“I have been accused by some of destroying the common bond, and I will gladly accept blame for that: I don’t believe in the common bond. I believe in a common bond.”
The Versatility of Co-op Designs
On Tuesday November 12th, the largest milk company in the Unites States, Dean Foods, filed for bankruptcy.
Among the contributing factors were too much corporate debt and changing consumer attitudes toward both branded products as well as the traditional dietary recommendation to drink three glasses of milk per day. In 2017 Americans drank 37% less milk than in 1970 according to the Agriculture Department.
The solution to continue providing distribution of dairy products according to newspaper accounts is “to sell itself to Dairy Farmers of America, a marketing cooperative that sells milk from thousands of farmers.”
This situation illustrates the ability of persons and firms affected by the market conditions can potentially ally via a cooperative to address changing circumstances for mutual benefit.
A Lesson for Credit Unions
What can credit unions learn from this example? When the taxi medallion crisis arose, credit unions were best positioned to help borrowers transition to the new, lower valuations. But these options were stopped as NCUA liquidated the credit unions experienced in these kinds of transition problems. Without a firm that can renegotiate and continue to serve these borrowers, the only option is to force collections even if this causes member bankruptcies.
Meanwhile Uber reported a $1.2 billion loss in the third quarter.
It is forecasting a profit sometime in 2021 as it runs through investor capital. The taxi industry will adapt, just without credit union participation.
“ED” Talks for Credit Unions: Cooperative Ideas Worth Spreading
TED talks are a relatively new learning paradigm. Not only have these presentations expanded in both depth and breadth, but they have even become the curriculum for educational courses.
As described on their home page, TED is a nonprofit devoted to spreading ideas, usually in the form of short, powerful talks (18 minutes or less). TED began in 1984 as a conference where technology, entertainment and design converged, and today covers almost all topics — from science to business to global issues — in more than 100 languages.
Its mission is simple: to spread ideas. “We believe passionately in the power of ideas to change attitudes, lives and, ultimately, the world. On TED.com, we’re building a clearinghouse of free knowledge from the world’s most inspired thinkers — and a community of curious souls to engage with ideas and each other.”
ED Talks: a Clearing House for Cooperative Thinkers
I believe there is a parallel opportunity for such a resource in the credit union cooperative community. We have both a wealth of current leaders and historical examples that can be shared to educate and inspire change similar to the TED exchanges.
An “ED” Talk: Choice and Credit Union Success
In June 1986, the savings and loan crisis was beginning to emerge into a full blown industry debacle. Among the first causalities were the private insurance options available in several states (Ohio, Rhode Island) for mutual S&Ls. The closing of these funds led to concerns about the multiple private insurance options for credit unions.
In this environment of fear, Ed Callahan spoke to the summer leadership conference of the Association of Credit Union League Executives (ACULE).
He asserted that the five years of unparalleled success since deregulation proved credit unions had created the best financial system in the country. But there was a threat.
The industry’s success was based on choices. That vital characteristic was being undermined by “panic” and a failure of leadership.
Listen to this two-minute excerpt in which he makes the case with passion and logic for why choice is central to cooperative performance.
Best System:
The Insight for Today
Throughout credit union history there have been efforts to create single source solutions. Examples include state leagues, a one-stop option for required fidelity bonds, and a dominant service bureau data processing company (CUNADATA). It is easy to confuse a single, uniform solution as the best way to achieve cooperative system.
Ed states the years of success years after deregulation enhanced choice by opening up options that are now threatened by a monopoly share insurer.
His concern about no choice of a share insurer except the NCUSIF, is certainly as critical today as 35 years ago. For if this logic continues to prevail in credit union land and beyond, a potential next easy move is to have just one federal insurer called the FDIC.
While his example was share insurance, the message would be the same for all areas of credit union solutions. For choice to be sustained, leaders will have to be willing to support options even when their own organizations may not have chosen that path.
P.s. If you have an idea to share for your own “ED” talk, please send it to me at chipfilson.com.
What Deregulation Means
The Myth of Efficiency and the Allure of Scale
Supporting most mergers and more recently, bank purchases, is a belief in the importance of getting bigger.
