Are App Platforms the Future of Financial Services?

COVID  accelerated the online movement  for all aspects of social and economic life.  In credit unions, some assert the transition away from the branch-based model of financial services to an all virtual one is now inevitable.

One example of this total virtual embrace is the former United Airlines, now Alliant CU with $14 billion in assets. It has no branches and is the ninth largest credit union in the country.  In contrast the $8 billion Wings Financial whose initial sponsors were also airlines, still has 30 branch operations in airports as well as in the communities surrounding its home office of Minneapolis-St Paul.

The Startups

Multiple startup financial providers, relying solely on virtual platform services, are attracting venture capital and IPO attention.   As described by Ron Lieber of the New York Times, What’s in a First Name for the New Money Apps:

The start-ups’ interfaces are indeed generally slicker and simpler, very much a welcome change.

And if you resent all of the overdraft and other fees the big brother banks so often charge — and you do, there’s little doubt — Dave and friends look even better. They tack away from old-fashioned bankery, with a suite of offerings like advance access to your paycheck, overdraft fee avoidance and assistance building credit.

Their brand’s “personalization” is communicated with  first names like Dave, Marcus, Albert or Bella.  Or sometimes with a disruptive promise like Aspiration and Revolut.   One online offering called Simple was just that, and has already closed.

The Enduring Advantage

While distribution options and transaction volumes migrate to virtual self-service, that does not mean branches will go away.  They may decline in traditional teller transactions but become more vital for other service interactions

Credit unions are organized around a “community” of people versus organizations built with venture capital.  Their cooperative advantage is relationships which are also the core of their organization’s purpose.

The value of human touch is often lost in AI automated interfaces, text messages, self- service applications and video demonstrations.   “People seeking financial service” as one consultant expressed, “do not visit branches, they visit bankers.”

Moments of Impact

Times’ writer Ron Lieber ends his review of virtual financial apps with the following story:

Davy Stevenson, the vice president of engineering at Hasura, which helps software developers more easily build applications using data, was an early neobank adopter herself. She experimented with the first versions of Simple, which no longer exists.

Today, she banks with her humble credit union. Though she pines a bit for the technical wizardry that her software developer brain knows the institution could deploy, she’s also happy with the way the people there treat her.

One CEO in his monthly staff updates includes examples of this member service advantage.  Here is a member comment from the July newsletter:

Dear (CEO’s name:)  (employees and cu name omitted)

Customers probably contact you when you when something goes wrong. Not this time. I wanted to let you know when your customers are given the best customer service, which is just what I received from the CU recently.

Two ladies I dealt with recently are the epitome of the great people on your staff. The first was J., and I apologize that I didn’t get her full name. J. was extremely knowledgeable in helping us transfer money to a friend living in England. She insisted on staying on the phone as I processed the transfer. She was so polite, helpful, and extremely efficient and I wanted you to know that!

Then, around the same time we were also processing a loan for an RV we were buying. M. B.  processed our loan so professionally and politely that I felt you needed to hear about her also. She instantly took care of everything and two old people are now ready to hit the road! Another great CU employee!

The Humble Credit Union

As long as members remain the mission, the future is secure.  Even when that future is increasingly enabled with Internet Retailing.


Credit Union History for Understanding Today’s Cooperative System

America’s Credit Union Museum is collecting oral histories of system participants to help future generations understand their cooperative roots.

Fifteen videos are now posted. Interviews are from retired leaders such as Carroll Beach, Dick Ensweiller, Brad Murphy and John Tippetts. Persons still active include league presidents Tom Kane and Caroline Willard, and Sarah Canepa Bang, the senior policy advisor to NCUA Vice Chair Kyle Hauptman.

Episode 15: The Deregulation Era

My first contribution discusses deregulation. It describes how Ed, Bucky and I learned with credit unions in Illinois to navigate the disruptive economic changes occurring in the late 1970’s and early 80’s. We went to NCUA using these lessons on a national scale.

The talk is 24 minutes. If your time is limited, here are some topics to scroll to:

3:00 Where the cooperative model fits on America’s economy

5:00 Learning about regulation and credit unions at Illinois’s DFI

12:10 We take our experiences to NCUA

14:00 Communicating what deregulation was; why it worked

16:15 Upgrading the NCUA’s internal capabilities

20:20 the PennSq bank failure

The Value of Oral History

The museum’s initiative to record individual’s credit union experiences will be invaluable to visitors and scholars. They are easy and fun to listen to, especially if you know the characters.

