Category: Mergers

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Credit Unions’ Origins versus Their Future Stories

As a state and federal regulator for eight years, credit union directors would sometimes come up during conferences to show me the original membership card in their wallet.  The important part was the number on the card.   Whether it was a single digit or other very low numeral, it validated the owner’s presence and belief at the cooperative’s founding.

Many credit unions summarize their beginning under the About section on their web sites.  The theme is that from a few committed persons and minimal dollars, see how far we have come today.

Jim Blaine presented the SECU (NC) founding story in a recent post.   A few excerpts provide you a flavor of his imitable style as he contrasts the official version with one member’s reality.

Creation stories are intended to provide us with an explanation and some reassurance that “stuff doesn’t just happen”. These stories are often called “creation myths”, or that fancy word “cosmogony”. . .

Folks at SECU for decades have gathered around the campfire to hear our creation story… “On June 4, 1937, 17 state employees and teachers in Raleigh pooled their meager resources of $437 to form State Employees’ Credit Union…” and the rest is history.  Sounds almost like a religion or cult following doesn’t it? Well, for some of us it is… 

But, as with most idealistic ventures, there is usually a back story. Way-back-when, I received an enlightening letter from long-time member Paul Wright. . .which begins:

“Back in 1932 I was a liquidating accountant for the State Banking Department. Mr. Gurney Hood was Commissioner of Banks and we had about 10 accountants and 12 or so bank examiners – all the banks were in trouble back then.”

You can read the specific impetus driving this unusual organizational effort in the full blog which concludes with Jim’s observation:

😎 Well, I did get a “kick” out of the letter and it did not in any way tarnish my belief in those “17 apostles”, with $437 who believed, with great purpose, that they could “capitalize on the character of their coworkers and help each other attain a better economic status.”

Wanted to share the “TRUE STORY” with you because today: 1) many credit unions – and one in particular – seem to have “forgotten” why they were created, 2) seem to have “forgotten” who they were created to serve, and 3) seem to have “forgotten” that most of their member-owners still often live in a “paycheck-to-paycheck”, “lend me $10 ’til payday” world of economic stress….… and of course, wanted to 4) remind the bankers that from its “creation” all SECU was ever trying to do was to save them from themselves… (still trying!)

Future Stories

History matters, whether factual or embellished by time and future events.  It gives perspective on present circumstances and hope for how we might envision future opportunities.

But sometimes the always changing events in which we live cause some to say they have had enough.  The forces driving the profession in which I labor are just too overwhelming.  I’m no longer comfortable and need to get out.

An example is the resignation last week of Harvard’s football coach of 30 years.   He had an extraordinary record as summarized in this article:

He ended his career with 200 wins, and, with a 17-9 victory over Dartmouth on Oct. 28, surpassed Yale’s Carm Cozza to set the record for Ivy League coaching wins. During his tenure, Harvard won 10 Ivy League titles and defeated the archival Yale Bulldogs 19 times, including nine straight from 2007-2015.

He also led the Crimson to three undefeated seasons — in 2001, 2004, and 2014 — leading Harvard to amass the sixth-best winning percentage in all of Division I football since 2000. Throughout his career, he won the New England Coach of the Year award eight times and was named a finalist for the Eddie Robinson Award — awarded to the top coach in the Football Championship Subdivision (FCS) — on five occasions.

So why did he retire, still young and in many ways at the top of his game?  The driving motivation was changes in the college football model, specifically paying players through the “name, image, likeness” opportunity.  Here is his blunt assessment:

“College football is changing dramatically and certainly not for the better,” Murphy said. “When people ask my opinion of what’s going on in college football, I give them a very simple explanation. It absolutely — positively — is professional football, only without any rules whatsoever.”

Some very successful credit union CEO’s and boards are voicing a similar lament about their industry.  The challenges are just too numerous: technology, regulation, changing competition, lack of volunteers, little member loyalty and of course ever pressing competition.

As they look ahead,  these CEO’s and boards give up and retire.  Change has made it too hard to continue even after demonstrated successes of 40, 50 or 80 years—it is time for them AND the credit union to go, in their future outlook.

Tomorrow I will share an example of one credit union’s “future story” after 66 years of stable and focused growth.  It determined  it wouldn’t be able to continue and had to merge to continue to serve members.

