Category: Co-ops in Capitalism

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Friday Updates

The following are updates from posts this past week.

VyStar’s Challenges: Continuing to Expand in Georgia

Both CU Today and Credit Union Times report that VyStar has called off its $195.7  million purchase of Heritage Southeast Banking Corporation, a holding company for three local banks located outside Atlanta.

The local TV station NEWS4JAX covering the story included the following quote from CEO Brian Wolfburg :  “Following a thorough evaluation of the transaction between VyStar and HSBI, we have mutually agreed that moving forward separately is the prudent decision. VyStar will continue to expand our services in Georgia.”

This Georgia expansion seems tone deaf to the concerns of members in the credit union’s legacy Jacksonville market.  This recovery challenge appears greater than a botched conversion.

There are dozens of comments posted after every NEWS4Jax story:

Mark 2 HRS AGO

It seems that Vystar management made a poor decision with NYMBUS and are having to force it down members (co-owners) throats, regardless of the inconvenience and future inadequacies of software capabilities. The NYMBUS salesperson probably made bundle of commission off of this sales job to Vystar.

BigSwifty500 21 HRS AGO

This story is worthless and full of non-truths. The login page still says it is “temporarily unavailable”. Time to move my accounts elsewhere.

B coffey 2 DAYS AGO

N Y M B U S….this is the name of the company vystar is sharing “relations” with. They performed, designed this mess. Both companies share Board members. Nymbus  is even located in their (Vystars) building in Jax. Vystar is listed as a Nymbus investor. Starting to see a forming problem here?????

john marshall 2 DAYS AGO

This “upgrade” (that isn’t one) ought to be called Wolfburg’s Folly!

Racemedic

Translation: “We know a dumpster fire when we see one and we know to run the other way. Sincerely, HSBI”

Jthall76

Glad I switched to Community First CU

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Crypto Crash: The Selloff in Crypto Assets Resumes (CNBD Disrupter article, June 16)

Bitcoin fell again today as a sell-off in global risk assets resumed, with crypto investors reeling from a dramatic plunge over the last few days that saw the world’s largest cryptocurrency almost drop below $20,000. . .  

Bitcoin is sitting at levels not seen since late 2020. The digital currency is down more than 20% in the last week and has dropped more than 60% from its all-time high in November. . 

The current bear market is often dubbed a new “crypto winter”.  . .

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“Good Angel-Bad Angel”-The House Hearings on January 6th Insurrection

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Should Credit Unions Be Offering Bitcoin and Crypto Currency?

Crypto currencies were supposed to be a store of value that would protect owners from traditional market risks as well as inflation.  Based on  block chain technology, they were intended to avoid the historical problems of fiat currencies backed by governments.

Both roles have now been shown to be faulty.  Here are some recent assessments.

Bitcoin tumbled Wednesday to a new 18-month low, spurring a sharp fall in crypto markets sparked by crypto lender Celsius freezing customer withdrawals. The world’s largest cryptocurrency fell to under $21,000. Bitcoin has lost around 28% since Friday and around 70% from its all-time high in November. (Reuters) 6-15-22

Bill Gates is a  crypto and NFT sceptic.  His latest observation is that the whole enterprise is based on the greater fool theory:

On Tuesday, the billionaire Microsoft co-founder described the phenomenon as something that’s “100% based on greater fool theory,” referring to the idea that overvalued assets will go up in price when there are enough investors willing to pay more for them.

A former crypto believer has written an appraisal of his experience with the title Crypto is Dead-Get out Now.

On May 18, 2022 Washington Post financial writer Michelle Singletary posted an article Six Signs Crypto is a Classic Ponzi Scheme.

CU Today reported that consumers lost more than $1 billion in crypto fraud in 2021 according to the FTC in a June 7 article.

Celebrity Hype and a Trillion in Losses

A critique from Jared Brock identifies the issue for why credit unions should be concerned about their involvement with crypto purchases.  He starts with a question in his June 6 article: Should Matt Damon and Reese Witherspoon Go to Jail for Promoting a Ponzi Scheme?

A trillion dollars in losses requires accountability.

But until two weeks ago, all sorts of celebrities were shilling for their favorite coin — or rather, whichever coin company paid them the most endorsement money.

Matt Damon.

Reese Witherspoon.

LeBron James.

Kim Kardashian.

Charli D’Amelio.

Jamie Foxx.

Paris Hilton.

Ashton Kutcher.

Gwyneth Paltrow.

Tom Brady.

Steph Curry.

Elon Musk.

Mark Cuban.

Tiger Woods.

Larry David.

And dozens more.

They made untold millions by convincing the ignorant public to late-join a Ponzi scheme.

Now they’ve all gone silent.

Because now that the industry is crashing back to reality, real people are losing their shirts.

Call me old-fashioned, but I think someone needs to be held accountable.

Should celebrity crypto boosters go to prison for promoting Ponzi schemes?

Two Credit Union’s Announce Bitcoin Purchase Partnerships

Even with this litany of false hype, fraud, documented  losses and ongoing uncertainties around crypto, several credit unions have moved ahead to facilitate the purchase of these “currencies.”

