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.

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.

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)

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.

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?

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.

Lamentations and Aspirations

Contemplation during Tenebrae

How does one retain hope in the face of seemingly contrary system ambitions, apathy for engagement beyond immediate responsibilities, and the all-consuming worship of credit union institutional success? Where is purpose in a time of national agendas dominated by topics such as cannabis legislation, CECL accounting, cybersecurity and secondary capital? How do member circumstances become a priority that supersedes traditional product messaging?

It seems the unceasing focus on credit unions’ performance constantly overwhelms the uplifting of member hopes.

How can cooperative leaders better balance competitive requirements and corporate vision? The resolution may line in a brief phrase from Leonard Cohen, the poet and composer, who wrote:

Ring the bells that still can ring
Forget your perfect offering
There is a crack, a crack in everything
That’s how the light gets in.

Credit Unions in Good Company on Tax Day

Today is tax filing time for consumers and most corporations. State chartered credit unions file Form 990 as a non-profit, exempt from Federal taxes by an IRS ruling.

What do credit unions have in common with the following US corporations? Amazon, IBM, Chevron, Eli Lilly Deere, etc. These companies paid no federal income tax in 2018. These are among sixty large, profitable US corporations on a list compiled by The Center for Public Integrity, which paid no federal income tax. In fact, the group collectively received tax benefits amounting to $4.3 billion that is a negative tax rate!

So, is “good company” a sufficient explanation for the credit union tax exemption? Or should it be good purpose?