Credit Unions and the Evolution of “Buy Now Pay Later” Lending

In 1961 Hillel Black published a book Buy Now, Pay Later to expose the misleading interest rate disclosures of lending firms fueling the “explosion of consumer debt.”

As a reporter her purpose was to “investigate in human terms the breadth of meaning of debt living; what it is doing to all of us in concert and how it affects out individual lives and the lives of our children.”

The Introduction by Senator Paul Douglas, Chairman of the Senate Banking Committee sets the scene: “Today personal debt is edging close to $200 billion; mortgage debt is approximately $140 billion, and consumer debt is about $25 billion. Various devices are used to conceal from the consumer what he is required to pay.”

Senator Douglas was a fan of credit unions: “As a borrower from most credit unions, the consumer does receive the true interest rate.”

The chapter titles of Black’s book, set the tone: Enter the Debt Merchants, The Rub in Aladdin’s Lamp, The Shark Has Pearly Teeth, The Car You Buy Is Not Your Own.

She closes with an endorsement of credit unions with their 12% maximum annual interest, 20,000 institutions and eleven million members covering roughly 6% of the population. Her ending plea: “Let it not be said that America, in the midst of plenty, suffered its citizens to become a nation of indentured debtors.”

Six Decades Later

I was drawn to the book by its title and the endorsement of credit unions. CUNA reprinted Black’s article, Buying Credit Wisely, in the NEA Journal of May 1966 promoting credit unions as the preferred consumer borrowing option.

Last week the CFPB presented a 25 page report which profiles the users of today’s Buy Now Pay Later (BNPL), a newly defined consumer financing practice.

It is a study which profiles the borrowing patterns, demographics and credit scores of BNPL users versus a group of non-BNBL customers from survey responses and credit reports.

The study describes the product: BNPL refers exclusively to the zero-interest, pay-in-four (or fewer) installment loan that facilitates purchases at the point of sale.

These credit products differ from traditional installment loans in important ways: the average loan amount is $135 over six weeks compared to $800 for traditional installment loans over a period of 8-9 months; and BNPL is offered at zero percent interest, while traditional installment loans often carry a positive interest rate.

And its growing usage: In the period 2019 and 2021, the number of BNPL loans issued to consumers increased by almost tenfold. Between the first quarter of 2021 and the first quarter of 2022, seventeen percent of consumers borrowed using BNPL.

One finding: Some groups were much more likely than others to borrow using BNPL. In particular, Black, Hispanic and female consumers had a much higher probability of use compared to the average, as did consumers with annual household income between $20,001-$50,000 and consumers under the age of 35.

CFPB Study’s Conclusions

While many BNPL borrowers who we observed used the product without any noticeable indications of financial stress, BNPL borrowers were, on average, much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products, and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers. . .

Further, contrary to the widespread misconception, BNPL borrowers generally have access to traditional forms of credit. In fact, they were more likely to borrow using credit and retail cards, personal loans, student debt, and auto loans compared to non-BNPL borrowers.

Finally, the report estimates that a majority of BNPL borrowers would face credit card interest rates between 19 and 23 percent annually if they had chosen to make their purchase using a credit card. . .

Sixty Years Later

Consumer borrowing is an even larger part of America’s financial structure than in 1961. Consumer spending accounts for 75-80% of the country’s GDP.

The problem of disguised interest rates was resolved with Congress’ Truth in Lending legislation passed in the late 1970’s.

Borrowing options proliferate today. Many new lending offerings are tied into consumer product sales such as Macy’s or Apple’s credit card promotions.

Credit unions rode this consumer borrowing boom into the present. They have been seen as the trusted source of fair loan value.

However, the playing field for lending is now level in regards to loan pricing disclosures. Competition is increasingly focused on other forms of value creation.

The surprise for me in the CFPB update, is that for some (many?) consumers the BNPL was for a majority a much better choice for borrowing than traditional credit cards or other forms of debt.

Will the allure of so-called free borrowing promote greater spending? It is too soon to know all of the consequences.

What this BNPL history suggests is that market forces can, when the rules of the road are uniform, correct some of the original predatory practices chronicled in the first Buy Now Pay Later report.

That is one outcome deregulation was intended to accomplish.

March 7, 2023March 7, 2023

Staying In One’s Lane

The new year has opened with a number of reassessments of business priorities decided prior to the rise in rates. The era of free money is over. Also TINA, the belief that there is no alternative kinds of novel investment decisions.