CU Today on June 13 reported Achieva Credit Union’s involvement with a bitcoin exchange:

Dunedin-based Achieva Credit Union is adding a bitcoin exchange to its mobile app through a partnership with New York-based NYDIG, a fintech platform that partners with mainstream institutions from banks to insurance companies. 

According to the credit union’s website, it is charging a 2% fee for any crypto currency purchased or sold.

Tracy Ingram, chief digital and infrastructure officer, told the Tampa Bay Business Journal that Achieva had noticed more of its members were becoming “crypto-curious.”  

The article also listed other CUs offering crypto services to members:  UNIFY Financial CU, Idaho Central CU, Stanford FCU, and Visions FCU.

The Credit Union Times report on Achieva’s new service described how the employees were asked to try out the new functionality resulting in over $2,500 in Bitcoin purchases. The purpose was to make them “trusted consultants” about the process.

Prior to launching, Achieva employees were invited to test out the new Bitcoin function. The employees who signed up were given $10 to purchase Bitcoin and learn the process. NYDIG also kicked in another $5 for the experiment. During the three-week employee pilot, those Achieva team members purchased more than $2,500 of Bitcoin.

According to Achieva’s Chief Digital and Infrastructure Officer Tracy Ingram,  the employee trial achieved two things: Employees learned how to use the new app and how Bitcoin works in order to help explain everything to members.

“Achieva employees are trusted consultants for members and it was vital that our team learn how this new Bitcoin functionality works so that they can answer questions for members,” Ingram said. “We always want to note that there is risk involved in investing in any cryptocurrency, and we want our members to feel comfortable accessing the trading services.”

Stanford FCU: a “Trusted Institution”

The Stanford FCU press release contained another important issue in its description of its partnership with NYDIG:

NYDIG is proud to partner with Stanford FCU to power its Bitcoin services in a secure and compliant way,” NYDIG Head of Banking Solutions Rahm McDaniel said. “A trusted institution like Stanford FCU wants to ensure the Bitcoin services offered to its clients meet the industry’s highest regulatory, audit and governance standards, and that is exactly what NYDIG provides. We are excited to partner with them to ensure their members have access to the opportunities associated with this emerging technology.”

According to Stanford FCU, the credit union saw nearly 25,000 buy and sell transactions by its members to and from crypto exchanges in 2021.

The Central Issue for Credit Unions

NCUA’s May 2022 letter in essence approved these types of partnerships but did not address one of their most frequent functions-purchasing crypto currencies.

Instead NCUA obfuscated the issue by talking about Distributed Ledger Technology.  For example:  As with the development of any new product or service, when deploying a platform, product, or service using DLT as part of the underlying technology, credit unions should find an appropriate balance between the opportunities and the risks.

DLT is not the same as crypto currencies which are based on this technology.  NCUA approved a practice of questionable purpose and uncertain value because of the underlying technology.  From many perspectives, purchasing crypto currencies is nothing more than gambling.

If NCUA did not understand the import of its letter, than how can credit unions avoid the marketing hype and celebrity marketing of this form of financial entertainment?  Not to mention the “crypto-curious” members?

In both credit union press announcements. NYDIG, the exchange and fintech partner, is relying on the trusted relationships and reputation of these two credit unions and their employees to not only offer, but also promote Bitcoin transactions.

I would just repeat the observations of Jared Brock above:

Call me old-fashioned, but I think someone needs to be held accountable.

Should celebrity crypto boosters (insert credit unions) go to prison for promoting Ponzi schemes?

In a future blog I will describe block chain, or distributed ledger technology, and how it might be useful for other purposes, not NFT’s and crypto currencies.

 

 

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When the Music Stopped for VyStar

On May 2, 2022 the $12 billion VyStar Credit Union celebrated its 70th anniversary with a ceremony at its founding location, the Naval Air Station, Jackson, FL.

The press release included the following announcement:  VyStar is also leading a digital transformation that includes a new website and online & mobile banking platform.  But then reality set in.

The Music Stops

On May 14,2022 the confetti hit the fan. The conversion to the new online and mobile platform failed.  As of the following Friday there were more than 13,444 comments posted on the VyStar Facebook page about the outage.

The situation as described in a CU Times story on May 22:  The brief outage, as explained to members, was planned to last for two days. As May 20 rolled around, seven days later, the $12.3 billion credit union’s 822,000 members still were offline and furious.   One Facebook posting:  “How in the Hell Does a Credit Union go a week with its online systems completely DOWN in 2022???”

The CEO Returns

Brian Wolfburg, CEO had been  on vacation overseas.  Upon his return he was interviewed by a reporter Jim Piggott for the local TV station, NEWS4 JAX.  The complete  18 minute interview is here.  The on air report excerpt  was just six minutes.

Wolfburg repeatedly references the credit union’s 70 year history to indicate that the credit union will “get it right.”   Members posted their skepticism in comments after the story such as:

Mikey19 DAYS AGO: I think the CEO should resign and the person that is in charge of this mess should be fired. Who is with me on this. Let’s email the Board of Directors to let them know our thoughts. VyStarBoard@vystarcu.org

Members File Complaints with Regulator

A June 6, CU Times article detailed member complaints with the Florida Office of Financial Regulation:

Complaint Filed May 20:  “VyStar Online Banking has been unavailable to members for 7 days now with no date given as when to expect the system to be operational. VyStar Management has been vague and evasive with little to no accountability for the botched roll out of its new online banking system. They have gone ‘dark’.   The story added:

CU Times has repeatedly asked for interviews with VyStar executives and board members. The interview requests have not been granted.

