche strategy. But bringing new technologies and services to members while truly serving them – not dinging their credit, not hitting members with outlandish fees – is a part of the credit union’s mission.
Andy, you’re right, I think it is greed. It’s profiteering and short-sighted leadership by CU’s board. Can we add a letter to the CAMEL rating…A. CAMEL-A. For “Are You Acting In The Best Interest Of Your Members – Are You Acting Like A Credit Union.”
CUs aren’t the original alternative to banking, but throughout the 20th Century and into the 21st, they’ve been the best. They have an infrastructure in place to serve that groundswell of support for banking alternatives. CUs can capitalize on this if they want to.
Gotta weigh-in here. The research was flawed, the PR was misleading and now people are talking about the topic of conversions.
Sounds alot like the flap over whether Hillary cried or not.
For a bit more analysis of the issue, I would encourage you to get a hold of Filene’s study on the topic. Drop me an email if you’d like to read it, or if you are a Filene contributer, simply go to the beautifully designed www.filene.org and log-in to get your copy.
I agree with those who have said that this research is flawed. In my own experience, there are many credit unions out there that would not expressly take the option of converting off the table (purely as a business calculation), but have a very small chance of actually converting. It’s business, and you “never say never.”
However, and I’m just throwing an idea out here - what if credit unions that were converting had to offer liquidation as one of the choices on the conversion ballot? Seems to me that it would refocus the whole conversion issue where it needs to be - the best interests of the membership.
I understand the research numbers are “iffy”, but do any of us really think that there aren’t a considerable number of credit unions that view “becoming a bank” as a legit and viable option that deserves consideration?
So what if it’s only 25% or 10%, the underlying issues still remain.
@GeorgeH: I would love a copy of Filene’s analysis, if you don’t mind giving it up. You can email me at cuskeptic at gmail dot com if you feel so obliged.
The relevant alternatives to banks are not considering a conversion…the ones who strive to be bank-like are. Big difference there.
I have some commentary on all of this, but instead I’m going to watch the Super Bowl. But for now, here’s a link to Filene’s research publication on CU conversions. Enjoy:
• Credit Union Conversions to Banks: Facts, Incentives, Issues and Reforms
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Forgive me for being a little ignorant here, because I’m really just a peon when it comes to these things, but coming from a lower standpoint on things, I’m gonna throw this out and see what ya think.
Having come from a teller/member service background, trying to build a new office, I was always disappointed when people came in to close accounts (naturally). What I later came to understand, was that if these accounts were “low-dollar, low activity” accounts, then it actually did our ratios good when the member came in and closed the account. It made us a stronger office. Now don’t get me wrong, we are here to serve everyone, even those with “low-dollar, low-activity accounts.” But by weeding out those accounts, the office itself was strong, which ultimately gave us resources to do more in the community and help more people in the long run. And really, lets face it, how much are we really helping those people who aren’t using the account in the first place?
Hang in there with me, I do have a point for this. Switching gears into the conversion topic . . . I’ve always been of the standpoint, that if you’re going to act like a bank, and opporate like a bank, then for crying out loud, just be a bank. Now, does that mean that I like to see credit unions convert? NO, not at all! I think the more appropriate action would be for these credit unions to wake up and start acting like credit unions. But, is that realistic? Is that going to happen? If it’s not, then why not “weed out” the credit unions that are giving the REAL credit unions a bad name? If a credit union is not going to hold true to the credit union philosophy and help push the credit union movement in the the right direction, then do we really want them in it? Or, will it help the credit movement as a whole (the bigger picture), allowing a stronger credit union movement to truly help more people, to let them be what they are? I mean, if it walks like a duck, and quacks like a duck, why call it a cat, making the rest of the ducks look bad.
Many credit unions have grown or expanded themselves to become “bank like”. They have multiple branches, similar services, similar fee structures, etc. to banks. These credit unions, however, take advantage of their tax advantaged status. Also, credit unions are much less regulated than are commercial banks.
I also observe many credit unions hiding behind the facade of “serving the underserved” to only attempt to locate branch offices in affluent neighborhoods and offer services to those who are not of moderate means. Isn’t that what credit unions originally designed to serve?
Credit unions have a decision to make. Either they remain credit unions or make the conversion to a bank. The day is coming when a credit union cannot have it both ways. If the credit union doesn’t reign in those CUs trying to be banks, then be prepared for the regulators to do so.
Credit unions also aren’t structured enough to be able to manage the risks that banks have. CUs are not highly regulated and are not examined to the stringent levels of banks. We are going to see several of these larger and fast growing credit unions fail which will bring additional scrutiny on our industry.
Credit unions that act like banks are cheats and carpetbaggers. They should stick to their original intended purpose to be small and to take care of the little guy.