The difference between the Harvard football coach’s retirement and these credit union leaders is the credit union leaders decided to withdraw from the game.   Harvard will find a new coach who will want to tackle the challenges of competing in a time “of no rules.”

Also the credit union decided to give up and transfer all of their ample resources to another organization.  It would be similar to the Harvard athletic department confirming Coach Murphy’s insight and declaring, “From now on Harvard is not going to field a football team.  So just root for Yale or whatever school you prefer.  And any young men who might want to play, don’t apply to Harvard.”

The instances of credit union leaders closing up shop is becoming more widely presented as an acceptable strategy.  The decision is oblivious to whatever “creation story” the credit union told its generations of members who created the  bountiful legacy that is given away to outsiders who had no role in its success.  There is not even an effort to find a new coach.

The other disturbing aspect of these “future rationales” is that sometimes the leaders use the closure to enhance their own personal futures.  It would be like Coach Murphy deciding to take all of Harvard’s footballs and memorabilia with him when he leaves saying, I deserve this because I made it all happen.

A college, or for that matter any football team’s future, does not depend on a single coach or even player.   There is an institution, an organization, or even a league that supported the decades of every team’s individual efforts.  I believe it is time for these supporting organizations and their alumni to speak up.  The institutions they built to benefit future generations are being unilaterally shutdown.

 

 

 

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The Latest Cooperative Score:  3 Wins and 107 Losses

The credit union system continues its losing ways.   As of September 2023  there had been a total of three new charters and 107 failures that is, charters given up by boards.

The trend is the same pattern as 2022’s full results.  Last year there were four new charters and 146 cancellations.

While some characterize the closings as mergers (rarely liquidations) they are operating failures of organizations that have existed for generations.

When a previously independently led, local credit union becomes a branch or, in some cases completely closes its physical presence, and transfers members accounts to a new entity with whom members have no relationship, this is a business failure.

The dollar value of a credit union charter is $500,000 to $1 million or more.  That is the order of magnitude NCUA requires of organizers of new credit unions to raise.   Instead of repurposing long standing charters, most of whom from NCUA’s own characterization are financially solvent, this value and legacy is lost.

Is Anyone Accountable?

Why is this failing trend continuing?    Three years ago NCUA announced a new chartering approach consisting of three phases:  proof of concept, charter application, and final approval.  There is no evidence this has made the chartering steps any easier.

In February 2023 , Vice Chair Hauptmann in a speech to the GAC announced the implementation of a new “provisional charter,” an approval that would facilitate organizer’s raising NCUA’s required capital.  Eight months later, it is just an idea.

NCUA’s Prior History of Charter Support

New charter numbers began to show decline from an average of one per week in the 1980’s to only single digits (fewer than ten) for an entire year in 1998, again in 2008 and every year since 2011.   One might surmise that expanded fields of membership met some of the interest in new charters.  But a more likely reason is that there is no constituency promoting and supporting new charters.

In the past NCUA has advocated and promoted  chartering as an integral part of its supervisory responsibility.

In its May 1984 NCUA News, the agency reported on “Student CU Conference a Success,” a meeting of 70 students from 15 colleges with student credit unions or in the process of organization.

In an October 1984 article the News reported that “McDonalds has something new, and not fast food.  It is a credit union.  A New York City based franchise recently became the first in New York state to sponsor a credit union for its employees.”

These examples were part of NCUA’s efforts to increase credit union membership.   In its December 15, 1982 Letter to Credit Unions these were outlined as follows:

“In an effort to preserve and expand credit union membership, the Board has delegated to the Regional Directors the authority to approve and disapprove most new charters . . .

A major credit union expansion effort called CUR-84 was launched late in 1982.  It is a two-year national program involving the cooperative efforts of NCUA, state regulators, national trade associations, state leagues and others interested in strengthening the credit union system. . .  CUE has as its minimum goal 50 million credit union members by 1984, the 50th anniversary of the Federal Credit Union Act. This will be accomplished by chartering new credit unions where feasible. . .”  (page 5)

These efforts are profiled in the full 1982 NCUA Annual Report (pages 10-11).   It also highlighted the Regional Directors’ role.   “Region I grabbed the chartering and expansion ball and ran with it.  Thirty nine new Federal credit union charters were approved by the region during the year, 34 percent of all Federal credit union charters granted in 1982. 