An example of a foray into a new lane is told in an article, Paradise Lost, Why Goldman’s Consumer Ambitions Failed.

The story in brief. In 2014 as a means to further its long term growth objectives and participate in the emerging fintech sector Goldman’s leaders decided to transform the Wall street investment bank into a main street player. Despite its success in corporate finance, advising heads of state and serving the uber-wealthy, it had no consumer finance presence.

In 2016 it launched Marcus (the first name of Goldman’s founder), and quickly attracted $50 billion in online deposits and an emerging consumer lending business. The distinct brand separated the firm from any lingering reputation fallout from the 2008-2010 financial crisis. It also positioned the effort, if successful, to be spun off as a separate fintech business, like Chime.

The effort morphed from a side project to become a selling point to Goldman stockholders looking for a growth story. However, even early on the initiative was questioned by some of “the company’s old guard who believed that consumer finance simply wasn’t in Goldman’s DNA.”

The initiative was placed in the same division that housed Goldman’s businesses catering to individuals. Most Marcus customers had only a few thousand dollars in loans or savings, while the average private wealth client had $50 million in investments.

In addition to increasing low cost deposits to over $100 billion, a major success was winning the competition to partner with Apple’s new credit card for its iPhone users.

Only later did it realize it “won the Apple account in part because it agreed to terms that other, established card issuers wouldn’t. The customer servicing aspects of the deal ultimately added to Goldman’s unexpectedly high costs for the Apple partnership.”

Then reality hit. Internally there was an ongoing debate about how the initiative should be led. There was turnover of senior staff leading the effort. The ramp up of hiring and expenses promoting the new business turned into a cumulative loss reported to exceed $2 billion.

The coup d’grace was the dramatic increase in the cost of funds. The Fed began its upward rate hikes in March 2022. The era of low cost financing was over.

The company pulled back from its strategy, even though its adventure in consumer banking managed to collect $110 billion in deposits, extend $19 billion in loans and find more than 15 million customers. The future of its GreenSky fintech lending business which it purchased in 2022 for $2.24 billion is unclear.

The bank turned away from its ambition to build a full scale digital bank. Disrupting the consumer banking market was harder and much less profitable than it had forecast.

Last week Goldman’s CEO Solomon told an CNBC analyst: “The real story of opportunity for growth for us in the coming years is around asset management and wealth management,”

What Is a Lane?

Staying is one’s lane is not an easy concept to apply. Most organizations want to expand and grow into new areas. Making prudent future investments to sustain a credit union is an important management responsibility.

If Goldman with all its all professional talent could not launch a successful fintech bank, is this a case study credit unions might learn from?

The following are credit union initiatives that can have consequences far different from the initial expectations. Especially as low-cost funding assumptions are rethought and the environment for lending enters a state of uncertainty.

Purchases of whole banks at premiums that have created tens of millions of “goodwill” (an intangible asset) on credit union balance sheets;
Out of area credit union mergers, even cross country, where there is no market overlap, sponsor relation or advantage to the members of either organization;
Direct commercial real estate loans and participations in office buildings to “members” who are professional developers located in cities far removed from funding credit unions;
Loan participations purchased in asset classes where repayment becomes more challenging when the economy slows or enters a recession;
Investments in the tens of millions in fintech startups to build technology solutions for the digital era but which have a limited customer base and no operating profits. Will OTTI write-downs be required?
Expanding FOM’s to geographic areas with no economic or market overlap to the credit union’s core market;
Extending member lending programs to serve all consumer market segments from the traditional blue collar borrower to the millionaire retiree;
Embracing high profile social issues, disconnected from the credit union’s market or business priorities.

Goldman’s consumer banking entry was the subject of much internal and external scrutiny. The firm used its internal talent, hired outside proven expertise, bought external companies, partnered with esteemed brands and still could not make the expansion work profitably.

Credit unions often lack the internal process or external pressures to look hard at new lanes. They rely on third party brokers and consultants who only get paid if the deal closes. One credit union CEO discussing a recent whole bank purchase in a far part of the state away from their historical market said, “It just fell into our lap.”

Unlike Goldman whose results are subject to constant investor scrutiny and market comparisons, credit unions lack the transparency and accountability that mark public institutions.