Hearing these examples will stimulate interest in cooperative history; more importantly it can give perspective on today’s topics.

Deregulation was not a political ideology, strategic blueprint or onetime response to a changing economy.

In credit unions it was nothing less than building a better system of “cooperative credit in the United States.” It turned upside down the practice of government making everyday business decisions for credit unions.

Rather that responsibility was now in the hands of those closest to the members-management and boards.

Most importantly these changes were developed mutually with full dialogue and participation by all segments of the movement.

Ten Questions for Whole Bank Purchases     

Some proponents assert that buying banks is just another market option for a credit union.   Similar to expanding a branch network, investing in technology or launching a rebranding campaign, this is just a business decision that needs to be “pencilled out” to see if it makes financial sense.

Analyzing a purchase transaction is not simple.  Every transaction has a different market context and unique financial data.

Ten Questions Before Any Purchase

Credit unions buy banks with cash, not stock, which is the common practice in bank-to-bank purchases.  Some data provided in bank announcements to enlist shareholder support are also relevant for credit unions.

The following list focuses on evaluating the purchase transaction itself, not the broader public policy implications or a credit union’s strategic framework.

  1. What will be the total expenses of the transaction for all fees, consultants, contract cancellations etc., and how will these costs be recorded by the credit union? What transparency will the credit union provide to demonstrate its own due diligence work.
  2.  What is the dollar total of bank assets and/or liabilities the credit union must sell as ineligible for a credit union charter? If significant, why is the merger being considered?
  3.  How will key personnel be retained and will there be a cultural fit? What obligations will the credit union have to the former executives and employees of the bank? Will covenants or conditions such as non-compete clauses limit major stockholders, senior and/or key executives whose stock has been paid out from becoming competitors. An observation from a merger veteran:  Credit unions talk about “buying” skills during a merger.  If you can’t keep a commercial lending team, mortgage banking team, wealth management team, then you are not buying anything.  Those jobs are like free agency – they sell their skills to the highest bidder.  You are not acquiring a piece of equipment, a patent, or a manufacturing process, you are buying people.  This is a service and relationship (networking) industry.  A star performer can take their network (and team) anywhere.  A merger is often the “nudge” the star performer needed to make a change to a different employer.  If they don’t see a direct benefit from the merger, you run the risk of losing them.
  4. How will the transaction affect the credit union’s net worth position? If all bank capital is absorbed in the acquisition, will the credit union remain well capitalized and able to realize its growth prospects in the newly obtained market?
  5. How will the additional assets affect the credit union’s overall ROA, efficiency, and concentration ratios? What is the payback period (breakeven) on the cash paid out in the transaction? How do various customer retention scenarios affect this return?(Proforma balance sheet and income statements before and after the purchase are useful in addressing these changes.)
  6. How much overlap with current markets exists? If high overlap, why merge to begin with?  If low overlap, is the credit union reaching too far from its geographic core?  How will an investment in a market where the credit union has no presence benefit current members?
  7. How will the bank customers become “involved” credit union members? These bank customers did not choose the credit union, have no direct experience with it and are probably unfamiliar with their acquirer. Can the credit union retain these relationships plus gain new ones?
  8. Why did the credit union pay a premium over the market valuation for this transaction? If the franchise is so desirable, why were there no other bids? How will existing market competitors–bank or credit unions–react?  Will there be critical comments such as taking away jobs, tax revenue, deposits, and local leadership from the community? Might competitors hire away key personnel?
  9. What are the regulatory requirements to be navigated? Will FDIC require public announcements be placed in affected markets?  What process will each regulator follow when evaluating the purchase—will different criteria be used for the FDIC and NCUA? Depending on the selling bank’s structure, will potential double taxation affect the price–  once on the asset value increases in liquidation and again on gains from shareholders’ stock sale.
  10. What existing plans will this acquisition defer, disrupt or postpone? What new risk mitigation measures will this event require?

Knowing questions to ask in any undertaking does not lead to easy answers. Any list of due diligence questions is incomplete as each circumstance introduces special factors.

However, using a check list can help assemble the basic information and analysis to consider versus the generalizations sometimes used to justify these purchases.