This was followed by a list of significant new charters including New York University Employees FCU and Fidelity Employees FCU.  (page 15)

The NCUA’s 1983 Annual Report singled out new student charters as well as ones for employees of Dow Jones & Company and Channel, Inc the cosmetic company.  ((page 8).

Here are the total new charters granted for the years 1981 through 1985:   119, 114, 107, 135, and 55.

NCUA set the tone, promised support and organizers stepped forth.   When the board meetings were held on the road, it was a common practice to present a new charter in the region where the event took place as part of the agenda.

That regulatory inspired, system-wide effort is missing today.  The result is an industry with slowing growth more and more dependent on mergers, bank acquisitions and wholesale financial markets for expansion.  Without new entrants, any industry becomes mature, lacking entrepreneurial drive and increasingly dependent on external versus internal organic growth options.

Are we the Future?

In the December 1984 largest ever credit union conference of all regulators and credit unions in Las Vegas, Chairman Ed Callahan gave the closing charge.  He said:

We are the future.  But If credit unions are lumped together with banks and S&L’s, that will be a challenge.  The future depends on how you look at yourselves. Credit unions are different, and you must go public with that attitude. 

You must hammer away at the differences (with banks) with deeds as well as words.   For 75 years credit unions have been doing one thing.   To have an identity crisis now makes no sense at all.  Seventy-five years of success should tell you what the future is-it’s been people in the beginning, it’s people now and it will be people in the future.”

What does the first two decades of charter decline in this century portend for the future?  Where are the innovators who will promote and expand this unique system?

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Merger Exuberance:  Preparing for the Future or Signaling a “Mature” Industry

CUNA and NAFCU are now joined.  Coming right behind is the announcement of COOP and PSCU’s combination by yearend.

What are the implications of these large scale mergers? According to the participants, they are preparing for a more ambitious future.   However some  analysts  see mergers  as a sign of declining opportunities and creativity as an industry enters a  maturing, slower growth  phase.

One Observer’s Take: A Wake Up call

“First NAFCU merges with CUNA, now PSCU and COOP.  This should wake up the rogues amongst us – opportunity calls.

“Once sold as the titans of hope, they are now seen as one trick ponies riding old ideas and copied solutions.  No longer is their faith in ownerships’ will, unique competitive differences nurtured, and innovation cast from confidence  in their  community.  These players rode their vehicles into the ditch.

“There is no sincerity leveraging others, margins guaranteed without value shared, or room left for the creativity of leaders whose credit unions these firms were designed to serve.”

How Should Credit Union  Owners Evaluate the Latest Proposal?

In both mergers the details of the combinations are at best scarce.  Most of the justifications  are rhetorical: “ speak with one voice”;  “ we are stronger together than we are separately”;  “a transformative opportunity to bring broader opportunities and products.“  And, “the merger brings together teams with a similar mission/vison and comparable values and cultures. “

There is also future hope: “The combination offers credit unions increased scalability, access to best-of-breed technology, unparalleled services and differentiated value, fostering long- term success and sustainability for the credit union movement.”

This is the language of marketers and PR, not operations. It is a script one can find in almost every significant coop merger. There are no facts or data, except to clarify  who will be running the show:  CUNA in one case; and PSCU  in the second.

How are the credit union owners who built these organizations with loyal patronage, capital support and volunteer leadership resulting in financially independent organizations, to evaluate these future promises?

Some thoughts:

  • Ask for the latest financial statements and the 2-3 year trends. How will the combination affect the member-owners’ financial stakes?
  • What will the key financial indicators look like in the first year including operating expenses, revenue goals, and net income?
  • What gains and losses (write downs) will the two organizations incur from the merger that would otherwise not have occurred?
  • How will existing third party relationships be evaluated?
  • What are the projects and investments that will be post-merger priorities?

These operational questions are critical. The political decisions to combine are the easy steps; implementing a merger is difficult especially if there are no concrete goals, measures or key success factors identified up front.

Owners are asked to transfer the results of their cumulative years’ relationships into a new entity without any stated outcomes.

