Category: Cooperative Design

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When Credit Unions Aligned with Communities of Faith for Social Progress

Catholic Energies is a non-profit, five-person organization that helps churches and schools convert to solar energy. Based in the District, the key capability they offer is collaboration with church owned properties, solar companies and investors seeking solar tax credits

In D.C. the group worked with the Catholic Charities of the Archdiocese of Washington to build a solar array on a church owned field that will light 260 homes by feeding into the local power grid. The energy credits will offset the costs of electricity across twelve of the charities’ properties in the district.

Catholic Energies is a subgroup of the non-profit Catholic Climate Covenant. This national initiative was launched to educate and engage US Catholics in caring for the environment. The sub group, Catholic Energies, was also responding to Pope Francis’ release in 2015 of Laudate Si, which argued for partnerships between religion and science to respond to climate change.

A Credit Union Social Action Precedent

The Catholic church’s involvement in issues of social progress embraced the credit union movement in the past. According to an article in the Grand Rapids Press from December 20, 1926, the National Catholic Welfare Conference intends to establish “a nationwide system of credit unions to lend money to wage earners. These short term loans will be extended to the 36 states with credit union laws.”

The article described the “parish credit union as a cooperative savings and loan society. Depositors buy shares at the par value, usually $5, and get a 6% a year interest. The capital thus obtained is loaned out at 8%.”

To understand the importance of this organizational effort, one need scan an alphabetical listing in any state in the following 50 years to see all the credit unions starting with “St.” followed by the parish name. In Massachusetts today there are still nine credit unions listed by parish names.

And like solar energy today, this effort had formal church support. Fr. Otto Thiel wrote an article in the December 1941 issue of Franciscan Studies explaining the church’s involvement.

It begins: “The religious and economic are the two predominant influences which have moulded man’s character and the world’s history. Religious motives are more intense than economic, but their direct actions seldom extends over so large a part of life (as do the economic ones).” After surveying the history of pawnbrokers or usurers to meet the economic needs of people of small means, he continues, “a way was discovered by which honest and responsible working people could supply themselves credit from within their own ranks. That discovery properly marked the origins of the movement which has produced the credit union of our day. . . It is neither a purely charitable nor a mere business organization, but one of self-help or co-operation. Its origins might be traced back to the Mons Pietatis of the later Middle ages, an organization to provide credit facilities for poor borrowers.”

More Than Catholics

Even prior to this national effort, other faiths promoted the credit union solution. In the January 1920 Annals of the American Academy of Political and Social Science, an article described multiple efforts to create new thrift organizations to serve the needs of both rural and urban borrowers.

As reported in the article The New American Thrift Loan: “According to the latest report of the Jewish Agricultural and Industrial Aid Society, several of the rural credit unions in New York have been obliged to wind up their affairs. In place of the eight credit unions among farmers reported in 1916, only three now exist. . . and no mention is made regarding the present status of credit unions among Jewish farmers in the states of Connecticut and Massachusetts. “

A Current Day Example

In June I met Greg Truex, the manager of the two year old, $16 million ELCA FCU. It is remarkably successful as a new startup relying on a largely virtual operating model. The credit union is sponsored by Evangelical Lutheran Church in America. The mission statement : God’s Work. Our Hands.

To succeed credit unions need more than capital. The hundreds if not thousands of credit unions sponsored by religious organizations, show the importance of both purpose and collaboration. And that heritage is still an invaluable coop advantage in today’s ever more crowded financial arena.

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A Modest Proposal for Secondary Capital

NCUA’s June delay in implementing a new risk based capital (RBC) rule was in part explained by the need to examine whether a secondary capital option should be part of the new capital model.

Cooperative design and history suggest there is an immediate and straightforward additional capital option. This solution can be implemented regardless of the outcome of the RBC discussions.

The 1934 Federal Credit Union Act mandated that the par value “shall be $5 per share,” an amount in the law based on twenty five years of state-chartered credit union practice.

Credit unions had no share insurance funds, state or federal, until the 1970s.  Prior to that all member shares were at risk, that is equity for the institution.   An ongoing consequence of this financial structure, even in the era of deregulation, is that credit union shares are second in payment priority in event of liquidation to all other liabilities. This means that third party lenders to credit unions, such as the FHLB system or banks, know that equity is more than a credit union’s retained earnings. In the event of failure, the insurance fund must pay lenders’ outstanding loans ahead of shares.