Tomorrow I will look at the four current transactions and their individual explanations.


Chapter II: Bank Purchases by Credit Unions: Just Another “market transaction?”

(Two blogs precede this chapter II. One posed the issues of credit unions buying banks; a second reviewed cooperatives’ public policy role.)

As of mid-June, four credit unions have announced agreements to purchase five whole banks. Each of the four purchasing credit unions—Lake Michigan, Vystar, Wings Financial and GreenState (buying two banks at once)—have had prior instances buying a whole bank and/or branch combinations.

These events raise both policy and transaction questions. One explanation by NCUA and trade associations is that whole bank purchases are “just the free market at work.” Nothing out of the ordinary. Two independent firms make decisions in the interests of both sets of owners and their communities.

Not Market-Tracking Decisions

However, this explanation is neither complete nor useful. It is incomplete because only one side of the sale is open to owner scrutiny—the selling bank which must have shareholder approval. The credit unions purchasing the assets and liabilities act like private buyers. They rarely release any factual or financial data except press release generalities such as market expansion, diversification, acquiring new lines of business or adding professional expertise.

When facts about the transaction—such as the sale price– are presented, they are from the seller’s briefing their owners not by the purchasing credit union.

In a “normal” market-driven bank purchase (or merger via exchange of stock) both parties will provide their rationale for the transaction. Here are several excerpts from 2021 sale announcements provided by the bank undertaking the purchase, not the selling party:

BancorpSouth said it expects to have $125 million in merger-related costs. The bank said it plans to save $78 million in annual non-interest expenses as a result of the merger. The bank plans to achieve 75% of its merger-related cost savings by 2022, and 100% in 2023. or,

Webster plans to cut about 11% of the combined entity’s annual noninterest expenses, American Banker reported Monday. The company expects to incur $245 million in merger-related expenses, but the deal is projected to save $120 million while the company generates an extra $440 million per year. or,

NYCB and Flagstar: Accelerating Our Transformation Strategy: NYCB estimates the merger will result in additional capital generation of $500 million annually, as well as $125 million in annual cost savings. The bank expects to incur $220 million in merger-related expenses. (the release includes full operational and financial estimates)

Each of these purchasing banks provides data about the transaction, how it will benefit shareholders, goals for cost recovery and the expected return on investment in following years.

Credit union purchases convert firms subject to market monitoring into private entities. No longer can external markets assess management’s performance. Coop member-owners are not involved in the process before or after.

Investing Beyond a Firm’s Experience

In many areas of commercial enterprise there are wealthy individuals or firms who jump into an industry by “investing” in competitive arenas different from where they made their wealth. Consider Silicon Valley entrepreneurs buying professional sports teams, wealthy heirs venturing into the film and entertainment business, young work-from-home retail investors jumping into $0 cost online stock trading, etc.

Long time professionals sometimes refer to these new entrants’ cash inflows as “dumb money”–affluent outsiders bitten by a bug to try something different or indulge a personal interest. And there are plenty of brokers, salespersons and expert third parties helping these newbies learn the ropes and get into the business—for a fee.

These promoters make their living by closing deals. Their most common message is urgency–“act now or miss out” — if you don’t, someone else will take this opportunity off the table.

But how is an interested credit union member supposed to weigh such an event? One approach is to ask if the member would buy the bank’s stock for their personal investment based on the information available to their credit union?

Would You Buy This Bank’s Stock?

Too difficult for a member? Here is an actual case.

A $605 million credit union announced in July 2019 an agreement to buy all the assets of a bank with the following performance record:

  • June 30, 2019, bank data: $97.8 million in bank assets, $77.6 million in deposits; $11 million in equity; a $7.0 million FHLB loan; and loans of $73.7 million.
  • The bank has had negative income every year since 2008.
  • The “efficiency ratio” for 2018 was 111.08% and for 2017, 129.0%. At June 2019, 127.8%. Every period’s operating expenses have exceeded income.
  • Two consent orders were issued by the Office of the Comptroller of the Currency. The December 19, 2012, one was followed by a second on November 2015 designating the bank a “troubled institution”.
  • This order was ended in February 2019 after the bank raised $4.5 million new capital issuing 600,000 new shares for a price of $7.50 per share in January 2018. The cost of the offering for the bank was $366,000 or 8.1% of the gross proceeds.
  • The bank’s 2018 annual report states its core market deposit shares as: 1.69% Arlington Heights, 2.83% Rolling Meadows, and .03% in Cook County.
  • The 2018 annual report included the bank’s outlook: We do not anticipate net income until we experience significant growth in our earnings.At mid-year 2019, just before the credit union announcement, the bank’s operating loss was $262,000.