Potential Legal Trouble

A June 8 article in CU Today described the  potential of a class action suit.  Also the credit union would end its fee refund of fees incurred by the outage.

VyStar said that it proactively refunded/is refunding fees that it charged members from May 14 through June 9 as a result of the online and mobile banking conversion, but as of June 10 it will not do so.

Members Leaving

In a June 9 CU Today update, the story described members intentions to leave the credit union:

Action News Jax said it contacted VyStar CU regarding how many members have closed out memberships, but said the credit union did not provide any data. 

Class Action Suit Filed

June 13, CU Today reported on a class action suit:

In an interview with FirstCoastNews.com two weeks after the solutions went down, Attorney Austin Griffin, a partner in StoryGriffin PA, a consumer justice law firm in Jacksonville Beach. Fla., told FirstCoastNews VyStar members could go after the credit union with three possible claims: negligence, breach of contract and fiduciary duty.

Griffin told the publication that since VyStar is a credit union and not a bank, there is “an expected higher standard of care.”

VyStar’s Status Today

The latest update on VyStar’s web site reads:

Online statements now available. Access your accounts and make External and Internal Transfers via your computer, tablet or mobile device at online.vystarcu.org. Please note: We will continue to have planned daily maintenance from 1 a.m. to 4 a.m. EST when system access may be unavailable.

The Credit Union Times latest summary  is as of June 14.  Over 28,000 comments have been posted by members frustrated with their experience.

Context for the Event: VyStar Invests $20 Million in Nymbus

There are more factors to this story than a botched conversion.

In  July 2021, VyStar signed a deal with the Jacksonville, Fla.-based Nymbus as the credit union’s online and mobile banking partner.

This statement by Joe Colca, Seniro Vice President of Digital Experience was part of the release:  “Our previous investment already demonstrated our confidence in Nymbus. We’re now proud to lead by example for other credit unions seeking a trusted fintech partner to implement sophisticated technology, people and processes to offer progressive products and member experiences.”

In October 6, 2021 Credit Union Times reported Nymbus had moved into VyStar’s head office location.  “A fintech with credit union funding is moving from Miami Beach to the campus that houses the headquarters of VyStar Credit Union in Jacksonville, Fla.

Nymbus said in a news release Tuesday that it made the move because of its relationship with VyStar ($11 billion in assets, 778,348 members). VyStar invested $20 million in April to help develop Nymbus’ month-old Nymbus CUSO to better extend its services to credit unions. In July, VyStar chose Nymbus as its new online and mobile banking solution partner.

In September 2019, VyStar created a $10 million fund to invest exclusively in fintech companies. VyStar has said it has supported Nymbus because it provides a way for it and other credit unions to keep up with members’ rising expectations for sophisticated online services. Nymbus’ website said it saves banks and credit unions “decades” in developing such services.”

Two senior managers of VyStar were also  members of Nymbus’s Board. Joe Colca, VyStar’s SVP on the board was quoted:

“Nymbus has proven to be an effective, valuable partner in our efforts to improve the member experience at VyStar and strengthen the credit union industry as a whole,” Colca said.

 VyStar’s FOM Expansion and Bank Purchases

Vystar’s first bank purchase was announced on January 15, 2019 with the  purchase of First Citizens Bank: VyStar Credit Union announced it plans to acquire $280-million Citizens State Bank, a Florida state-chartered bank headquartered in Perry. CSB has four locations: two branches in Gainesville, and branches in Perry and Steinhatchee, Fla.

The article continued that this purchase was possible because of an FOM expansion:

In November 2018  VyStar received approval from the Florida Office of Financial Regulation to significantly expand its field of membership by 27 counties—more than doubling the original 22 counties—to include all 49 counties of Central to North Florida. This expansion included Taylor County, where CSB’s Perry and Steinhatchee offices are located. VyStar currently serves the Gainesville community with two branch locations with plans to open additional offices in Alachua and Ocala by mid-year, the CU said.

Subsequently,  on March 31, 2021 VyStar’s purchase of the $1.6 billion Heritage Southeast Banking group  for $189 million was announced.  The closing has been deferred three times.   This would be the largest purchase of a bank by a credit union.

Largest Subdebt Placement by a Credit Union

To support these bank purchases and rapid growth, VyStar issued $200 million of subordinated debt in the first quarter of 2022.  This is the largest subdebt capital placed in credit unions to date. Arranged by Olden Capital, the issue was sold to 41 investors including credit unions, banks, insurance companies and asset managers.

Without this external capital infusion, Vystar’s net worth would have been 7.9% of March 31, 2022 assets.  With the debt and using a four quarter asset average as the denominator, VyStar reported a net worth ratio of 10.15%.

“Values-centric” brand campaign: “Do Good. Bank Better.”

From an October 2021’s CU Today story  New Branding Campaign:

VyStar Credit Union has launched a new “values-centric” brand campaign, “Do Good. Bank Better.”

