As much of the industry gathers in Washington this week for the Governmental Affairs Conference, this is a good time to consider how well credit unions are balancing financial performance and their purpose.
I would ask each credit union executive to consider this as they Hike the Hill to update their lawmakers on credit union legislative priorities: How well is your financial cooperative serving your members’ financial needs?
Milestones And Record Market Shares In 2015
Credit unions as an industry are doing well, posting record numbers by almost all measures size. Although the results more than satisfy regulator scrutiny about safety and soundness, remember this: Member well being doesn’t show in the CAMEL score; but it’s the critical differentiator between credit unions and banks.
That difference needs to be a bright line, yet I fear that line may be dimming. For example, I recently heard a speaker say only 4% of credit union lending goes to people with credit scores of 640 or less. Another analyst said that credit unions as a whole now charge about the same for non-sufficient funds as do banks.
In financial services, overdrafts are called “punitive fees.” These examples suggest a growing divergence between the institutional success of credit unions and their member-owners' financial well being.
Have credit unions lost their purpose, their social mission? Have they taken the regulators’ seal of approval of their financial success and lots of capital as their own end game?
I believe celebrating institutional financial success as our paramount objective threatens our continued integrity as a system of cooperative institutions based on members' financial health.
Financial Security And Political Rhetoric
Every political candidate — left, right, or center — is talking about some aspect of consumer well-being: helping the middle class, reducing income inequality, finding better-paying jobs, even free college. And there is enough public support for these positions — extreme or well considered — to suggest a real need by many Americans for greater economic security.
Some numbers from the Center for Financial Innovation support this political focus:
76% of Americans are living paycheck to paycheck.
47% of Americans cannot cover a $400 emergency without selling something or borrowing money.
37% of Americans have credit card debt greater than their savings.
56% of Americans with a low FICO score 500-649 will potentially pay more than $200,000 in higher lifetime interest vs those with higher scores.
Payday lending statistics from Filene say 68 million adults are financially underserved; they have $38.5 billion in payday loans, and they typically pay 400% in interest and fees for a two-week loan.
These needs are real — and these are the circumstances for most FOM’s whether community or SEG-based. The Center has identified the goal of "sustainable financial health" as critical to improving America's consumers.
Do Purpose And Mission Matter?
In January, Laurence Fink, the CEO of investment giant BlackRock, sent a letter to his counterparts at the country’s 500 largest companies. In part, it said: “Many companies continue to engage in practices that may undermine their ability to invest for the future. Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need. . .The absence of effective long-term policies undermines the economic ecosystem in which companies function, and with it, their chances for long-term growth.”
That’s from a titan of Wall Street. How much more should the goal of “long-term value creation” apply to credit unions' member-owners, who created the cooperative in the first place?
Without mission, the cooperative model risks becoming a “bank light” financial system increasingly under the sway of its operating agents (boards and professional managers). The focus becomes short-term financial performance to earn bonuses and regulatory approval. Would a tax exemption still be valied in that scenario?
The Crisis Mindset Carryover
Without question the regulatory mindset from the 2008 crisis continues to drive the NCUA’s rule making, regulation, and examinations. Cooperative metrics are missing, and their absence undermines the real strength of the co-op model and its interdependent systems.
Bank regulation is not a model for co-ops. Its primary purpose is to resolve the conflicts between private and public interests. For co-ops, the member-owners’ interests should always be paramount. This member trust is the most critical source of soundness for credit unions.
But I believe a new era is possible, based on the positions and statements of NCUA board member Mark McWatters. I will not go through all of them except to note he has stated his confidence in the cooperative model, has recognized its value in serving consumers and small business, and is intent on regulatory reform.
McWatters wrote in February’s NCUA letter that he intends to build a “blueprint” in 2016 to update NCUA’s regulatory approach. How do we contribute to that effort? How does improving the financial health of members — credit unions' central purpose and mission — become a metric both used and respected by not only credit unions but also by regulators?
What the industry needs to do now is two-fold:
Create a cooperative scorecard. Credit unions are good at financial education, and follow democratic governance principles. So that’s a start. Let’s develop a more comprehensive member financial health scorecard.
Engage the rulemakers, not just the policymakers. This is perhaps even more urgent as the rulemaker's influence is often greater than the lawmaker's in pushing cooperative evolution. Rulemakers must be educated to value the member-owners' well-being as much as the institution's bottom line.
So, while you spread the word about credit unions this week and beyond, be sure your message is clear. Remember, what you are doing for your members and the communities they live in is why you were created, even if it is not part of the regulator’s exam.