Staying in one’s lane may appear as lacking ambition or in some instances defeatist. Given the recent changes in interest rates and uncertainty in economic direction, it could be the most important strategic consideration a credit union makes.

March 6, 2023March 6, 2023

Spring & Annual Meetings-A Time for Renewal

Have you been born again? As a PK (preacher’s kid) I would occasionally get that question. If affirmative, the follow up query, is when did it happen?

This view of spiritual life requires an awakening experience. Preferably with a specific time and place. A new starting point; a before and after event.

Renewal, Not Replanting

My understanding is that awareness of the sacred in life is an every day possibility. A parallel example for this reawakening is spring.

Plants are coming to life almost a month early this year. Each flower has its own timetable with daffodils and crocus first- followed by tulips, camellias, alliums and many varieties of lilies and iris.

This reemergent beauty occurs in a sequence depending on the sun, how much rain falls, and of course the temperature. All the conditions in February were favorable for an early spring flower show. The impact of nature’s role on timing will vary; but the flowers seem to adapt naturally to whatever conditions occur.

Importance of New Beginnings

Both organizations and plants operate on cycles. In credit unions it is usually the annual plan with the yearend results showing the “flowering” of an organization’s purpose. These outcomes could be making money, growing a key metric, expanding service or products, or in rare instances, just coming through a difficult economic or leadership transition intact.

Following the annual report is a new forecast, a renewal or a focused extension, not starting from scratch all over. Similarly one can add plants to a garden but most will come back naturally.

In credit unions, the required Annual Meeting can both celebrate past results and promote new directions. It is an opportunity to gain members’ support, both in board elections and with thoughtful presentations about the credit union’s direction.

For cooperatives, the annual meeting should be a special occasion to report and honor the owners.

Woodstock of Capitalism

Berkshire’s annual gathering in Omaha is an example of an Annual Meeting event in the private sector. The press calls the event attended by tens of thousand Berkshire stockholders, the “Woodstock of Capitalism.”

As a prelude, the firm releases its Annual Report. The most talked about aspect is not the company’s yearend financials, but CEO Warren Buffet’s introductory letter about the firm’s direction and his bits of elderly wisdom.

The Report for 2022 was released last week. It contains discussions that credit unions might consider emulating. The following excerpts reflect company updates and principles Buffet follows. (I added some emphasis)

The opening: Charlie Munger, my long-time partner, and I have the job of managing the savings of a great number of individuals. We are grateful for their enduring trust, a relationship that often spans much of their adult lifetime. It is those dedicated savers that are forefront in my mind as I write this letter. . .

The disposition of money unmasks humans. Charlie and I watch with pleasure the vast flow of Berkshire-generated funds to public needs and, alongside, the infrequency with which our shareholders opt for look-at-me assets and dynasty-building.

What We Do

Charlie and I allocate your savings at Berkshire between two related forms of ownership. . .

When large enterprises are being managed, both trust and rules are essential. Berkshire emphasizes the former to an unusual – some would say extreme – degree. Disappointments are inevitable. We are understanding about business mistakes; our tolerance for personal misconduct is zero. . .

Over the years, I have made many mistakes. . . Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.”

Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire. . .

The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.

The Past Year in Brief

Berkshire had a good year in 2022. The company’s operating earnings – our term for income calculated using Generally Accepted Accounting Principles (“GAAP”), exclusive of capital gains or losses from equity holdings – set a record at $30.8 billion. Charlie and I focus on this operational figure and urge you to do so as well. The GAAP figure, absent our adjustment, fluctuates wildly and capriciously at every reporting date. . . The GAAP earnings are 100% misleading when viewed quarterly or even annually.

On Repurchases of Berkshire Shares

Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

Almost endless details of Berkshire’s 2022 operations are laid out on pages K-33 – K-66. . . . These pages are not, however, required reading. There are many Berkshire centimillionaires and, yes, billionaires who have never studied our financial figures. They simply know that Charlie and I – along with our families and close friends – continue to have very significant investments in Berkshire, and they trust us to treat their money as we do our own. And that is a promise we can make.

Finally, an important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors.

That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.

The Last 50 Years

Thus began our journey to 2023, a bumpy road . . . America would have done fine without Berkshire. The reverse is not true. . .

We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate.

Some Surprising Facts About Federal Taxes

During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion. Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.

Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur.

I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America.

Buffett’s Rule

I will add to Charlie’s list a rule of my own: Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says.