Would a person buy this bank’s stock that has not had positive earnings for a decade, promises none going forward and has miniscule market share? The new investors in 2018 paid $7.50 per share; the day before the announcement the share price was $6.80-below what the new investors paid.

The credit union offered $10.33-$10.70 per share or $2.4 million higher than the book value and 55% higher than the market valuation prior to the sale.

The credit union addressed none of this operating history, even though the facts were public. The credit union offered no information about how this decade long losing operation would benefit it or the members. The purchase was finalized by Corporate America Family Credit union and announced on April 30, 2020.

Why did the credit union bail out this bank’s owners with their members’ collective capital? How will this $13-$14 million dollar “investment” provide any return for the credit union? No one knows; the outcome is now hidden away from external or internal oversight. On the public facts, this would not appear to be a “smart money” move.

Tomorrow I will provide critical questions to evaluate these purchase transactions.

Has the Credit Union System Lost its Entrepreneurial Edge?

The cooperative model thrived because the founders believed their innovative efforts would improve members’ lives. That belief in creating something better is a key motivation for persons launching startups.

In the credit union system this pioneering spirit lasted well into the 1980’s. New organizations were designed to serve members and enhance collaborative efforts. At a system level, both the CLF and NCUSIF were fully funded with models requiring shared responsibility between the regulator and credit unions.

Onboarding the Next Generation

Coop charters for new generations of members were one element of this creative energy. In 1984, NCUA in coordination with the credit union system, launched CUE-84 (Credit Union Expansion 1984). The goal: achieve 50 million members to celebrate the 50th anniversary of passage of the Federal Credit Union Act.

An essential component was expanding student run credit unions at colleges and universities. In NCUA’s 1983 Annual Report, three student credit unions – at Georgetown, Skidmore, and the University of Chicago– were highlighted from that year’s 105 new federal charters.

This effort continued into the mid 1980’s. The New York Times in a lengthy 1986 article, Credit Unions Boom On Campus, opened with a brief history of student charters:

“The first student credit union was formed in 1975 at the University of Massachusetts. Students at the University of Maine formed one in 1978 and at the University of Connecticut in 1979. But it was not until 1983, when the National Credit Union Administration helped to organize its first conference for colleges, that today’s credit union movement began. Four were formed that year.”

The attraction for the student organizers was “the students who start credit unions see them as good training for a career in finance.”

According to the Times, interest was widespread: “By doing so these young people, a group increasingly known for their career-mindedness and entrepreneurship, have made the student credit union into the campus business of the 1980’s.”

NCUA’s role

NCUA’s support for student charters was a central point of the article:

“There has been significantly more growth in the number of new student credit unions than other types of credit unions,” said Harry Blaisdell, a spokesman for the agency. ”The chartering of new credit unions has slowed down significantly in recent years, but there has been a real explosion of interest in college student credit unions.”

Mr. Blaisdell estimated that at a minimum, another ”half dozen” would be chartered in 1986, with ”a good possibility of more.”

The increase has been due at least in part, Mr. Blaisdell says, to an effort by his agency to encourage their formation. In 1984, the agency modified a credit union regulation so that student credit unions could accept deposits from corporations, philanthropic organizations and ”other supporters” outside their chartered group.

Normally, Federal credit unions are permitted to accept deposits only from members, but the law also allows credit unions that serve primarily ”low income” members to accept insured savings accounts. The agency expanded the definition of ”low income” to include students.

”This is in keeping with the Administration’s emphasis on private-sector initiatives in this time of decreasing availability of college funding,” Mr. Blaisdell said.

Mr. Blaisdell said that his agency has organized several national conferences on student credit unions and published pamphlets that tell students how they can form their own. One of its pamphlets, called ”Credit Unions for College Students,” offers, at no cost, to provide information and send an official to help organize the credit union.” (emphasis added)

De Novo Efforts and the Future

Attracting the rising student generation is critical for the survival of any business or industry. Today NCUA’s chartering process is at best clogged and at worst nonexistent for everyone, not just student led credit unions. This disinterest in new charters is also widely shared. Many existing organizations prefer focusing on established credit unions versus small startups.