VyStar said the multimedia campaign has been inspired by the people, businesses and organizations that it serves, and that it elevates VyStar’s “powerful promise to support its members and communities by offering better banking options and giving back to strengthen the places it calls home.”

“We proudly live by the words, Do Good. Bank Better., and this is just the beginning of our efforts to continue sharing our nearly 70-year story,” said VyStar President/CEO Brian Wolfburg in a statement. “As we evolve as an organization, we remain true to our roots by upholding our standard of leading by example and showing goodwill in everything we do.”

The Member’s Chance for a  Choice

VyStar has been on a very ambitious multiyear growth spurt:  converting charters and expanding the FOM, purchasing whole banks, investing in multiple fintech companies, raising external capital and launching a new public relations and branding campaign.

Members’ reaction to the online conversion failure shows how much confidence has been lost in these many expansion efforts.  The situation calls into question multiple initiatives especially the credit union’s investment and role in Nymbus plus its thrice-deferred bank purchase.

This episode and its background are now occurring in a rapidly changing economic and financial environment.  Investments and other assets that appear sound when the cost of funds is near zero now have a very different risk profile.

Once again the regulators have been on vacation.

The credit union’s reputation is being stained. Its operations, business initiatives and internal capabilities appear strained on several levels.  The net worth ratio is created, not earned.

The best solution may be to follow the advice of the member who posted:  Let’s email the Board of Directors to let them know our thoughts. VyStarBoard@vystarcu.org 

Members are the owners.  They should do more than vent frustration by exercising their power to choose their representatives for the board.  They should take back their “home” if they truly want to see the credit union “do right” for its members and communities.

 

 

 

 

 

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Credit Unions and Consumer Education: An Example from Rhode Island

In response to last week’s bog about the gaps in financial education courses for high school students, I received an example of a credit union effort from five decades ago.

In the 1970’s and early 1980’s Rhode Island credit unions were a source of system innovation. The state had a strong dual chartering option.  State credit unions were authorized NOW accounts (negotiable orders of withdrawal) a forerunner of share drafts and checking.

There was a private share insurance option which was initiated because NCUA would not insure the credit union NOW accounts. That insurance option was also provided to Rhode Island’s mutual savings banks. That dual coverage became an Achilles heal during the S&L troubles in the mid- 1980’s.

The state field of membership options included the traditional employer, community, and associational common bonds.  The community charter included  anyone who lived or working in the state.

Rhode Island’s influence extended to the national leadership where Joe Cugini, President of Westerly Community Credit Union, was serving as  Chair of CUNA when Ed Callahan, Bucky and I arrived at NCUA in 1981.

But an even more unusual leadership role was that of the league President, Bob Bianchini.  While League President, he was also elected and served as a state representative in the Rhode Island legislature.

Here is his account of his focus on consumer financial legislation while in the legislature.

“I was elected in 1978, at the same time I was serving as President / CEO of the Rhode Island Credit Union League.  Serving in the legislature was a part time endeavor (legislators were paid $300 dollars a year) so most everyone who served also had other employment or other sources of income.

“Credit union issues were not often paramount during the time I served. When legislative efforts regarding consumer financial services were proposed, credit unions were almost always included in any proposed legislation.

“I avoided sponsoring any legislation that affected financial institutions, but to be completely candid, when such legislation was proposed, my colleagues often would ask me for an explanation and my opinion. I would often do the same when bills were proposed that impacted other industries. I would frequently seek an explanation or points of view of my colleagues who labored in those particular industries, such as education, legal, automotive, medical etc.

“When I proposed the consumer education, the first legislators from whom I sought support were the teachers who served with me in the House.  My explanation of what I hoped would happen would be that kids would receive information about basic consumer education.  For example, how to balance a checkbook, what types of savings and loan products were available to consumers, the importance of balancing income and expenses. I’m sure there were other topics included as well.

“The opposition to my original bill from the Department of Education was based more on a standing concern by the Department.  They opposed any specific topics  inserted in school curriculum through legislative efforts, rather than opposing the idea that kids should be exposed to basic consumer education.

“The compromise we reached was that consumer education would be included as part of all social studies classes. I can’t recall if it was 8th or other grade levels.

“It’s now 43 years later and I don’t know whether that practice still exists. If it does, I would think it might impact the grade level assigned to the state’s commitment to taking financial courses.

“At that time, I informed our league board and legislative committee of my efforts. Although I can’t recall other legislative and regulatory issues that the league was following then, I’m sure it was a full agenda.”

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A CEO Reports to His Team

Learning from others is how many inform their own leadership approach.  Each month Weokie FCU’s CEO Jeff Carpenter sends a briefing to staff about the important events.

The brief excerpts below are from his April update. Used with permission.

The complete report includes pictures, member testimonials, project priorities and performance numbers.

Open communication contributes to shared efforts with common purpose.  Both are vital for effective organizational performance.

Living Our Vision & Mission

WEOKIE adopted a new vision in 2022 and has been working hard to make the vision, not just words on a paper, but a reality. I wanted to pause a minute each month to share some of the “stories” of how we are  “making a difference, one person at a time”

Calculating the Coop’s Value

Why Cooperation Matters

“Cornerstone IMPACT 2022: I attended my first “in-person” meeting of the Cornerstone Credit Union League’s Annual Meeting and Convention entitled IMPACT.