A Family Gathering in Omaha

Charlie and I are shameless. Last year, at our first shareholder get-together in three years, we greeted you with our usual commercial hustle. . .

Charlie, I, and the entire Berkshire bunch look forward to seeing you in Omaha on May 5-6. We will have a good time and so will you.

An Example for Credit Unions?

Buffet’s approach to his owners has multiple insights as credit unions prepare for their Annual Meeting. Can it be a time for renewal?

His comments are honest, open and written to inform owners and reassure their trust.

His leadership principles are clear. His business priorities are stated with conviction and promise.

His benchmark performance standard is the Report’s first page. It shows Berkshire’s stock return vs the S&P 500 for every year since 1965. For 2022, Berkshire gained 4.0% and the S&P had an 18.1% decline.

Member-owners will reciprocate management’s respect with loyalty. Virtually every credit union today, like Berkshire, has positive stories to tell members, both financially and enabling self-help. The message is not a marketing campaign or commercial. Rather the meeting is an opportunity to reaffirm who the credit is and renew the principles guiding leaders-as demonstrated in their own words.

This required process should be a moment of fresh hope, like spring flowers. It should be a time to present the best of what the credit union does; and to reaffirm the ongoing opportunities to serve one’s community.

Also imitate Buffet. Make it a fun, family gathering.

February 1, 2023February 1, 2023

Two Messages from Clayton Christensen

How would the author of “disruptive strategy” counsel credit unions in this time of rising rates and tightening liquidity?

I met Clayton Christensen following his participation on an expert panel debating the future of higher education and its ever increasing costs.

His message was that college and post graduate institutions were subject to the same disruptive challenges that he had described in multiple businesses. His theory explained why successful companies often fail even though they appear to have a dominate competitive position.

Further he announced, during the panel, that he would inaugurate such a disruptive effort at Harvard Business School with an Internet course based on his strategic theory. I asked if Callahans might talk with him to see if this course might be a resource adaptable for credit unions. He gave me his card, his administrative assistant’s name was on the back, and said to call and make an appointment.

Several months later a team from Callahans went to Cambridge.MA to meet his colleagues filming the course modules for Internet delivery. After taking the course and adapting concepts to the cooperative context, Callahans launched a course on disruptive strategy for the credit union market.

Even though Christensen died in 2020, today his course on disruption lives on as part of the Business school’s online offerings.

From the Bottom Up

The central theme of successful disruption is challenging market leaders from the “bottom up.” Credit unions might say from the “grass roots”up.

Successful firms generally grow beyond their initial markets and increasingly focus on more profitable segments. They neglect early and familiar targets to go after more lucrative ones by expanding with more sophisticated and complex solutions.

Then their lower end markets become vulnerable if new entrants better define the “job to be done” and add value where the larger firm is no longer investing. A new entrant gains a foothold at the lower end and can then relentlessly innovate to move up market.

His theory is a framework that asks questions and introduces concepts to sharpen leaders’ strategic intent. It is not a model dependent on technology driven advantage, but one of business model disruption.

The cooperative design based on local, defined markets (members), the values of service and collaboration, and self-funded financing is very compatible with Christensen’s theory. For many decades credit unions have been an example of his strategy playing out in consumer financial services. Their success is measurable and market gains real.

However as credit unions became more financially self-sufficient and the focus on original groups lessens, market ambitions expand. Today a number of credit unions seem to embrace the “top down” pursuit of more affluent consumers served by regional and national financial institutions.

Some credit unions openly proclaim multi-state, national, and even global market ambitions. Others purchase entry into new markets by buying banks or pursing mergers far distant from their proven success.

In doing so credit unions are sacrificing their competitive advantage of alignment with members or groups. These credit unions have become “market players” going wherever an opportunity appears, versus serving a distinct area or need.

The Liquidity Challenge

A current example. Many credit unions today are facing liquidity pressures. Slowing share growth, continuing loan demand, underwater investments and rising rate competition for shares pose new challenges versus the decade of easy money. Some respond the way the big players do by bidding for money with CD rates currently in the 4.25-4.75% range and advertising openly for anyone’s cash.

Others have taken a look at their core strengths including local relationships, community presence, branch networks and the fact that many employers are looking for a special benefit to attract and retain employees. Their back-to-future share growth with new members’s savings rely on credit unions’ core local advantages and reputations within communities that took years to establish.