Moreover, there is a world of difference in the skills required to manage an established institution versus the spirit necessary to start something new. In an ever-changing economy, losing this startup instinct can quickly lead to obsolescence or what academics call isomorphism—copying the competition and becoming identical in structure and form.

One CEO, an ardent believer in chartering, described why this creative impulse matters:

  • “De Novos spark renewal and all it implies about the faith in what the current players are doing – “we like what we are doing and want more to join us in the effort” – an endorsement of the future.
  • De Novo is about the spirit and the energy of those who will start something worth the effort and are ready and willing to push up a hill.
  • De Novos create a small sandbox opportunity for innovation and agile adjustments to longer standing models.
  • De Novos create a rallying point for participation and sponsorship by ALL – an opportunity to give generously, with gratitude, to encourage system resilience.
  • De Novo efforts are always more than starting a small CU – they are the feel-good effects where individual hope is ever present and renewed.”

Emulating Banking Strategy?

Credit unions’ remarkable success has led some away from the key factor that underwrote today’s industry standing. The cooperative model succeeds because it is people-centric, putting the member as the focus for all decisions.

This is very different from a capital-based system where decisions are driven by investors’ projected return on their wealth.

Credit unions’ financial stability and reserve accumulation have tempted CEOs to adopt this capitalist model:

  • to buy new businesses, not innovate current processes;
  • to merge other credit unions versus organic expansion into underserved markets;
  • to buy banks versus offering better value to their customers and communities.

Credit unions increasingly finance versus invent change. Innovation means searching for and funding external startups deemed relevant to a credit union’s priorities.

A Gap in Human Capital

Credit unions’ growing financial surpluses now cover for a deficit of human ingenuity and commitment. Some CEO’s and boards invert the cooperative model of self-help and collaboration. They use their ever-increasing financial reserves to purchase competitors or further market dominance, not pursue their members’ agenda.

The efforts by students and others to start their own institution should remind all credit union supporters of their cooperative roots. It is vital that newcomers be given the opportunity enjoyed by ordinary citizens in prior eras to start their own coops. If new entrants are not encouraged, the alternative will be a maturing system preoccupied with institutional trophy acquisitions.

A critical priority for today’s leaders, building on the fruits of others’ labors, is promoting this spirit of renewal. Entrepreneurs are an essential resource to bring new life to cooperative systems both present and future.

Learning from Another Co-op: REI

Recreational Equipment, Inc., or REI, is an American retail and outdoor recreation services corporation. Founded in 1938 in Seattle, Washington as a consumer’s co-operative, REI sells sporting goods, camping gear, travel equipment and clothing.

REI operates 146 retail stores in 39 states plus DC. In addition to its products, it also offers services such as bike maintenance and outdoor-themed vacations and courses.

This is the announcement upon entering the store: reminding members they belong to a coop:

Membership Fee and Equity

REI’s annual revenue for 2020 was $2.75 billion. The co-op lost money in 2020 as stores closed during the pandemic but ended the year with $2.3 billion in total assets and $990 million in reserves. By adding 1 million new members the membership fee portion of equity increased by over $18 million to a total of $331 million. This annual addition to permanent capital partially offset the $34 million 2020 operating loss.

REI defines active members as persons who paid a $20 lifetime membership fee and purchase $10 or more of merchandise in a given calendar year. Each active member is entitled to vote for members of the company’s board of directors.

The annual patronage dividend is normally equal to 10% of what a member spent at REI on regular-priced merchandise in the prior year. None was paid in 2020 due to the operating loss.

Online Community and Executive Compensation Models

The company’s online community notes that 24,313 members have engaged in 31,629 conversations. These dialogues are intended to “connect, learn, share and inspire members to get outside!”

REI employs over 11,000 people and has been ranked in the top 100 Companies to Work For in the United States by Fortune since 1985. Its disclosure of executive compensation could be a model for credit unions. The seven page document outlines both the pay evaluation steps and full details of all remuneration. The 2020 report shows that top executives received no annual incentive and took substantial pay reductions compared with prior years.

