Category: Income Equality

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Cooperatives, Credit Cards and Wealth Redistribution

Who pays for your rewards?  That was the question posed by a Federal Reserve study released in December 2022.

Their short answer is “sophisticated individuals profit from reward credit cards at the expense of naive consumers.”

The Federal Reserve study describes this outcome as a redistribution of wealth.  They calculate the result as an “aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.”

The full study is 84 pages, but the Conclusion is on pages 30-31.

“Those Who Know the Least”

How this happens is a replay of the long-standing practice that in American those that have the least, or know he least, pay the most for financial services.

The reason for this redistribution is differences in consumers’ financial management savvy.  The data “show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs.”

The academic work supporting this documented result is summarized in this initial summary:

“Consumers lacking financial sophistication often make costly mistakes.  In the consumer credit card market, such behavior can entail over indebtedness and sub-optimal repayments.

“Banks, in response, can design financial products to exploit these mistakes, combining salient benefits with shrouded payments. Naïve consumers might underestimate these payments and incur costs from usage.

“Sophisticated consumers, in contrast, might rake in the benefits while avoiding the payments and thus profit from usage. Such products can therefore generate an implicit redistribution from naïve to sophisticated consumers and thereby contribute to inequality.”

The Cooperative Challenge

Members need credit and/or debit cards for most routine transactions today.  The study documents the move away from cash payments. Credit cards are the most common way consumers transact daily and then  pay one bill at the end of the charge period.  A credit card is as important as a checking account for every consumer.

Most consumers are attracted by card rewards.  A card with only a low cost line of credit, is a difficult sale against the highly promoted barrage of reward programs.

These reward offers are not just from major banks.  The most popular cards partner with retail, travel and other services or products  to entice users to accumulate points that can be used to pay future purchases.

Cash back “immediate rewards” offer a 1-3% discount on purchases if points are not a consumer’s goal.

The Federal Reserve study shows that these benefit and rewards programs are paid for by consumers who are less adept at managing their finances.  For this user group the card becomes a loan with interest rates in double digits.  This interest income augments interchange fees and is the dominate source of bank card profits.

The Federal reserves describes these differing consumer card management habits as an income  “redistribution from less to more educated, poorer to richer, and high to low minority areas.”

Should Credit Union Card Programs Be Different?

What is a credit union’s responsibility in this wealth transfer process?   Should it not offer any rewards card and just maintain a low, universal borrowing rate for all users?

Members want rewards.  Is the response to develop multiple card programs to appeal to different segments?  Can credit unions really beat the best card offerings by highly visible national programs targeting high income individuals?

The Federal Reserve study documents what issuers implement as the universal profitability model for credit cards–borrowers pay for the benefits of those who do not carry balances.

With rare exceptions, most credit unions in their credit card offerings follow this banking model. Is this redistribution outcome consistent with cooperative purpose?

This is not a question of legality or even equity.   Rather it involves both strategic and values decisions.

If the intent is to serve all members with their diverse needs and circumstances, then marketing efforts will inevitably focus on the largest, strongest and most financially  attractive members.  They have bigger cars, larger mortgages, and higher family incomes.   This tier is every financial institution’s top priority.

To compete for this wealthier segment’s business with competitive loan and savings rates, the rest of the member base must pay more for loans and earn less on savings.  Risk based pricing is one tool used to implement this redistribution.

But is this the card model coops were intended to provide?   I don’t know the answer.  Credit unions were originally formed to serve different segments.   Today the goal for many is to serve the “whole market.”

The wealthy tend to be excellent rate shoppers. The less well-off tend to take what is offered. Is the result of an open-ended market ambition that no segment is served really well?  If so, is such a cooperative strategy sustainable?

 

 

 

 

 

 

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A Compensation Revolution Started by a CEO

Credit unions, corporations and multiple organizations are finding it difficult to fill vacancies. One response is to raise pay for both existing and prospective employees-especially at the lower end of the wage scale.

Some credit unions have announced increases to a $15 minimum starting wage; others have used hiring bonuses or payments for employee referrals.

The majority of these adjustments are at the entry level or bottom of the pay scale.   But is there another way to think about compensation that would start at the top?

What if credit unions were to emulate the example of CEO Dan Price and rethink their approach to pay starting with the CEO?

Reducing the CEO’s Pay from over $1 million to $70,000

Gravity is a  credit card processing and financial services company founded in 2004 by brothers Lucas and Dan Price. The company is headquartered in the Ballard neighborhood of Seattle, Washington and employs 100-200 people, including a branch in Boise, ID. It is a private company and plans to stay that way.