A Second Message

The public reputation of credit unions rests partly on their values and democratic origins. One CEO’s mission statement simply reads: Do the Right Thing. In the for-profit competitive consumer finance markets, this appeal is distinctive. Value is about more than price or even great service.

The New York Times columnist David Brooks distinguishes between what he calls “résumé virtues” and “eulogy virtues.”

“Résumé virtues are what people bring to the marketplace: Are they clever, devoted, and ambitious employees? Eulogy virtues are what they bring to relationships not governed by the market: Are they kind, honest, and faithful partners and friends?”

In a YouTube video Christensen summarizes his understanding from his own life and work in a 2012 Ted talk How Will You Measure Your Life? This 19 minute video opens with his discussion of why successful companies fail. Then he extends the analysis to his own HBS classmates lives and the personal disappointments they have encountered while achieving material success.

(https://www.youtube.com/watch?v=tvos4nORf_Y)

The source of both corporate and personal disappointments is the same. We live in a system that rewards short term achievements, investments that will pay off now, not in the years to come. Creating successful relationships whether in family or businesses, does not result from short-term thinking.

He closes with how to “measure” your life’s success at minute 17. If you have only two minutes, listen as he presents what David Brooks calls the eulogy virtues.

Christensen’s Two Messages

Christensen’s theory of disruption is a classic way of understanding credit union advantages from a strategic standpoint. The framework focuses on long-term competencies combined with “job-to-be-done” tactics.

This approach asserts that it is not the demographic characteristics of the member that motivate market choices; rather it is what the member wants to accomplish that determines which financial firm the member will chose.

The second point is equally consequential. Your “success” (personal and professional) will depend on “how well you help other people to become better.” Even if this just entails giving your business card to a stranger in the audience.

Both observations seem to me an endorsement of a credit union “calling.”

January 19, 2023January 19, 2023

Early Learnings from Bank Yearend Earnings

“Everyone looks like a business genius when interest rates are at historic lows and money is incredibly cheap. But when the tide goes out, you see who isn’t wearing any swimming trunks.”

(Warren Buffett, among others)

This week all major banks will report their 4^th quarter earnings. Yesterday the money center banks released their results. Today the large regionals report.

Credit union 5300 call reports for the same period will not be available for 60 days or more from NCUA, unless individual firms post their financials independently.

There are three observations from these commercial investment and consumer banking leaders so far.

4^th quarter earnings compared with the same period of 2021 are at best mixed. JP Morgan’s net is up 6%; Bank of America, 2% up; Wells down 50%; Citigroup a negative 21%. Goldman Sachs down 69% and Black Rock’s profit fell 23%.
Goldman’s decline was due in part to a cumulative $3 billion loss since 2020 in its efforts to develop a consumer lending market under the Marcus brand. The firm has since reorganized these products.
The stock prices of most money center and regional banks have fallen precipitously over the past 12 months.

Some examples:

JP Morgan -10%

Bank of America -27%

Citigroup -24%

KRE Regional banking ETF -25%

Each institution singled out different factors affecting their results: increase in loan loss reserves, falling revenue in certain business lines such as investment banking and trading, operating expenses too high, rising interest rates, recession worries and economic uncertainty.

The common refrain in the earnings announcements: “These are not the results we expect to deliver to shareholders.”

There were a number of negative events called out: Goldman’s loss in the consumer market, Wells Fargo’s $3.7 billion additional government fine, and JP Morgan’s $175 million write off of a fintech acquisition. Results were mixed but not troublesome from a systemic view.

Potential Questions for Credit Unions

ROA for credit unions through September 30 fell about 21% to 88 basis points versus 2021. The largest single factor was 15 basis points in loss provision expense.

What the 12 months decline in bank stock prices suggests is that the market analysts see a more challenging year for financial performance in 2023 in all banking sectors. Uncertainty from the inflation-recession outlook is the major concern.

This overall decline in bank stock values raises questions for credit unions. For the 20-30 who completed or announced upcoming bank purchase, did they overpay? Will the purchase goodwill premiums need to be reassessed? Will purchase offers going forward reflect the market’s valuation declines?

Goldman introduced its Marcus consumer initiative in 2016. It announced a partnership with Apple for a new credit card. Since 2020 these “platform” based initiatives for consumers have lost $3.8 billion. This is one factor in the bank’s announced 3,500 immediate employee layoffs.