The assumption is that size creates scale resulting in greater efficiency. But the assumption is much less compelling if one were to look at the operating expense or efficiency ratios of the set of credit unions over $ 1 billion. Both ratios are all over the map for the largest credit unions.
The wrong focus?
Efficiency is not unimportant, but it is only a part of the performance requirements needed in a competitive organization.
Today’s financial, economic and competitive uncertainty rewards the ability to traverse the unexpected and the unknown. An efficiency orientation can undercut the ability to adapt and respond to ever changing events.
Where should the emphasis be?
If efficiency can hinder progress, what is the skill set needed by management to succeed? Dealing with new circumstances requires creativity and courage, that is a team that trusts each other.
Technology and especially artificial intelligence applications can force a standardized solution on individual circumstances, that while efficient, may strip a process of its most critical component, human skills and empathy.
When I speak with CEOs with long running, superior track records, they often describe a people centered, process approach, to building their credit union. The priority can be member service, trust or another form of member advocacy or empathy.
This core management process is then reinforced with metrics shared with the entire team.
Member relationships drive scale, not efficiency
The outcome these CEOs single out is “productivity” often measured by average member share and loan relationships, not efficiency. For member relationships are the underlying factor that brings “efficiency” no matter the scale or size of a credit union’s balance sheet.
Top 100 US Co-ops Generated $222 Billion in 2018 Revenue
Each year the National Cooperative Bank compiles the top 100 US co-ops by total revenue. The listing for 2019 is here.
Several observations:
- The top three serve the farming sector. Co-ops serving agriculture dominate the list.
- Five credit unions are in the top 100 along with three other financial co-ops.
- The co-op at number 99, NFO, Inc. lists only $27 million in assets but generated $535 million revenue
- The Associated Press is the 100th largest co-op and the only co-op under communications.
Not Covered by Mainstream Business Media
Often co-ops fly under the business reporting news sources. No stock price to follow. Few opportunities to buy or sell. As member-owned and focused, there is less “public interest” in their performance and role.
They are most often referenced when they are doing something extraordinary as in a 60 Minutes Report on Land O Lakes, the second largest co-op by revenue. The CBS report provides an illuminating insight into the power of cooperative design and innovation, and its vital role supporting American farmers in a year when over 50% farms are expected to lose money.
The Real Capital Powering Credit Unions
In a recent podcast interview by Robert McGarvey, CEO Randy Karnes summarizes CU*Answers’ approach to strategy. On more than a dozen business issues from culture to market analysis, his concise insights are extraordinary.
At a time when supplemental capital for credit unions is a topic of regulatory review and wide industry interest, his comments on the CUSO’s approach to financial soundness, especially capital planning, are especially relevant.
As he explains, for his CUSO patronage by the owners is more valuable than dollars of capital. The reason is that patronage is “belief, persistence and cash flow.” Capital dollars have to be paid back. Patronage sustains and grows.
The Message for Credit Unions
All of the proposed approaches to supplemental capital will need to be paid back. The real “capital” that has been the source for all credit union’s soundness from day one is the member relationship. Member loyalty, use and trust are the patronage that sustains viability even if net worth ratios fall below well-capitalized.
The reason for 208 assistance in the FCU Act is to allow members to “recapitalize” their credit union over time through their patronage. When PCA or other supervisory actions prevent members and management from recovering from setbacks, the fundamental strength of the cooperative model is compromised.
Almost all credit unions active today, were founded without financial capital. Their financial success is created over years or even decades of member participation.
When the success or status of a credit union is measured by only financial yardsticks, sooner or later, that framework will be found wanting. It overlooks the fundamental difference between a member-owner cooperative and a for-profit financial alternative.
The message for credit unions from this CUSO’s 50-year history may be that all financial capital is supplemental. Longevity requires relationships. That is the cooperative difference and unmatchable advantage.
To listen to Randy’s 34 minute interview by Robert McGarvey’s CU 2.0 Podcast , Episode 47, visit: https://www.buzzsprout.com/268738/1513849-cu-2-0-podcast-episode-47-randy-karnes-cu-answers-for-small-credit-unions
Strategy: How Important is Scale?