“WEOKIE is stronger when we cooperate with other credit unions and the Cornerstone League is a great facilitator and cause agent for credit union collaboration.

“The meeting had excellent educational content and numerous opportunities for R&D (Research & Development, aka Rip-off & Duplicate) great ideas that other credit unions are pursuing.”

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Technology versus Slow Checkouts

America loves innovation.  Especially in technology.  We celebrate, honor, and enrich those entrepreneurs who bring efficiency and ease to our life and work with their inventions.

Technology underwrites greater productivity, reach and speed in credit union services. It enables 24 by 7 interactions. Manual processes from loan underwriting and live teller interactions are replaced by AI decisioning and intelligent teller machines (ITM’s).

Even phone responses and “live” chat are now automated to the point where one must opt out to “speak” with a real person.

What society prizes, is what the people will create. One writer contrasts our modern view of success with the culture in ancient Greece.

The ancient Greeks gauged progress differently from us. “What is honored in a country will be cultivated there,” Plato said. The Greeks, imperfect as they were, honored beauty and justice and moral excellence, and so they cultivated these values. We honor speed and connectivity and portability, and so that is what we get.

The author asserts our current focus leads to: “cognitive dissonance from our misplaced faith in technology, and an attendant disregard for other forms of human progress.”

The Introduction of “Slow”

I was reminded of this contrast between ancient and modern values after reading about a new approach in retail services in Europe, called Slow Checkout.

Jon Horvat describes this approach in retail and service industries: With so much buying happening online or through self-service kiosks, the art of shopping has lost much of its attraction. Some market-savvy executives have noticed this shortcoming and have recently introduced slow checkouts, which turn the routine chore into a meaningful experience.

Many retail experiences, that is personal shopping, are no longer personal.   Human contact, especially the kind of interactions characterized  by local farmer’s markets have been eliminated in the race for self-service and cashless checkout innovations.

The pressure to automate customer interactions will only accelerate as labor shortages occur in many retail service sectors.

Executives at several retail grocery chains in Europe noticed something was missing in their retail experiences. Some customers wanted human interaction.   Jumbo a Dutch supermarket chain and Carrefour, the French grocery leader, both introduced “slow checkout” lanes after discovering that people wanted to chat when then paid for their groceries.

Harvat describes this approach as follows:

These small-talk cashier lanes are gaining popularity. They are called “chitchat” checkouts. The French name, blablabla caisses, is a bit more expressive.

About 150 of Carrefour’s French stores have opened blablabla caisses, with plans to have at least one till in every location by the end of March. The lanes are marked for only those who want to talk with cashiers. There are no time limits for the customer, although most try to respect those waiting in line. The lanes come at no extra cost to the consumer.

Shoppers are encouraged to take their time on the slow checkouts; cashiers greet with bonjour and can ask about the family or the weather. No managers will be around to speed the process up. The aim is to slow it down.

Both customers and cashiers report greater satisfaction in their roles where interaction is encouraged.  Shopping is a social experience, not just a purchase transaction. Small talk is an important experience for people living alone or feeling lonely.  Cashiers enjoy the opportunity to communicate with people, giving them a sense of expanded agency in their interactive role.

Credit unions have traditionally been an area where these interactions have been a valued part of the member experience.  Members get tired of talking to machines or referred to online applications or processes.  They want to talk with real people.

People are social creatures.  These chit-chat interactions show that economics, the best rate or the fast turnaround, is not the only, or even the most important, human need in every circumstance.

Every person has needs that surpass material economic sustenance. Humankind does not live by bread alone.

The Boutique Credit Union

One person who has recognized this critical capacity for human interaction is Bo McDonald.  He is a credit union consultant who has focused on the unique capabilities and experiences provided by smaller credit unions.   While some may see credit unions with assets of under $100 million or below the credit union average size as a disadvantage, he sees these as “boutique businesses.”

When inspired by passion they provide member experiences long lost in some billion dollar institutions.  Ultimately every credit union is founded on relationships, even if the only measures traditionally used are the number or size of  transactions.

These boutiques may not have the growth patterns of their larger brethren; but they demonstrate the enduring power of cooperative design.  For  when we look under the technology covers increasingly deployed by credit unions, we learn that what members really value is someone to talk to  when they have a need.

Boutique credit unions demonstrate that real progress can also be achieved by slowing down and giving members your undivided attention.

 

 

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Cooperatives and Awakening the “Sleeping Giant”

Three recent observations:

  1. While reviewing an exam for a billion-dollar credit union of 25 pages, nowhere was the word cooperative used.  There were no  comments on any of the credit union’s responses to members during COVID, their PPE loans and multiple  community involvements including expanded DEI.   If the name were removed from the exam,  it would be impossible to know it was a credit union, not a bank.
  2. Two readers commented on REI’s values approach to its “brand:”

“While I am a fan of REI, I would like to mention (and this is probably not a surprise to you) that they too have a tendency towards oligarchic governance you have talked about in the context of credit unions. If I recall correctly, to be eligible for a candidacy in board elections you have to have leadership experience in a Fortune 500 company.