The question for credit unions is, if a an expert firm such as Goldman can lose this much entering a new business line, consumer banking, could credit unions face the reverse challenge?

For example, Jim Duplessis in Credit Union Times observed that total credit union commercial real estate loan production has risen 41% in the first nine months to $36.7 billion. For some credit unions these participations are a new lending effort.

Many banking CEO’s are cautious about the future. It is not just the recession prospect, but declines in mortgage activity, drawdown of consumer savings, and economic impacts from higher rates not yet fully played out.

A Proven Track

To the extent credit unions follow their consumer members closely, the future should be sound.

Where the difficulties may occur is forays in areas where experience is limited. Among these are commercial loan participations, whole bank acquisitions, and investments in “side” business such as technology startups or crypto offshoots.

One of the advantages in this economic and rate transition is that credit unions don’t have to worry about their stock price. However the market’s negative outlook for bank stocks should be an alert that prior assumptions in underwriting and investing may need to be reassessed.

What credit union wants to be found swimming without trunks?

October 21, 2022October 19, 2022

NEXT CITY-A Site Worth a Visit

One of the traditional advantages of credit unions is their local knowledge. This includes members’ circumstances, critical business trends in the area and continuing reinvestment to improve collective and individual opportunity.

As credit unions expand their market aspirations and growth ambitions, knowledge of and commitments to local communities can wane. The local knowledge and the resulting advantage of loyalty and member trust can be forfeited.

Next City is a nonprofit news organization that believes journalists have the power to amplify solutions and spread workable ideas from one city locale to the next.

It features actual projects. Case studies are the core of its reporting. It publishes an almost daily blog.

Here is a portion of the October 19 email update featuring mutual financial firms. It asks a critical strategic question about credit unions.

While reporting a few years ago, I came across this startling fact: In 1986, the number of community banks across the country peaked at 15,717, but today there are fewer than 4,500.

Now I can’t remember the last time I went a whole day without thinking about it. I vaguely recall, as I’m sure many others do, the wave of bank mergers that really took the country by storm in the 1990s.

Maybe some of those mergers made sense, given changes in technology and the world. But the rising tide of mergers went along with a drought in the formation of new banks and credit unions.

I still don’t think we’ve fully processed what this shift in the banking system has meant for our cities and communities.

Even today I don’t think we have a full picture of what was once possible, why it’s no longer possible, and maybe why we should make it possible again. I hope today’s story helps make that picture more complete, if not more clear.

Banks With No Shareholders? The Curious Case Of Mutual Banks

Ponce Bank, founded in 1960 in the Bronx and currently New York’s only Latino community bank, shows the possibilities of lending as a mutual bank.

Shouldn’t credit unions be in this reporting?

June 24, 2022June 24, 2022

Looking at Gas Prices: Facts and Interpretations

The St. Louis Federal Reserve’s economic research unit (FRED) has published two brief articles this past week analyzing trends in gas prices, both recent and long term.

Both provide evidence for those who would seek to turn the debate political about the increases.

The first article is the Long Term Trend in gas prices. The analysis has two conclusions:

Average annual CPI inflation from 1990 to 2021 was 2.4%, while average annual gasoline price inflation was 3.9%.
Increased demand for gasoline is not likely the primary reason for gasoline price increases over the past decade, however. It increased from 62.9 million gallons in 1990 to 80.4 million gallons in 2006 but began to decrease in 2006. In 2019, U.S. motor gasoline consumption was 80.9 million gallons—only 0.5 million gallons more than motor gasoline consumption in 2006.

The macroeconomic result is that expenditures on motor gasoline made up a smaller percentage of GDP in 2019 (1.7%) than they did in 1990 (2.1%).

Feathers and Rockets: The Consumer’s Disadvantage

The second analysis tracks the relation between the price of oil and gasoline at the pump.

The article’s conclusion: When oil prices shoot upward, gas prices rise with them. And when oil prices fall, gasoline prices also fall; but they can fall at a slower rate. Economists refer to this market dynamic as “asymmetric pass-through.” A more colorful description of the phenomenon is “rockets and feathers.”

The chart in the article is dynamic allowing the user to focus on recent changes. This phenomenon doesn’t occur every time oil prices fall, but can be seen in recent months: at the beginning of December 2021 and at the end of March 2022.

Why Members Are Angry

How one interprets the charts and data in these articles will probably influence which political interpretation for higher prices a person is inclined to believe now.