The $5 Par Share Value Today

The historical par value of  $5 was often purchased on an installment plan, for example,  25 cents a week. This par value, now a variable amount, was the foundation for all funding and was at risk should the credit union not succeed.  Virtually all FCUs and state charters still active today, were financed with this membership shares-at-risk model. This shared fate meant that the cooperative model was indeed based on common values and purpose.

The value of the $5 initial member share purchase requirement today depends on which index one uses to analyze changes in economic value.   There are at least seven choices from the consumer price index to various efforts that track the cost of labor, to nominal GDP per capita. The range of results from these various indexes shows that the value of the $5 share in 1934 would range from $62.70 (CPI) to $373 (GDP per capita) in 2019.

Reengaging Members in the Cooperative Model

The option to ask members to purchase one at risk (uninsured) capital share with specified minimum par value would provide additional equity but more importantly signify once again the uniqueness of the cooperative model. It would be available only to members, limited in individual amounts, and subject to terms and conditions set by the boards.

There is no need to invent multiple plans for secondary capital sold to third parties creating a potential conflict with member’s returns. Instead the original design that successfully launched tens of thousands of charters could become today’s solution for capital flexibility when that is in the members’ best interest.

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The Greatest Generation: What They Did for Credit Unions

Tom Brokaw’s characterization of my parent’s generation as the “greatest” is recalled every time a WWII commemoration is presented.

But as the recent celebration of the 75th Anniversary of D-Day is overwhelmed by present events, it is important to remember another vital contribution this same generation made when not fighting a world war.

Children and young adults born of Depression-era parents, also accelerated a self-help movement for economic democracy that continues to thrive today. It is the $1.5 trillion cooperative credit union system which counts almost a third of Americans as member-owners.

The seeds were laid from 1909 to 1934 in states that passed over 25 laws authorizing cooperative charters. That pioneering “proof of concept” provided the credibility to pass the Federal Credit Union Act in 1934. Now credit unions could be formed anywhere in the country.

A Chartering Tsunami

What happened next is as dramatic a change as occurred in any post-war industry in America. For with the encouragement of the Bureau of Credit Unions housed in a small niche of the Department of Agriculture, the credit union option flooded across the US.

From a first-year total in 1934 of 78 new credit unions, the total of active federal charters peaked in 1970 at 12,977. Except for the war years of 1943-45, the net growth of new charters was 300-400 per year, with a high point of 852 new credit unions in 1954.

By 1970 the total of all credit unions was 23,687 of which 10,132 were state-chartered.

How could this dramatic expansion in just one generation have taken place?

Two Who Helped Build the System

Just as the war years produced leaders and heroes, so also did this national chartering effort by those fighting for consumer choice in a financial service industry dominated by for-profit firms.

Many factors aided the dramatic growth of cooperative charters: the need for consumer credit, the support of employer-sponsors, the creation of support organizations for the credit union system, and the post-war economic boom. However, these favorable circumstances still needed cooperative entrepreneurs.

One of Those Was Louise McCarren Herring (1909-1987)

I first met Louise while at NCUA in 1982 where she was escorted by Sam Rizzo, the President of the National Deposit Guarantee Association (now called ASI), a cooperative state-chartered insurance alternative to the NCUSIF.

Her stories about participating in the founding of CUNA in Estes Park, Colorado in 1934 were memorable as she was sole living participant from that event.

But more significant than being present at the beginning, was her role in chartering hundreds of credit unions throughout the state of Ohio, including 17 within the Kroger Company’s grocery store chain  where she had found her first job.

Louise’s contributions were more than chartering. She helped create organizations that were essential to the growth of the emerging credit union support system including leagues, centrals, and alternative deposit insurance. She was an ardent supporter of choice and dual chartering.

Her passion for cooperatives was unabated late in life. She believed everyone should have an opportunity to belong to a credit union. During deregulation when credit unions were arguing whether credit unions could have member overlaps, she defended the opening of the charter and the importance of serving entire communities with the logic: Poverty is not a common bond.

The Organizer

Lance Barden (1896-1967) helped organize 400 to 500 credit unions. After WWI service and college, he joined the US Farm Credit Administration (FCA) in Berkley, Calif. While there he formed a credit union for the employees and served as both manager and treasurer.

A year and a half later he was appointed federal credit union organizer in the FCA’s credit union section for northern California.

In the book The California Story, his wife describes his work as a credit union organizer. “Our entire lives were wrapped up in credit unions. Even our weekends; managers of small credit unions would visit us regularly on Sunday afternoons and Lance taught them bookkeeping and accounting.’’

Lance was sent to Hawaii in 1936 to continue credit union organizing. The plan was to stay two weeks and start a half dozen or so. Instead he stayed the entire winter and organized close to a hundred.