“We desperately need legislation that ensures fair electoral practices in co-ops. Glad you are advocating for this in credit unions. REI is a great company and credit unions are great – but they also need some tough love. “  (Leo Sammallahti)  

“I’m sure REI is admirable in its promotion of important values. However, the current unionizing effort does not seem to put REI in a good light.

“My own experience in a nonprofit progressive worker-rights advocacy organization (prior to joining the credit union movement) was that the management vigorously fought our efforts to unionize. It’s not an uncommon story among “liberal” organizations. Our effort was ultimately successful, but it taught me a lingering lesson about progressive hypocrisy. The co-op world is not exempt.”  (Cliff Rosenthal)

  1. Here is a small sample of the number of  job openings from Sunday’s CU Insight:
  • 77 positions at Lake Michigan Credit Union
  • 65 or 5.4 percent of NCUA’s authorized staff of 1,201. Fifteen were at Head Office and 50 in the regions (from NCUA Operating Fund report)
  • 40 positions at Michigan State University FCU
  • 37 positions at True Sky Credit Union

What do these Observations Mean?

Is our cooperative model struggling?   Is our business merely subject to the same economic forces affecting every other firm?  Are credit unions even addressing the multiple challenges of  inequality existing in every community?

In some respects the cooperative model is not working well.   On the surface we increasingly appear as just another financial option.  In many cases, let’s be frank, credit unions are not much different from many other financial choices in their behavior and impact on their communities.

Instead of transforming financial opportunity, credit unions increasingly embrace the tactics of their competition including purchasing banks, mergers (sell outs) of sound long- serving coops, and measuring performance by strictly financial and growth goals.

Recapturing our Promise

Occasionally a story appears in the press about a find in a flea market or an opportunity shop.  A person discovers an antique looking Roman bust selling for $34.99 in a Goodwill store.   She later learns it is 2,000 years old and priceless.

Sometimes in  life we do not understand the value of what we have.

But every credit union, not matter its size, has a founding story and purpose.  Every board inherited a legacy of power, fortitude and energy to make life better for members.

But does senior management and the board know what they have?  That is, an institution with the power to override the ever present push and pull of market forces of greed, domination and even exploitation?

The credit union charter is intended to enrich its members versus building institutional glory.  Every charter comes with that hope and potential.

So what is lacking today for why this transformative promise seems to be missing?

In One Word: Imagination

One of the examples of creative capability was Ed Callahan’s way of presenting the potential for the credit union movement, both as Chairman of NCUA and as CEO at Patelco Credit Union.

He believed the credit unions were “a sleeping giant,” or America’s “best kept secret.” They should be an option for all Americans.  Whether retired, between jobs or even for college and high school students.  The field of membership was an inclusive, not an exclusive concept.

In practice he did not let current reality limit what the future could be.  The NCUA exam cycle was over two years for federal charters when he arrived.  He held a “fire drill” that resulted in every federal credit union filing, for the first time ever, the yearend call report.   Working with regional directors, every federal credit union had an exam contact in 1982, and each year thereafter.

To celebrate the 50th anniversary of the passage of the Federal Credit Union Act, he announced a movement goal of 50 million members by 1984.   He inspired the largest credit union conference attendance ever in December of that year when state and federal examiners and credit union leaders came together in Las Vegas to debate their future.

Working with credit unions, the NCUA’s share insurance fund and CLF were redesigned following cooperative principles to create a three-part regulatory framework for the cooperative system.

These transformative events were inspired by the promise of what credit unions could be.  He recognized that in the new era of deregulation not all would perform with the same capability.  But working together, the system could position every credit union to be a competitive and valued experience for members.

Imagination was fueled by belief in what the pioneers had envisioned.  While the three current observations above may seem like challenges, they are opportunities to create a better coop system.

Let’s be honest.   Credit unions have always been understood, even trusted, as more than another financial choice.  They represent a member-centric focus dedicated to improving members’ lives and community options.

They are more than a financial institution.  Credit unions at their best represent the common hopes of young and old for a better life and a meaningful role in their chosen community.

The tools for transformative change have been a part of the cooperative model from the beginning.    What is needed is imagination tempered with vision and compassion.

Then indeed, the “sleeping giant” will be truly awakened.

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Credit Unions and Democratic Practice

Credit unions are strong proponents of democratic values.   Until they have to practice them.

I was reminded of this reluctance in a press story of a recent merger approval.  When asked about the vote tally, the credit union did not answer how many of its 9,870 members supported their charter cancellation:

Members of the $137 million Embark Federal Credit Union in Great Falls, Mont., voted to approve a merger with the $1.7 billion Horizon Credit Union, the Spokane Valley, Wash.-based financial cooperative said in a prepared statement Tuesday.

Horizon did not disclose the final vote tally. The credit union did not respond by deadline on Tuesday afternoon to CU Times‘ request for the member vote count.

Reporting the vote outcome, but not the actual numbers, suggests the credit union does not want the totals known.  The credit union provides the veneer of democracy but not the facts of how many member-owners actually participated in this required step to give up their charter.

To paraphrase a term from writer Jared Brock, credit unions have become “cooperative oligarchies.” The word comes from the Greek oligarkhía, meaning  “rule by the few.”

Merriam-Webster ‘s definition:  “a government in which a small group exercises control especially for corrupt and selfish purposes.”