A common assumption by many working in credit unions is that scale, that is increasing a credit union’s balance sheet size, is critical to competitiveness, and therefore survival. As one CEO wrote: “Given our market and community field of membership, we believe scale is more important than ever.”
Facts versus Truth
This belief in “scale economies” is often supported by citing average financial performance by peer group size. These averages do show that larger credit unions tend to grow both members and assets faster than smaller ones. Also, they generally operate with lower expense ratios, larger dividend payouts, and generally higher ROA’s and loan to share ratios.
However even within the same peer group (over $1 billion in assets) there is a wide variation in these ratios. Becoming larger does not automatically create these outcomes.
The logic that data confirms the necessity for scale, does not hold true across all situations. Facts alone may not reveal underlying truths about successful cooperative performance.
Moreover, the facts used may rely on an assumption or mindset, that itself is debatable.
The Scarcity Mindset
Scale matters in a competitive market, some argue, because it can lead to larger market share and therefore greater economic power.
Scale is achieved by growth, that often means out running competitors. This can be done organically or more recently, by some credit unions soliciting mergers or buying out bank competitors.
Growth thus becomes the primary objective, if not the mission of the credit union. It is driven by an assumption of limited resources (or members) and that an institution must get their “share” before someone else takes it away.
I call this the “scarcity mindset” myth. Credit unions think of strategy as a struggle to get more and more, and can never slow down, because ultimate scale is always unreachable. The end point keeps growing from $100 million, to $1 billion to $10 billion in assets. No asset size is ever enough.
The Cooperative Abundance Assumption
Credit union were founded on belief in the power and resources of community. That by working together we can mobilize savers (those with more) to help borrowers (those with less).
By institutionalizing this process, members become empowered and the well-being of all is improved. It is not the amount of resources that matter, but rather how they are managed for the common welfare.
This approach created by self-help and collaboration rests on the assumption of abundance. Credit unions are motivated by relationships and mission. This focus creates trust that underwrites the inevitable cycles of economic fortune that will occur either individually or organizationally.
Instead of a scarcity mindset that focuses on getting whatever one can to grow an institution, credit union design rests on a belief in commerce organized around neighborliness and community. In my individual capacity, I may not have what I need; but in my collective contributions, there is enough for all.
A Fork in the Strategic Road
The vast majority of credit unions have never had a major merger. Most credit unions do not seek to buy out their financial competitors.
However, there is a commercial motivation promulgated by self-interested brokers, consultants and growth-oriented CEO’s and boards that assert survival depends on outmaneuvering the competition through size. This market driven ideology of institutional success subverts the cooperative focus on purpose.
The cooperative model was created to give member-owners the opportunity to create and manage their own financial options in a market dominated by firms that make a profit from relationships.
The cooperative goal is to transform individual options and bring the resources of like-minded persons to build an institution using the resources available, that is a belief in an “economy of abundance.”
The credit union approach is sustained by a community of shared values, not just more plentiful resources.
Questions to Consider
As boards consider strategy, it may be helpful to ask the following:
- How do we measure our scale, if that is an objective: institutional outcomes or member relationships?
- Is our motivation for growth from fear or confidence? If it is fear from uncertainty, will we survive by doubling down on the familiar?
- If scale is critical, what is the plateau we are aiming for? How is it determined?
As I look across the multiple examples of success among all credit union asset groups, I note that those who possess less are less possessed by motives for scale. And instead of intending to be sustained by their savings from scale, they rely instead on the member’s trust and loyalty.
Why the Appeals Court Ruling on NCUA’s FOM Rule Is Irrelevant
According to the US Census Bureau’s population clock, the estimated 2018 United States population (February 2018) is 327.16 million.
This is a bit lower than the 329.06 million estimated by the United Nations.
As reported in Pentagon FCU’s June 30, 2019 quarterly call report, every one in the US is eligible to become a member. The data submitted by the credit union is as follows:
| MISCELLANEOUS INFORMATION | NUMBER | ACCT |
|---|---|---|
| 2. Number of current members (not number of accounts) | 1,788,610 | 083 |
| 3. Number of potential members | 329,152,485 | 084 |
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.