He also helped to form leagues in California and Hawaii. His work became a family vocation and commitment. His son and daughter became credit union CEOs. His granddaughter Sue Longson became CEO of a credit union in her teens and continues as a consultant today.

Lance’s example of hard work, sharing firsthand experiences and an exceptional commitment to the cooperative model demonstrates what one government employee can accomplish. While verifying specific numbers of new charters is difficult, what is clear is that whatever the final count, he helped to found more credit unions than NCUA has chartered in all the years since 1985.

Lance’s wife told a story that illustrates Lance’s belief in the credit union model. When he organized a new credit union, he would ask for the money right on the spot. “Right then and there. There was one time a very poor man had just died. The credit union didn’t even have its books setup, but Lance lent the first nickel he collected to the man’s family for his funeral.” He always said, “When you give your money to a credit union, it will be put to good use immediately.”

The Greatest Generation’s Gift to Us

This phase of credit union history is about more than new organizations and building organizational support. Lance and Louise’s contribution was more than hundreds of new charters. What they “paid forward” was a set of values along with institutions to sustain those ideals.

Recent events have shown how cooperative institutions can be quickly and quietly merged or closed.  The loyalty of generations lost.. Objective accomplishments are overlooked.. Shared values are the foundation that sustains cooperatives.

The greatest generation paid forward an enormous legacy for their children  Can we maintain and extend this inheritance?. Should  we aspire to do anything less?

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Credit Unions and Farming: What we can learn about business sustainability

Clichés are frequently based on an element of fact. But that does not mean they are the truth.

One of the most persistent clichés that drives credit union thinking is that bigger is better. That is, only credit unions with $10 million or $100 million or a $ 1 billion in assets will survive. The consequence of this assertion is that many viable, well-run and long-serving credit unions believe their only future is to merge.

The truth is the cooperative model fits all sizes but especially smaller, niche players. Locally managed, focused, relationship-based financial institutions are needed in large and small communities across America. All credit unions start small, some grow and many remain “undersized” versus the largest few. Size doesn’t determine viability. Rather it is leadership’s understanding of the their business model that creates sustainability.

Living in a small farming community

Several recent conversations about farming and the minimum amount of acres needed to make a living echoed this size fixation in credit unions.

Certainly “conventional” or industrial agricultural models dominate farming in America today. A college classmate recently lamented that the 160 acres of southern Illinois farmland his family inherited was just not financially viable. “We would have to have at least 1,000 acres to make a real profit,” he asserted.

In grades one through four, I lived on a five acre farm outside Divernon, Illinois; a town of just over 1,000 population, about 20 miles from Springfield, the state capital.

We had three ponies, played cowboys and Indians all summer long with our homemade bows and arrows from the stand of poplar trees. Every morning my older sister would milk the cows by hand, my mom would pasteurize and bottle the milk and my dad deliver into town. We raised fruits and vegetables which we sold on the roadside in all growing seasons. We bred and raised our own pigs and several times a year would send a hog to be butchered for meat. We kept the meat supply in a frozen locker in town. The rabbits we raised were for eating, rolled in flour and pan fried just like chicken.

My dad wanted to be a farmer and buy more land but America was literally feeding the world in the 1950s. Five acres provided a rich experience, as long as we understood the best way to use our limited resources.

Community Supported Agriculture

Last month I visited Caledonia, Michigan (pop 1,600) for dinner. As we walked down the two block main street I saw a Schuler Farms poster in a store window selling “shares.” The business offer was full shares for $600 or half shares for $400. This Community Supported Agriculture (CSA) farm model is described as a “micro farm with vision and planning:” I went to the web site for more information.

A CSA honors a commitment between the farmer and the share holders. The members pay the grower in advance for a weekly share of the harvest. The shareholder receives a crate of fresh, local, naturally grown produce from a source they know and love.

The 2019 Membership Agreement reads in part:

In the community supported farm structure, every member of the relationship benefits, the share-holders, the farmers, the farms (the earth), and the greater community.

Each member will receive a weekly share of organically grown gourmet produce, that varies throughout the growing season. The product is expected to be available by mid-May and end in October. We farm with all natural organic methods . . . Our vegetable selections are for the most part based on taste and experience with various varieties, as well as trying new varieties all the time. . . .

Our plan is to start small and develop a core group of members that buy into our philosophy and quality. We are looking for families who have a high vegetable intake, culinary skills, and the time to prepare the food and eat within the season.