Both articles highlight the reality of retailer market power and consumer search costs as reasons why many members (consumers) feel so frustrated by the seeming monopolistic pricing patterns when paying for gas at the pump.

Their anger is more than high prices. It is the absence of “consumer sovereignty” (choice) the supposed hallmark of a market economy.

May 2, 2022May 2, 2022

A Model for Your Annual Meeting

The Woodstock for capitalists had its annual gathering this past Saturday.

Here is Warren Buffett’s opening comments for this six hour marathon interaction with shareholders.

How would your approach compare with this effort?

(https://www.youtube.com/watch?v=4H5OibatT00)

Here’s is Buffett’s answer to a question about the best investment you can make in an era of high inflation.

(https://www.youtube.com/watch?v=NaX-bjJn-AE)

March 11, 2022March 11, 2022

Going Public: Colorado Partner Credit Union, their CUSO and a SPAC

In March 2021 Colorado Partner Credit Union announced that Sundie Seefried, its 20 year CEO would step away to lead a new cannabis banking company called Safe Harbor Financial.

Safe Harbor was a CUSO formed through the combination of the credit union’s cannabis banking arm and its division that licenses those services to other financial institutions.

At December 2021 yearend Partner Colorado reported $575 million assets, six branches and serving 36,000 members. Its CUSO investment, presumably all Safe Harbor, was valued at $8.2 million up from $3.8 million the prior year. These valuations were achieved with a reported total cash outlay of only $750,000.

In February of 2022 there was a new transaction announced: Safe Harbor CUSO’s cannabis industry-focused financial services would be acquired by ”Northern Lights Acquisition Corp, a special purpose acquisition corporation (SPAC).

A special purpose acquisition company (SPAC) is a “blank check” shell corporation designed to take companies public without going through the traditional IPO process.

A $185 million Purchase Valuation

The terms according to one news report were that Northern Lights will pay $70 million in cash and $115 million in stock. Sundie Seefried – who created Safe Harbor – will be the CEO of the new public company.

The full February 14, 2022 press release projected the equity market value of the post-sale closing company to be $327 million.

In an interview the CEO Seefried described Safe Harbor’s competitive advantages in managing the financials for businesses conducting legal marijuana transactions:

“The amount of work necessary to manage that BSA risk is expensive,” Seefried said in July. “And the resources are demanding, in terms of the monetary system that you have to purchase.

“We did cannabis and we did it thoroughly,” she added. “We think we have the compliance program to a good state of stability here.”

The only financial information I could find about the Safe Harbor CUSO was the following;

The company had almost 600 accounts across 20 states and $4 billion in transactions in 2021. It would appear to be a fee intensive business model in return for its compliance expertise and financial transaction management.

What Does this Example Mean for Credit Unions?

Credit union sale of all or partial ownership of a CUSO business is not a new event. Several major examples include the sale of CUSO Financial Services (CFS) a broker dealer, with minority credit union ownership, sold to Atria Wealth Services in 2017.

Prime Alliance Solutions was a significant national CUSO offering first mortgage services to an estimated 1,900 credit unions. It was developed by BECU, the majority owner with a limited number of other credit owners and Mortgage Cadence. The CUSO venture was sold to Accenture, in a private sale, in 2013.

Another industry CUSO model that is a frequent target for acquisition is data processing. The largest credit union owned processor USERS was sold to Fiserv in the 1980’s. A number of other regional DP firms have also been acquired by private companies.

What make the Safe Harbor-SPAC transaction unique is that the business will now be publicly traded.

At this time several aspects of the transaction seem noteworthy.

The Safe Harbor sale is unique in that the stock will now be publicly owned. In the past some credit unions converted to stock banks such as HarborOne, but this is the first CUSO to be traded on a public stock exchange.
The creation and development of this unique financial intermediary is a tribute to the CEO who has worked on this business model since 2015. You can listen to her discuss the intricacies in podcasts posted on the CUSO website. Her biography says she has served in the Credit Union industry since 1983 and became CEO at Partner Colorado in 2001. She holds a Bachelors in Business Management from the University of Maryland and an MBA in Finance from Regis University.
If the CUSO is indeed wholly owned, the transaction should produce a windfall for Partner Colorado and its members. In the FAQ’s on the Safe Harbor web site this relationship is described as: Yes! Your accounts are held at Partner Colorado Credit Union and will be insured through the NCUA Share Insurance Fund. This would indicate an ongoing business relationship.