What a Credit Union Might Teach REI

As I left the store I picked up REI’s branded credit card application that “co-op members love.” One feature promotes REI’s values on the environment and conservation by donating 10 cents for every transaction, up to $1 million, to the REI Cooperative Action Fund. Members receive 5% back on all REI purchases and 1% back on all other transactions.

Interest rates on outstanding card balances are variable: 11.49% to 23.49%; cash advances have an APR of 23.99% plus a 4% fee with a $5 minimum. Convenience checks charge 3% of the draft amount; the balance transfer fee is 3% and the minimum interest in any month is $2.

Who issues the card? US Bank, a $530 billion bank with a .93 ROA in 2020. It would appear that a partnership with a credit union card issuer could provide members better rates. For REI this would also be an example of the cooperative value of working with other coops.

Anyone interested?

Taxi Medallions in the American Cooperative System

In February 2020 when the NCUA board voted to sell over 4,500 credit union members’ taxi medallion loans to a private hedge fund, it broke faith with the borrowers and the credit union model authorized by Congress.

Cooperatives are intended to be a financial option different from the market-driven, for profit business models.

Yesterday’s blog, “Low Balling Price to Win Market Share,” described the Uber/Lyft business model’s use of venture capital to underprice the regulated cab industry fares to achieve market dominance.  One reader commented:

The “destroy the competition” at any cost business model is capitalism at its most ruthless point (and it’s what China is doing right now too).  I’m a capitalist but running the competition out of town with an unprofitable business model backed by a war-chest of reserves is poor form.  Don’t know what to do about it; legislating it away may do more harm than good. 

But that legislation is already on the books.  First by state charters, and then in Congress (in 1934), consumers and groups were given an option to fight predatory practices by forming not-for-profit, member-owned financial services.  The question is whether the leaders of the system–regulators and credit union CEO’s–believe in this cooperative difference today.

Cooperative Ownership Supports Individual Owners

To recruit back their driver business partners, Uber and Lyft have reportedly paid incentives of $250 million and $100 million to entice them to return to their platforms.  But this time these price incentives are being passed through in the fares which are as  much as 40% higher.

What made the credit union financing of medallions special was that it gave drivers the chance to buy a medallion and become an owner, not just a worker.

A person familiar with the medallion financing industry described this credit union role as follows:

The decline of the 75-year history of the taxi industry is very complicated.

 But one thing remains true.  “Ownership” was key in its success and if the medallion rises from the dead, that will be why. In America, it is better to own than be owned by your employer-no matter how benevolent that employer might be. That is why immigrants of many colors and nationalities turned to the taxi industry.

 The incentives the ride share companies gave passengers and drivers when they were initially focused on destroying “Yellow” are now gone.

 The medallion buying market is now only owner-operators, so investors and speculation are gone.

As long as the purchase price affords the “new” owner the chance to earn what they earned as a worker, they will choose the owner option.

 Cooperative financing gave these members a way to create their own business-the American dream.  Credit union lending has always intended to enable individual empowerment for productive purpose.

NCUA’s sale of the members’ loans to a hedge fund seeking control of a significant share of the NYC medallion market undercut this core purpose. Several credit union and borrower groups with firsthand experience managing these portfolios asked to provide options and were ignored by NCUA.

If borrowers had been given the payment options based on balances similar to the amount the agency received from the sale, the member workout transitions could have been accelerated and future values enhanced for both NCUA and these borrowers.  But NCUA decided to wash its hands and walk away.

The Credit Union Way or Not?

Time and again credit unions have demonstrated their ability to act in borrowers’ best interests even when this means reducing the credit union’s bottom line or using reserves.   The industry’s wide-spread fee waivers, deferrals, refinancing and just being there for members during Covid is the latest in a history of such actions.

Unlike for-profit firms, cooperative structure provides a shield against the ever-present market pressures for earnings.  Patience provides for both individual circumstances and market cycles to play out so decisions are not made when events seem at their worst.

Cooperative patience is a valuable capability.  It means the industry can act counter cyclically in a downturn by keeping loan windows open and giving members options to defer or even reduce payments.  Even now, there are  reports that the “Yellow” taxi option is making a comeback versus the technology disrupters.

But if this unique advantage is not understood and used by regulators or credit union leaders, then credit unions will end up responding to crises no differently than their banking competitors.  That is not what Congress intended.  It is not what America needs.  It is not in the member-owners’ interest. That banking approach would violate both cooperative design and values.