In 2015 CEO Price, now the sole owner, reduced his salary to $70,000 and made that amount the starting annual pay for any employee in the company.   The story went nationwide.   Inc magazine reported the action immediately; there have been follow ups to see the results  into 2021.

The company’s efforts were converted to a Harvard Business School case study.   This January 2018 article summarizes the case and concludes with a link to a 27 minute video in which Price and the Harvard professor discuss the underlying reasons at a Young Presidents Organization meeting.

In an April 13, 2021 twitter post, Price summarized the company’s results since the 2015 change as follows:

Since our $70k min wage was announced 6 years ago today:

 *Our revenue tripled

 *Head count grew 70%

 *Customer base doubled

 *Babies had by staff grew 10x

 *70% of employees paid down debt

 *Homes bought by employees grew 10x

 *401(k) contributions grew 155%

 *Turnover dropped in half

Price says a number of employees earn more than this minimum.  As the sole owner, this aspect of Price’s wealth grows as the company value increases.   He explains his approach and why it upsets many in the private sector:

“I did this as a private business owner. It affected no one but myself (I cut my salary from $1.1M to $70k) – the definition of private enterprise. But what I did was very threatening to them because it disrupts the narrative of “CEOs must be paid 1,000x more than their employee.”

Is there a Credit Union Lesson in This Spirit?

The increase in CEO salaries has continued across credit unions even during the pandemic.  Numerous consulting and trade firms provide data and peer comparisons to ensure CEO’s compensation remain competitive and growing.

What would happen if the whole salary paradigm were turned upside down as Price did at his company?  Gravity is a customer service firm where relationships matter. Price is very important.  Success depends on sales and every employee being an entrepreneur and accountable.

Price acknowledges this approach to compensation is contrary to most economic theory and business models.

He believes that once an employee’s concerns over money worries becomes only the fifth or sixth priority in their lives, more powerful intrinsic motivators will become dominant.  These include mastery of a craft, serving a bigger purpose, and autonomy.

When these characteristics spark employee behavior, then the business outcomes he cites can happen.

What Would Happen If?

Critics point out that the majority of Price’s wealth is in his ownership of the company.  So he can call the play Warren Buffett uses.   Buffett has been paid the same annual salary for the last 40 years-$100,000.

Credit union CEO’s do not have Price’s “stock” appreciation—although a small number have cashed out their positions by negotiating significant special merger payments as their credit union’s final act.

Skeptics point out this model would not work in low pay, low margin, slow growth industries such as food service and mass retail. In these industries robotic solutions and customer self-service are replacing traditional low wage employees converting variable salary expenses to a fixed capital investment.

Price’s response is automation makes the need for creativity, marketing and initiative in the remaining jobs even more critical.

Today a number of credit unions share their success with employees through various gain sharing programs.  These do not change the basic structure of the salary scale.

What would be a cooperative equivalent of this approach to employee motivation, accountability, compensation and organizational success?  Or as Price alluded, would this change be too disruptive of the existing narrative about how credit union CEO’s are compensated?

What would  be credit union member-owners reaction?   How might such a plan influence the way employees talk about the cooperative advantage with members?

Are there examples of credit unions  aligning compensation at all levels following a cooperative approach to this challenge?

I would be glad to share any examples incorporating this innovative spirit.

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A Much Needed Message for today—From 2003

John Herrera’s Wegner award acceptance speech as Chair of the Latino Community Credit Union is as moving and thoughtful today as it was that evening.

In 2003 Latino Community was only $11 million in assets, relying on credit union deposits and just ramping up its loan operations.   But its initial success and impact were already noteworthy.

Herrera’s speech touches a number of important themes:

  • The “family” of supporters-over 20 on stage with him;
  • The Movement has developed an “accent”-an accent on people and community;
  • His staff: they speak five languages, are from 16 countries and routinely work beyond closing hours until everyone is served.

But his two most vital messages, more relevant than ever, start at:

5:00- “Our story is your story”- a shared vision for all persons to have access to affordable financial services;

8:45- “Immigration and the treatment of immigrants”- There are “no illegal human beings.” Immigrants are a critical aspect of America’s democratic enterprise.  The first credit union was created by and for immigrants, who couldn’t speak English.

Here is the full speech, just over 10 minutes with the family of supporters on stage beside him.

https://youtu.be/T9UfOhtljws

Questions for Today

When was the last time you heard a credit union leader speak this movingly about their credit union’s addressing critical economic issues for its members?

When have you witnessed a more concrete example of the movement gathered around a common vision?

Which credit union leader has spoken recently or more eloquently about the role of the immigrant community for America?