Wall Street Is Discovering Main Street Coops

My biggest takeaway is that this is another example of wall street firms discovering credit unions as a source of new business. In addition to this public listing, brokers, hedge funds and investment advisors are actively soliciting credit union purchases of banks, placing subordinated debt financing to enhance capital ratios and increasingly bringing wholesale financing and other funding opportunities to the industry such as fintech startups.

In subsequent posts I will review some of these other activities and what we can learn from them.

The Need for Transparency

One purpose in writing about these events is so they can be fully and openly talked about. At the moment most of the investment banking activities are private with limited or no public disclosure.

For example two credit unions closed on subordinated debt capital with identical structures in December 2021. But the rates paid by the two credit unions appear to be significantly different. Both are sound institutions but even they must rely on what their brokers and advisors privately tell them about the market which may not be indicative of other options.

The second reason is so that member owners, whose funds are used, will know how they benefit from these transactions. Rarely have credit unions discussed these transaction with members.

The annual meeting’s business report and election of directors would seem to be an ideal moment to explain the financial impact and member payback on these investments. I have yet to hear of this being done.

A Payday for Members?

Hopefully the members will be the big winners in SafeHarbor’s public offering. The history of this effort was that it was all done with the credit union’s resources.

Partner Colorado valued its CUSO investment on the 5300 report for December 2021 at $8.3 million while reporting a total cash investment of only $755,000. With a SPAC cash and stock purchase of $175 million, will the members be in for a big payday?

October 20, 2021October 20, 2021

Would Your Competitors or Peers Invite You to Talk to their Senior Management Team?

Yesterday Kelly Evans, a CNBC host, reported a meeting last week between Elon Musk and the senior management team at Volkswagon. And no, it had nothing to do with merger or buying technology. Here is the opening of her story:

Here’s a headline that should stop you in your tracks: “Tesla’s Musk dials into Volkswagen executive conference.” My first thought, when I saw this, was that it must have been either some kind of quirky Elon Musk prank or a weird fluky accident.

But it was neither. It was, in fact, an invitation by the CEO of Volkswagen for Musk to address a meeting of 200 top Volkswagen executives in Austria, in order to “galvanize [their] top brass for a faster pivot to electric vehicles,” according to Reuters. I’m sorry, what?! Can you imagine, circa 2015, “Microsoft invites Adobe CEO to talk about transitioning to the cloud,” or today, “Facebook invites TikTok CEO to talk about their success in short-form videos and algorithms.” Or maybe, “Jacksonville Jaguars invite Patrick Mahomes to talk about success on offense.”

Anyhow, Volkswagen’s CEO, Herbert Diess, confirmed his invite and Musk’s “surprise” Thursday video appearance on Twitter and LinkedIn. “Happy to hear that even our strongest competitor thinks that we will succeed [in] the transition if we drive transformation with full power,” he wrote. You have to give Diess credit. He sounds like a disgruntled CEO who sees the future but can’t pivot his company fast enough, and is now pulling out all the stops to get there–including inviting his “strongest competitor” to give his own employees a pep talk.

How did this happen? How could the CEO of the world’s largest automaker for much of the last decade be calling a company that won’t even deliver a million cars this year his “strongest competitor”?

The Credit Union Analogy

Would your credit union’s success be such that a bank or other financial institution (mutual fund, insurance firm or broker dealer) would invite you to share your vision for the future of financial services?

Or, is the bank just inviting you over to see if you would like to buy them out at a multiple of book value?

Unfortunately, banks are unlikely to ask for an Elon-Musk kind of briefing thinking they there is little to learn from credit unions. They believe coop success is due to an uneven playing field, especially the tax exemption.

A good test of how your competitors, local and otherwise, view your effectiveness is not the dollars they spend lobbying, but rather whether they seek to emulate your credit union’s perceived advantage.

Unlike Volkswagen, I have not heard of any banks trying to become credit unions in practice or by conversion. But I read a lot about credit unions buying banks.

Which model do you think has the real competitive edge? And which is most likely to transform financial services as they exist today?

When competitors respect you, then you know you are doing something special in their eyes.

Even when interest in your business initiatives are only from your co-op peers, that is one indication that your credit union could be “driving transformation with full power” using Elon’s criteria for strategic advantage.