Democracy has rarely been tried by capitalists.  Can credit unions really go against the incessant drive for corporate dominance and consolidation of power sought by firms in “free” market economies?

Many CEO’s and credit union boards don’t want democratic governance. They want silent customers who will passively accept the  leaders who achieved their roles years, or sometimes decades, earlier.

What they ignore is that members are the political constituency to whom  fidelity is owed. Boards and CEO’s are nothing without members.  Members deposit the funds, borrow for loans, pay the fees and generate transactions that keep the credit union revenue flowing.

Member-owners are the reason credit unions exist.
Members keep the lights on.
Members create 100% of the wealth for their cooperative.

One would think it required practice to tell members the vote tally in this management initiated effort to give up their independent credit union charter.  Especially as the CEO was awarded a $100,000 bonus and continued employment at an increased salary with the continuing credit union.

Horizon Credit Union assumes Embarks FCU’s member capital of $14 million, (approximately $1,500 per member).   The members get rhetorical promises about the future.

Is this the democratic model that will sustain members’ belief in credit unions?

 

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Learning from Past Mergers to Design a Stronger Coop Future

Since the NCUA updated its rule for mergers in 2017, almost 1,000 voluntary mergers have been completed.  In the first quarter of 2022, 41 mergers involving 366,000 members and $5.5 billion in assets were announced.

These were overwhelming strong, long-serving successful credit unions whose boards and CEO’s decided to turn their loyal members’ futures over to another firm.

The 2017 rule was intended to correct self-dealing transactions that were prompted by payouts to senior managers and staff to incent sound credit unions to give up their charters.

The rule required disclosure of all compensation related benefits that would not have occurred if the merger had not taken place.   The result has been some, but not all disclosures of promised payments.

The rule has not prevented enrichment, but ironically validated them.  The amounts and creativity of merged CEO payouts are growing.  Financial Center CU’s CEO and Chair transferred $10 million of the credit union’s capital to their private firm incorporated just prior to merger.-all with NCUA pre-approval.  In the merger  of Xceed CU the CEO negotiated a $1.0 million dollar merger bonus while promising members to look after their interest as President of Kinecta FCU for three years-only to leave within six months.

The CEO of Global negotiated a “change of control” clause in his contract that will pay him $875,000 upon merger with Alaska USA.  Change of control is used in stock corporations for managers who might lose their positions in a sale of the firm.  In this case the CEO negotiates the employment clause, seeks out a merger, retains employment post merger as  President, Pacific and International Markets, and pockets the money for the deal whose terms he set up.

The Banking Industry Is Looking at Merger Practices

In a May 9, 2022 speech at Brookings, the Comptroller of the Currency announced a review of bank merger approvals:

From my perspective, the frameworks for analyzing bank mergers need updating. Without enhancements, there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks.

Bank mergers should serve communities, support financial stability and industry resilience, enhance competition, and enable diversity and dynamism of the banking industry. Revisions to the bank merger framework would help to realize this goal.

NCUA’s rule 2017 merger rule was off target.   It did disclose self-enrichment, incentives  which were common place.  But it did not prohibit them..  The rule entirely missed the  Agency’s primary job which to protect members’ interests.

The evidence before and since the rule indicates that managers and boards act without consulting members, negotiate terms privately, and then present the events as final only needing the members’ perfunctory ratification.

Formal member approval is a foregone conclusion.  All of the resources, information and control was in the hands of those who set up the deal.  Members are unable to challenge let alone question the actions.

As members are shut out of the process, the concept of member owned financial institutions becomes a fiction.  Boards and management control the fate of a charter, its resources and relationships.  Members’ interests, loyalty and accumulated wealth are just pawns in management’s efforts to enhance their well-being.

As demonstrated yesterday, the majority of mergers are sound, long-serving and certainly capable of operating on their own.

How does one bring balance, objectivity and most importantly, member interests, to the fore in this increasingly wild west of uninhibited sellouts of cooperatives.

One writer, Denise Wymore,  has urged a greater commitment to purpose by credit union leaders.

Decisions, not conditions, determine your credit union’s future.

Do we look for the why behind a tough situation or do we just complain about it? Increased regulation, cost of technology, economies of scale, expanded products and services, lack of succession planning. Struggling to achieve a goal is normal and natural. Is it possible to work together to address the challenges facing “at risk” credit unions?

You have to find meaning, a purpose, something bigger than yourself. Reflect and think about your credit union’s purpose, passion, meaning…

The Comptroller outlined enhanced regulatory reviews such as:

 “Community feedback on the impact of a proposed merger also is important. . . .For example, for mergers involving larger banks, , the OCC is considering adopting a presumption in favor of holding public meetings.”  and,

“The OCC takes into account an acquiring bank’s CRA rating and performance. Banks with unsatisfactory CRA ratings are highly unlikely to receive merger approval.”  and,

Financial Stability in “too-big-to-manage is a risk with mergers, especially for banks engaged in serial acquisitions.”

Whether NCUA can reassess its role in mergers is questionable.   Unless political pressure from the Congress is exerted, NCUA seems oblivious to the reputational and safety and soundness implications of the wheeling and dealing now occurring, and the harm done to the communities who are losing their local institutions.