Can you identify another time such as this evening, when you were proud to be a part of the credit union movement?

Hopefully this speech reminds us of who credit unions can be at their best;  and whether we are building on the legacy we have been given.

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Jim Blaine’s “Inaugural” Address

As the CEO of America’s second largest credit union for 37 years, Jim Blaine had the unusual skill of translating simple cooperative concepts into profoundly valuable benefits for members.

Every member received the same rate for the same kind of loan.  Believing home ownership was vital to members’ financial security, he designed a 100%, non-conforming first real estate loan for any member with a simple explanation: “Why compete with the government?” (Fannie/Freddie conforming products)

He railed against FICO-determined lending decisions and risk-based loan pricing. This early use of “artificial intelligence” offended his belief in the uniqueness of each person.  Character and judgment, not computer algorithms, should be the basis for granting credit to members.

Words Matter

In addition to steering State Employees North Carolina Credit Union, Jim was a wordsmith.  His blog, and his talks, were audacious, controversial, fun to read and based on core principles.  “Sometimes wrong, but never in doubt” was his tagline. His writing style and graphics were intended so that a reader immediately got the message.

He understood that a leader’s influence was in direct proportion to one’s ability to communicate. To the entire crowd: fellow-believers, opponents, the uninterested and the unwashed, meaning those who corrupted cooperative values for self-interest.

Some of his most scathing and widely read observations were about NCUA, a government agency which believed that its core purpose was to tell credit unions what to do, or not do.  Examiners would constantly challenge Jim’s traditional implementation of credit union purpose.  He would use the agency’s own words and facts to demonstrate the lunacy of their demands.   When he dared to break the code of silence NCUA imposed on examiner ratings and publish his credit union’s score, the regulator wreaked vengeance on the entire North Carolina state-chartered system.

Jim’s most enduring gift to the “movement” may be his writings.  As Churchill stated: “Words are the only thing that lasts forever.”

The Course to Be Pursued

In an inaugural address more than 157 years ago, the speaker gave “a statement of a course to be pursued.” That course concluded with this purpose:  “with charity for all; with firmness in the right, as God gives us to see the right, let us strive on to finish the work we are in; to bind up the nation’s wounds. . .to do all which may achieve and cherish a just and a lasting peace among ourselves. . .”

Lincoln used 722 words in 1864.  Jim’s 503 words address the legacy Lincoln hoped the civil war would resolve.

Jim speaks to the goal of a “lasting peace among ourselves” based on economic fairness and justice, core principles of the cooperative ideal. Diversity, equity, and inclusiveness are matters of the heart, much more than policy; something to practice in your life, rather than just preach.

Jim followed his own drummer when leading his credit union.  I believe these latest words will inspire all and even provoke some to answer his closing call for individual acts of rebellion!

Blaine’s “Inaugural” Address

(March 18, 2021)

“I am truly grateful to the African American Credit Union Coalition for this honor. The organization is remarkably successful and on the rise! I have known many of its leaders for a lifetime and have often sought, and even heeded, their advice! We shared a common bond – a belief in credit unions.

My life has been centered around my family, my wife Jean, and credit unions. Why credit unions? Because I could never accept that in America those who had the least and knew the least should pay the most for financial services. I believe that credit unions were created to correct that injustice. In the words of Thomas Paine – a true revolutionary in all respects – “I have always objected to wealth achieved through the misery and misfortune of others”.

That economic injustice continues to thrive in our financial system today. Credit unions remain the alternative, the best hope, the answer.

We all confront an uncertain future, and many folks would like to rewrite the past. You and I know we cannot change the past. But if we have credit union leaders with integrity, courage and character; we most certainly can reshape the future…but changing the future is very hard work. Arthur Ashe, the great American tennis player, described the credit union leaders we need. Ashe said: “True leadership is not the urge to surpass all others at whatever cost, true leadership is the urge to serve all others at whatever cost.”

One  word of caution as we look to the future and choose our new leaders; let’s make sure that diversity, equity, and inclusion is not a false guide, a false prophet. Can we really tell how diverse a credit union is by looking at the faces of our boards and leaders? Choosing our leaders by their race, their gender or their age is the old way – more of the same. We need a new way for credit unions.

And, the new way is to judge people not by how they look, but by how they think. As a famous preacher – I believe his name was King – said over fifty years ago: “Hopefully my children will be judged by the content of their character.”  Yes, let’s truly diversify and choose leaders based upon the content of their character. That is a more difficult, complex task, but our future depends upon it.