This locally focused farm model has become more relevant as a broader change is occurring for direct distribution of farmer’s crops. Since 1994, the number of farmers markets has grown from 1,755 to over 8,700 today. Communities large and small are supporting the need for fresh and local produce.

My current hometown Bethesda, MD has a cooperative Women’s Farm Market where Jean Paul sells plantings and vegetables from his 43 acre farm three days a week.

I believe this growing model of local farming has direct meaning for credit unions.

The diversity of credit union size is a source of system strength. Some small credit unions today will be the seed corn for larger ones in the future. But not all firms or farms can be large scale-whatever size that might mean. Credit unions of any size work well when they focus on the needs of their member shareholders. When that connection gets lost, then scale cannot replace relevance and relationship.

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Venture Capital Approaches to FinTech Investing

At the April FDIC sponsored conference on FinTech, a panel of three venture capitalists discussed how they evaluated their investments in this area.

The first firm said they look for opportunity that supports an already existing capital commitment. That is, they prefer that fintech’s partner with established firms to make their services better.

This approach requires a “partnering mindset.” This means knowing a real problem to solve that is scalable and could become an industry standard.

An example of this approach was the potential to transition in credit underwriting decisions from local “soft” knowledge to “hard” information, that is, how I type in my web browser.

A second speaker said their approach was about the “perimeter” of financial services. Was it best to be a “landlord” offering all lines of business? Or is it better to be best in class and then integrate across different financial “verticals.” The example given was the evolution of Credit Karma’s business model.

The third approach was data-centric. The firm looks at investments where there is a data cluster (generic or proprietary) and an algorithm (AI process) to analyze the information for solutions. The ideal business opportunity is generic algorithm on top of a proprietary database.

The three questions the venture funds would use to evaluate a pitch are:

  1. Are you an expert in the problem? If so, what would a customer, with the problem, say about your solution? Go and ask.
  2. Is your business model credible: what is the quality and speed of the product launch? Is it scalable? What are your sales and market skills?
  3. Can you distinguish between a differential “promise” and differential “execution”? The firms want both to be present.

As a cooperative member, my question was whether credit unions should develop and own their own fintech innovations, or whether they should buy or partner with others where they do not own the intellectual property? How that question is answered, would determine how one works with new startups.

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The Source of Credit Union Greatness

“Cooperation made the movement great. Yet many do not realize that there are still as many ways to cooperate as there were in the past. . . what I mean is going beyond the attending of meetings and sharing of ideas, but instead pooling of resources, mainly in the form of CUSO’s.”

(Ed Callahan April 1988, Callahan Report)

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E Pluribus Unum or the Reverse?

“Out of many, one” is the motto of the United states. The many states joining to form one union.

This is often how we approach any project, piece by piece, brick by brick, member by member.

Yet cooperative design rests on a different premise.  From a place of community (later called field of membership), the credit union emerges to serve individual needs.

Community is the foundation of cooperative design. Even as individual credit unions become financially self sufficient (post sponsor era), and accountable for their individual performance, sustainability requires continuing to create a sense of community. This may be geographic, values based, common employment or even shared purpose.

A shared commonality is the key to maintaining member relationships, which are the real capital on which every credit union depends.

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Why Financial Disruption is an Attractive Fintech Opportunity

Many factors are powering the multiple fintech startups in the financial sector.

The advantages of internet-based platforms are clear: low startup costs, rapid and continuing market responsiveness, easy scalability, preferred channel for younger demographics just entering markets, etc.

An example of the fintech ecosystem’s many segments can be read here.

But another reason financial services are subject to such extensive external disruptive efforts is that the barriers to entry for traditional charters are enormous. New charters for both banks and credit unions are costly, time consuming and closely monitored.

As a result, de novo charters are few and far between. Five new CU charters have been approved by NCUA in the last decade. The average organizational effort is more than four years, and often longer.

For cooperatives, incumbent credit unions are protected from new entrants by a massive regulatory chartering obstacle that effectively prevents new competitors, no matter how much needed by organizers.

However, if one looks at the number of new and innovative CUSO startups by credit unions, the appetite for innovation and new solutions is clearly understood. But without an openness to new charters, these ventures will be outside the traditional charter structure. While that may be a necessary short-term path for innovation, is that approach hindering a credit union’s ability to change themselves?

Outsourcing technology innovation and solutions to new organizations is expedient. But will it stymie more dynamic and necessary approaches in traditional credit union operations and services?

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A Strategic Paradox?

Frank Diekman, founder of CUToday.info, recently posed this question: As credit unions continue to get larger, are members getting smaller?

How would you respond if a member asked this of your credit union? Let me know in the comments below.