Putting Market Forces Back In transactions

I believe two changes in merger policy are required.  The first is make members’ interest the paramount criteria in any proposed charter cancellation via merger.  Secondly members should have the benefit of market forces to inform their decision.

Market choice would entail that all credit unions who decide to explore mergers would announce that intent publicly, invite all parties to express interest (both credit unions and non-credit unions) and then select the option the board believes meets the test of members’ best interest.  The full process would then be presented to the members for their approval or turn down.

The options for future employment, products and services, return of member capital would all be part of the public record and members would have the information needed to make an informed choice.   If a firm that is not selected wants to make a better offer, it would be able to do so and ask the members to turn down the board’s recommendation.

Putting Members Back in Charge

This change would place members in charge of the future of their credit union; not management and its personal preferences for future employment.

Mergers when sought should be a means to the end of enhancing member options and value. Today mergers alone have become the goal.  They are about self-dealing, power and control by a few.   It is time that members are given the choice about who they want in charge of their shares and loans.

 

 

 

 

 

 

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The First Quarter Score: 41 to 0:   Who Is Winning This Game?

This score is not the opening of an NBA playoff game.  It is the number of credit union charters given up versus new charters issued in the first three months of 2022.

What does the score mean?  Why is it so lopsided?  More importantly, are any members winning in these charter closures?

365,700 Members Lose their Credit Union

The 41 credit unions’ CEO’s and boards are transferring their 365,700 members to another credit union’s control.  These members did not choose this fate.  In fact they showed continued loyalty: total members increased by 2% and share grew by almost 11% for the year ended 2021.

These members have $3.3 billion in loans and have placed over $4.7 billion in savings  to benefit their fellow members. Collectively they have created over $540 million in common wealth, none of which will be distributed to them.  Their average ownership is $1,500 each.

There is no information that any of the members were consulted before the boards and CEO’s made these decisions.

Check the Box Explanations

The Credit Union Times article categorized  the 41 by the explanation NCUA provided when approving the  mergers as follows:

“34 credit unions that received the NCUA’s nod to consolidate for expanded services, two credit unions got the OK to merge because of poor financial condition, two for inability to obtain officials, two for lack of sponsor support, and one for loss or decline of field of membership.”

The continued growth in shares, membership and most importantly, the 47% increase in loan originations in 2021 suggest this group was more than competitive based on the latest performance data.  They ended the year with 9.9% net worth, delinquency of .55% and a collective ROA of 1.25%.

These 41 credit unions are sound performers which the members are loyally supporting.

The Largest Three

The three largest charter cancellations are the $2.5 billion Capital Communications FCU, the $612 million Global CU and $524 million People’s Trust FCU.  What they have in common is they are turning over the keys to their operations to credit unions already operating in their communities.

This means these six-decades old institutions are combining with other local credit union competitors.  The effect will be to reduce member choice, end opportunities for local leadership, close career options for employees, and extinguish the generations of earned loyalty and goodwill with members and local constituencies.

These credit union’s  hundreds of millions of collective capital will be under the control of directors the members did not elect and who will have broader corporate goals then just serving the newly acquired members and their transferred wealth.

These combinations eliminate local options and the diversity of models and service approaches that make credit unions successful.  Consolidation and concentration which reduces local competition may make life easier for managers.  It does not enhance member choice.

The most important math in credit union mergers is the 1 + 1 = 1.  There is no expansion of credit union coverage; the system did not grow market share; the members gained no immediate benefits.  But they will pay all the costs of merger including the cancelations of vendor contracts, employee benefits, and of course the help of professions who facilitate the deal making.

A Game without Rules or Umpires

Mergers of sound, well run credit unions are not benefitting members.  Rather they have become a sop for managers to game the system for self-benefit and boards who have lost any sense of fiduciary responsibility.

Writer-commentator Scott Galloway has characterized the motivations for mergers as:

Competition depends on rules, and rules depend on umpires. We should fight to protect competition — not winners. Because winners subvert the process. In the name of competition, they demand that their anticompetitive acts go unpunished. In the name of freedom, they insist on their right to shout down the dissenter’s voice.

His thesis is simple in capitalist economies:   No field sees winners try to retract the ladder behind them more aggressively than business or I might add, the CEO’s of sound merging credit unions.

The primary advantage of the credit union model is the member relationship grounded in democratic ownership.  Their unique advantage is their local knowledge and relationships that provide members a sense of agency over their lives and communities.

That goodwill, built up year by year over generations of members. is sacrificed in mergers.

NCUA requires new charters to survey potential members to demonstrate support, years of financial projections, vetting of proposed board members and employees with a process that takes hundreds of pages of documents and generally years to approve.

To give up a successful coop charter which took generations to succeed, is literally approved in weeks.  The form is perfunctory, there is no effort to validate the reasons given nor the rhetorical promises made.

The credit union system is failing the members who created it by routinely approving consolidations that mimic the activities of institutions for which credit unions were supposed to be an alternative.

At a time when individuals and communities are confronted by forces, events, private and governmental institutions over which they have no say, the credit union is supposed to be an option they  can count on.   Mergers destroy this sense of influence over events in one’s life.

The score this quarter is 41 to 0. At the moment, the members are losing this game.

Tomorrow I will provide some thoughts of others on what might be done.