By the way, if you want to get a jump on reshaping the future, try starting a little personal revolution of your own. Next time you are filling out a form and come to the question of “Race?”, drop down to “Other” and write “Human”. When you reach the ethnicity question, drop down to “Other” and write “American”. And of course when you reach the question on “Sex”, drop down to “Other” and simply write in “Yes!”….and the world will begin to change!

Onward and upward – for all!… With the African American Credit Union Coalition leading the way!

Thank you again for this honor.”

 

 

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Are Credit Unions Still Needed? A Chart Worth Many Words

Visual Capitalist is a website (https://www.visualcapitalist.com) that several times a week publishes graphs illustrating current or long-term trends covering many areas of economic, political and human activity.

This week they printed the graph below comparing the economic recovery of high versus low wage earners in America. (https://www.visualcapitalist.com/high-wage-vs-low-wage-economic-recovery-us/)

Their full analysis about this “unequal recession” had two conclusions:

  • The economic recession caused by COVID-19 has been especially devastating for low wage workers
  • While the recession is nearly over for high income earners, fewer than half the jobs lost this spring are back for those making under $20/hr

The Credit Union Opportunity

Within current members and in every credit union’s FOM, this divergence in recovery occurs. How can your credit union reach these members and serve them best as we wait for the pandemic to recede?

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When Vision is Lost: Difficile Est Bonum Esse

America’s character has been forged by both idealism (doing good) and entrepreneurial capitalism (doing well).

Jim Blaine captures these two aspects in his portrait of the Amana Colonies in central Iowa. This Utopian experiment did not last past the second generation. Today the community’s vision is divided into The Amana Society Corporation which controls and manages the businesses. The Amana Church Society now deals with spiritual matters. His blog posed the question whether today’s credit union generation still believes in the movement’s unique purpose.

Stories of Business Idealism

For 40 years USC Business School Professor James O’Toole has studied the ever present challenge of “doing good while doing well” in a capitalist economy. His latest book, number 19, is The Enlightened Capitalists.

It is a collection of stories of business leaders who built success in the market and also shared their firm’s financial gains with their employees and communities. He leads off with Robert Owen (1771-1850> proceeding to current examples such as Ben Cohen (Ben and Jerry’s) and Patagonia. Each is a story of a leader with a vision broader than financial success. These goals include shared ownership, employee education and well-being, environmental consciousness, and community investments.

I looked to see if cooperatives were part of this historical account. Late in the book he summarizes newer forms of organizations designed for more than financial success: benefit corporations, cooperative businesses, employee shared ownership plans (ESOPs), and mutuals. Credit unions get two short paragraphs. The first begins with this sentence, “Then there are credit unions, the most visible and successful form of cooperatives,” and the second ends with, “Again no organizational form is perfect: some credit union executives have taken advantage of their federal charters, accentuating the practical over the idealistic aspects of their businesses by paying themselves egregiously high salaries and even converting their organizations into regular banks to treat themselves to financial windfalls.” (pg. 419) Even credit unions illustrate his theme of vision overtaken by self-interest.

Difficile Est Bonum Esse

O’Toole’s conclusion after reviewing two centuries of multiple organizational efforts to combine financial success and social benefits is: doing good is very hard.

He concludes: “It would require a prodigious degree of optimism that I am incapable of mustering to conclude that the behavior of corporate leaders will change appreciably in the near future. . . my head will not allow my heart to disregard or discount the historical behavior of investors. . . I also find it ethically unacceptable to discourage corporate executives from attempting to buck the odds by adopting enlightened practices.” (pg. 472) He is especially concerned that the ever expanding patterns of outsourcing jobs and the gig economy model will further erode a fair allocation of financial gains for this growing class of “contingent” employees.

Lessons for Credit Unions

Both authors document the challenge of sustaining a reform effort’s original purpose. Innovative design and dedicated leadership can be a foundation. But vision can also be quickly shrunken by the realities of market competition or leadership failure. The factor that can help keep the vision alive is how the beneficiaries of the vision are incorporated in the oversight (governance) process. Is there a sense of us, not me? A bond of common values? Relationships, not just transactional events? Transparency empowering informed choice about the future?

Vision requires interdependence, not just the pursuit of self-interested independence. Both doing well and doing good entail documented plans. It is this joining together, this unity, that keeps credit unions from being sucked into the vortex of market capitalism, the system for which co-ops are to be the antidote.

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Has Anything Changed?

Almost twenty years ago, Callahans had a program of hiring five new college grads annually for the company’s future growth. There was a two week, full-time orientation to introduce the credit union movement and the company’s history before the new employees began a six month rotation among the firm’s operating units.

In the two-week introduction , we would invite a credit union CEO to speak about why they chose a career in credit unions and their vision for cooperatives.