An Update on the Taxi Medallion Business or:  “Low Balling Price to Win Market Share”

Uber and Lyft have never made money.   Cumulative losses are in the billions.  And continuing.   Two reasons for this lack of profit are spending billions of venture capital funds to subsidize fares below the regulated cab industry.  Secondly, under compensating their driver-business partners.

Now that both firms are public, the pressure for profits by public investors (now that the venture capital funders have made their windfalls) is changing their business and pricing models.

A thoughtful comment by my favorite market analyst (CNBC’s Kelly Evans), suggests the game may be up.  While it does not mean NYC taxi medallions will rise to the former values of over $500,000, it suggests that the future will be much more stable and that drivers and medallion owners can expect reasonable returns—as medallion prices become linked to actual earnings.

Kelly Evans, June 15, 2021:

Here’s a half-baked thought I’m just going to throw out there: 

Is venture capital bad for society? 

I was thinking about this as we talked to Kevin Roose yesterday about his recent NYT piece, “Farewell, Millennial Lifestyle Subsidy.” His point is that all the goodies millennials enjoyed over the past decade or so–cheap Ubers, food delivery, and on-demand household workers–were never properly priced until the companies all went public, suddenly have to turn (or at least pretend they’re on a path to eventually turn) a profit, and have to raise prices as a result. It doesn’t help this is all happening amidst a historic labor shortage, either.  

“Hiring a private driver to shuttle you across Los Angeles during rush hour should cost more than $16,” he wrote, “if everyone in that transaction is being fairly compensated.” It’s one more reason many millennials have tired of their previous urban/on-demand lifestyles and see the advantages of things like car and home ownership.  

So now that Uber has to shore up its financials, its rides aren’t as cheap and its service isn’t as attractive. This isn’t just a pandemic phenomenon; the company went public at $45 a share in May of 2019, and today trades at just $49 and change. If you’d bought General Motors the day Uber went public, meanwhile, you’d be up more than 60%.  

In other words, the $20 billion that Uber raised as a private company basically just allowed it to underprice rides for a while–long enough to nearly put the rest of the transportation-for-hire business into bankruptcy. How can any viable business, which has to rely on actual profitability, compete with one that’s that highly subsidized by the wealthy (which are most early-stage VCs and their investors)? Are all of these jazzy start-ups really about improving the future, or about using neat technology to earn subsidies that allow them to undercut legitimate businesses all over the country? 

On an even grimmer note, the rise of Uber led to a plunge in the value of New York City taxi medallions, leaving drivers who had bought medallions before Uber’s arrival holding massive debt. A 2019 investigation after more than eight drivers committed suicide in 2018 found the typical driver had $500,000 of debt, and a quarter of them were considering bankruptcy. 

Listen, I’m all for technological innovation. But there’s a difference between hey, now you can book a car from your phone! and hey, our private capital is allowing us to price this way below what it should actually cost.  

Now that we’ve seen how many of these stories actually play out, perhaps we customers ought to be a little more discerning. Maybe I don’t need to play in the unsustainably-cheap-to-the-point-of-being-bad-for-existing-businesses game. Maybe the next time we hear of a “disruptor” raising however many millions of dollars to “change the way we do xyz,” our first question should be–are you really innovating, or are you just temporarily lowballing the price of these services to win market share?  

Just a thought. Am I way off base here? 


Kelly’s points are very helpful.   We are now seeing the cycle of disruption play out and a new equilibrium being sought.   Four of my previous blogs discuss some of her observations about the fragility of the Uber/Lyft business model.

The common theme of each blog is that credit unions and NCUA should demonstrate as much responsibility to borrowers in a crisis as they do to savers.  Without the former, there will be no return for the latter. opportunity for the NCUA Board to do the right thing/’s betrayal/ an NCUA policy that must change/



The Public Policy Role of Credit Union Cooperatives (Part 1)

Most credit union observers agree that the emergence of financial cooperatives was one outgrowth of the reform movements affecting many areas of American society at the beginning of the 20th century.

Across America, factory workers, farmers, women suffragettes, and city social workers had organized numerous initiatives and political efforts to resolve emerging problems. These initiatives responded to individual abuses and inequalities that became exacerbated during this era of monopoly capitalism converting a largely agrarian economy to an industrial one.