Concrete objectives should be part of the dialogue.   Organizational alignments and who will lead the new firm are important. But leadership will change. Some specific benchmarks and benefits should be an important part of the dialogue to come.

Why the PSCU-Coop Combination?

A former CEO of a credit union owned technology provider had the following assessment motivating this event.

This is a transaction born years ago in the mind of executives trusting in the destiny tied to the path of “scale” – this is the only route for aggregators and deal makers.

Neither firm had the heart of a manufacturer of technology. The primary asset they sold their clients was affiliation.  In their minds the concept of clients as the owners of unique solutions was not an advantage. Rather it was viewed as more of a disadvantage with CUs limited by the very model of cooperatives, non-profit roots, and their virtual ownership aspects.

They were and are simply re-marketers, sales firms leaning on the value propositions of other firms. They will merge and take smaller and smaller returns as the owners of design, manufacturing, and their true competitors take a piece of negotiated solutions. 

As aggregators, they never owned the right to price, the right to equity, or the will to create.

Both were valuable players in credit union history, but not creative forces or protectors of what it means to focus on the power of ownership underwritten and  guaranteed through cooperative design. 

There are new days and new architects ahead with models which rely on the uniqueness of cooperative themes reborn to new needs. These firms drank the wrong Kool-Aid.

The Opportunity for Credit Union Innovators

It is important that credit union leaders not assume merged organizations will power the future or be the primary source of improved solutions.

Instead they signal opportunity for new marketplace entrants.  Now is  a time for new value propositions, new energy around execution, and old ideas  presented differently and considered again.

Merged businesses do not naturally create a strengthened survivor. These large mergers create artificial Goliaths repositioning from intra-industry challenge.

The result is not marketplace gained organic success.  Rather the events point to business assumptions requiring substantive review.

In the end, over-confidence on scale may actually hinder innovation and system resilience.  Until new coop disrupters emerge.

 

 

 

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The NAFCU-CUNA Merger and Cooperative Democracy

(Case study 2 of 3 on cooperative democracy)

There may be no more critical decision this year for credit unions than the voting now underway to merge NAFCU into CUNA.

Voting is the moment when the cooperative democratic process is most potent. One member, one vote regardless of asset size or other claims to influence.

While both trade organization’s members will vote, the choice that  really matters is what NAFCU  voters decide.  Their approval requires a two-thirds majority to dissolve the trade group.

What NAFCU members choose will affect every credit union.  Perhaps far into the future.

With NAFCU CEO Berger announcing his retirement, directors from both firms already working on transition plans, staffs  briefed on their future and joint leadership meetings to promote a single outcome, is this decision already a done deal?  Does voting matter?  If NAFCU members do not approve, is there a plan B for their organization?

Credit Union Trades Evolve with the Cooperative System

From the initial state leagues and Filene/Bergengren’s Credit Union Extension Bureau, collaborative trade support has evolved.  CUNA and NAFCU’s priorities have closely aligned with the dual chartering system.  CUNA focused on state leagues and regulations from its Madison WI headquarters and NAFCU the federal charter track from it’s sole DC office.  (See NAFCU’s 1967 founding statement at the end of this post.)

CUNA moved its primary leadership to DC in the 1990’s when it selected Dan Mica, a former congressman as its CEO. Has the time come when these different histories and organizational focus should combine?

This short summary by Berger presents the core merger rationale:  We’ve heard from many of you over the years about the need to better align our advocacy, reduce redundancies in the events and trainings we offer, and work together to strengthen the industry.

The (new) organization will be able to dedicate more resources to the areas that matter most to you. It will be the best of both CUNA and NAFCU – strategic, decisive, cost and value conscious, and responsive.

The Diverse Cooperative Model

Credit unions are not a monolithic system.  The genius of cooperative design is that it supports many different business models.   The  $ 15.5 billion Alliant Credit Union’s digital only model is the antithesis of the $5 million Sixth Avenue Baptist FCU (founded in 1963 in Birmingham AL) as described in this CUES article.

Navy FCU with over $155 billion in assets may have the same member-focused mission as the CDFI Holy Rosary Credit Union in Kansas City.  But their national representation needs are very different.