A frequent guest was Jim Blaine, the now retired CEO of State Employees Credit Union in North Carolina. It was and is the 2nd largest credit union in the country.

Jim is a master story teller. He makes his points with directness. He seeks agreement as he goes along. He wants you to share his beliefs.

The Never Ending Credit Union Challenge

Even with all of his distinctive rhetorical skills, the one assertion that stands out for me from his presentations is:

“In America today, those that have the least, or know the least, pay the most for financial services.”

From this factual foundation, he would then describe his business tactics: the non-conforming variable mortgage with every member paying the same rate, no indirect auto loans, a simple savings account, no paid advertising, etc.

While one might debate the tactics, his observation still stands as a challenge for today’s cooperative executives: what are credit unions doing about this persistent market reality for America’s consumers?

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Is America THE Land of Equal Opportunity?

The points in the slide below are from a course on political polarization. The question for credit unions might be how they can address the lack of mobility especially by the lower income quartiles?

Is this a community impact opportunity for cooperatives? How might it be measured?

  • Most people (even most Republicans) believe that the federal government should attempt to increase the equality of opportunity to get ahead.
  • Many people regard the U.S. as “The Land of Opportunity”
  • But many researchers have reached a conclusion that turns conventional wisdom on its head: Americans enjoy less economic mobility than their peers in Canada and much of Western Europe.
  • “It’s becoming conventional wisdom that the U.S. does not have as much mobility as most other advanced countries. I don’t think you’ll find too many people who will argue with that.” *
  • A project led by Markus Jantti, an economist at a Swedish university, found that 42 percent of American men raised in the bottom fifth of incomes stay there as adults. That shows a level of persistent disadvantage much higher than in Denmark (25 percent) and Britain (30 percent) — a country famous for its class constraints.
  • Meanwhile, just 8 percent of American men at the bottom rose to the top fifth. That compares with 12 percent of the British and 14 percent of the Danes.
  • While liberals often complain that the US has unusually large income gaps, many conservatives have argued that the system is fair because mobility is especially high, too: everyone can climb the ladder.
  • Now the evidence suggests that America is not only less equal, but also less mobile.

* Isabel V. Sawhill, an economist at the Brookings Institution

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A. Lincoln on Labor and Capital

A  Labor Day reflection:

In my present position I could scarcely be justified were I to omit raising a warning voice against this approach of returning despotism.

It is not needed nor fitting here that a general argument should be made in favor of popular institutions, but there is one point, with its connections, not so hackneyed as most others, to which I ask a brief attention. It is the effort to place capital on an equal footing with, if not above, labor in the structure of government. It is assumed that labor is available only in connection with capital; that nobody labors unless somebody else, owning capital, somehow by the use of it induces him to labor. This assumed, it is next considered whether it is best that capital shall hire laborers, and thus induce them to work by their own consent, or buy them and drive them to it without their consent. Having proceeded so far, it is naturally concluded that all laborers are either hired laborers or what we call slaves. And further, it is assumed that whoever is once a hired laborer is fixed in that condition for life.

Now there is no such relation between capital and labor as assumed, nor is there any such thing as a free man being fixed for life in the condition of a hired laborer. Both these assumptions are false, and all inferences from them are groundless.

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. . .

Source:  State of the Union Address: Abraham Lincoln (December 3, 1861)

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Learning from the For-Profit Sector: the CEO Pay Ratio

Cooperatives’ unique design uniting the member-owner as the single focus for corporate performance can provide some protections versus the potential conflicts of interests that every public corporation must balance between shareholders and customers. Regulation and rules for public companies are intended to promote this balance. One way this is done is through mandatory public disclosures in annual reports.

These disclosures may also provide insight about how cooperatives can better account for their stewardship of members’ interests.

I will be sharing a series of examples that credit union leaders may consider as we enter the annual member meeting season.

One example is the “CEO Pay Ratio”, a disclosure required of public companies by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This SEC rule requires that the relationship of the median of the total of all annual compensation of all employees be compared to the total annual compensation of the CEO.

The following is the disclosure for the CEO of Southwest Airlines (page 42, 2018 annual report):

  • The total annual compensation of the company’s median employee was $78,494;
  • The total annual compensation of the company’s CEO was $7,726,455; and,
  • The ratio of the total annual compensation of the CEO to the median employee’s total compensation was 98.4 to 1.

Would such a comparison be useful for monitoring credit union CEO compensation trends? For members to have prior to the annual meeting whose primary purpose is to approve the election of the Board which oversees the CEO’s role? Let me know what you think in the comments below.