Credit unions were one of many attempts to meet the basic financial needs of ordinary people who had no access to fair financial services of any kind. This experiment begun with St. Mary’s Bank in 1909, then slowly evolved state by state over twenty-five years. These various examples became the proof of concept that resulted in the passage of the Federal Credit Union Act in 1934 as part of FDR’s new deal initiatives.

Filene and Bergengren convinced the administration and Congress that a national program for expanding consumer credit could help with recovery during the depression by increasing demand for consumer goods and services with credit.

The following slides provide snapshots of the evolution of the “movement” from social initiative to a fully formed financial system alternative for consumers. They summarize the ever changing balance between mission/purpose and institutional financial success as overseen by the federal regulator.

  1. The Need for Fair Consumer Credit

  1. Roosevelt’s support. 4,793 federal charters were issued from 1934 through 1941 when new charters fell temporarily to around 100  per year during WW II.

  1. Credit unions were first overseen by the Department of Agriculture. During WWII oversight was transferred to the FDIC. Post war, the bureau of federal credit unions became a department within HEW. In 1977 the National Credit Union Administration became an independent agency.

  1. In 1977 NCUA’s independent status began with 13,050 active federal charters. At the end of 2020 there are 3,185 active federal credit unions. Of the 24,925 federal charters granted, 92% were issued in the forty-four years prior to NCUA’s becoming an independent regulatory agency. Under NCUA the balance between mission/purpose and economic performance has increasingly focused on financial performance.

  1. Today NCUA’s safety and soundness measures dominate cooperative oversight.

  1. The absence of new charters has stifled entrants with innovative ideas. The industry has consolidated and become more homogeneous in business strategy.

Slides: 3-6 are by Steve Hennigan, CEO of Credit Human FCU using feedback loop analysis.

The traditional view of credit union’s special role justifying their tax exemption has three bases: their cooperative, member-owned structure, the legislative intent to serve people left behind by existing financial options, and the field of membership-common bond-requirement.

As the cooperative business model has evolved, so has the concept of purpose and credit union’s role in their communities. Today member’s financial health is an animating concept for some. Other credit unions continue emphasis on superior service, better value, and member relationships.

Consumer financial services are now available from multiple providers. Credit union’s success confirmed that consumer lending is an attractive business opportunity for banks and other start up firms. Today many financial options and new entrants, from payday lenders to online lending startups, target consumers.

More than a Business Model–A Design Advantage

The founding pioneers of credit unions did more than prove out a new business segment with consumers. The cooperative model was one in which people:

  • Found a solution by working together;
  • Identified common challenges to organize and solve it themselves;
  • Prioritized mutual needs overcoming fears that they couldn’t succeed;
  • Created a community and bond that formed relationships to sustain efforts;
  • Accomplished something they had never done before to get something they didn’t have.

Cooperative purpose established these core traditions that are the foundation for continuing credit union relevance and uniqueness in an ever-changing economy.

The question is, if credit unions did not exist, would we create them today? What needs would they serve? Is purchasing the assets and liabilities of banks, consistent with the credit union cooperative role?


Intergenerational Thinking and Co-op Design

The concept of paying forward is inherent in the credit union model.  Current leadership begins with a legacy of common wealth inherited from previous efforts.  The assumption is that the current generation will in turn pass an even greater legacy to their children’s children.

This is not the performance standard dictated for profit making firms in a market economy.   Rather the inexorable force of the invisible hand drives a firm’s stock price.   Success or shortfalls, are measured quarterly against explicit annual performance expectations.

What Will our Descendants Thank Us For?

Credit unions were founded with a different ethic of success.  The member ownership allows co-ops to play “the long game.” Performance encompasses obligations for the common good of members and their communities.

John Ruskin (1819-1900) was a leading English art critic of the Victorian era.  He was an art patron, draughtsman, watercolorist, philosopher, social thinker and philanthropist. He wrote on subjects as varied as architecture, myth, literature, education, botany and political economy.

His vision for human enterprise uses an architectural metaphor which I believe embraces this unique, intergenerational scope of cooperative design:

“When we build, let us think that we build forever. Let it not be for present delight nor for present use alone. Let it be such work as our descendants will thank us for; and let us think, as we lay stone on stone, that a time is to come when those stones will be held sacred because our hands have touched them, and that men will say, as they look upon the labor and wrought substance of them, ‘See! This our fathers did for us.”