The two trades have addressed differing priorities when representing their members.  NAFCU has been more critical of NCUA spending, the TCCUSF merger and defending the unique 1% NCUSIF cooperative funding model.  CUNA and the leagues have defended the state insurance alternative, more open FOM approaches and even the purchase of banks, the vast majority completed by state charters.

Because NAFCU is smaller with a single organizational presence it has had to “try harder” at times.   When I asked the CEO of a state charter why the credit union belonged to both organizations, he replied: “The NAFCU team is very responsive and discounted our dues. They also have some great training programs and better conferences.”

At the NAFCU Congressional Caucus in DC this week, CEO Nussel described CUNA’s advantage as its “industrial strength” and NAFCU’s as being “more intimate.”

A key question is whether the credit union system is better off with a monopoly of national representation, or whether choice can be more effective for the system’s diverse business priorities?  Is it better to have a single unified voice or the option of a more accessible DC relationship?

Without  alternatives, the diverse needs of credit unions represented by  one organization could quickly follow the path of least resistance.   Instead of promoting more opportunities  for member solutions, lobbying protects the status quo: defeating tax threats, stopping Durbin reforms, limiting CFPB jurisdiction, responding to bank criticisms and challenging regulatory actions that enhance member transparency.

There Is No Easy Answer

This democratic merger vote matters.   The outcome will affect the future of advocacy in Washington for all credit unions.

A merger may resolve the future of NAFCU, but it could also create a new set of challenges.  Without alternatives large credit unions may decide to undertake their own DC representation, which several have done in the past.

Here is just one of many courses that help organizations navigate their DC interests: Decoding D.C.: Policy, Power, and People.

If the decision is indeed still open for your credit union,  consider critical questions before voting.   These could include:

  1. What do I rely on my trade organization participation and investment to yield?
  2. What does my community need from our cooperatives empowered by this combined structure and from the people attracted to these careers?
  3. Credit unions as cooperative organizations are most often local, personal, and vested in action – will this merger dilute or add to these capabilities?

And, does NAFCU have a Plan B?

Editor’s Note: NAFCU’s founding description from its website

In 1967, a group of hard-charging credit union CEOs pushed the envelope. They had to grow, and they needed an association that would help. So they created NAFCU–an aggressive association forged with equal parts expertise, political savvy and boldness.

Since its founding, our small, but agile association has been a highly effective advocate for credit unions at the federal level. We were the first credit union trade association to set up shop in the Washington D.C. area, and we’ve crossed many milestones since our first major victory in 1970, when the National Credit Union Share Insurance Fund (NCUSIF) was enacted.

We were the sole (and successful) defender of the NCUSIF in the early 1990s when regulators and the White House were advocating for major change to it, and we were the only trade association to oppose the CFPB’s authority over credit unions when the agency was formed (a stance we keep to this day as we fight to reduce the agency’s burdensome impact on credit unions).

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The People’s Voice: Saint Lawrence FCU Owners Veto Merger

St. Lawrence is the largest county in New York State.    Its 100,000 residents live in a rural mix of small towns and farms in an area called the “North Country.”   Saint Lawrence CEO Todd Mashaw says he can see the bridge to Canada from his office window.   Montreal and Ottawa are closer to credit union’s Ogensburg head office than Syracuse, the nearest large city in the state.

Prior to his upcoming September 30 retirement, CEO Mashaw’s final project was a six month effort to negotiate a merger with the $806 million SeaComm FCU in Massena, New York.   In the merger video he states:  “If the merger goes through I retire and if not ,  I retire.”

When the final vote was announced in August the result was 2,428 (70%) against to 1,023  (30%) in favor.  This overwhelming rejection is unprecedented.   The approximately 30% of members who voted is the highest participation in a merger vote where proxies are not involved.

The Merger Project

The selling of the merger proposal was a joint “full court press” of the two credit unions’ CEO’s.   The special web site “merger page information” contains copies of the many communications to members including a video with the both explaining why they believed this action was necessary for the future.

The hour long video on the site is a free flowing discussion between the CEO’s presenting their case for the merger.  They cite industry merger trends, multiple predictions about future technology and competition, the need to change now and a frank conversations with staff and members, not all of whom were in favor.

The documents supporting the combination on the site are numerous.  These include the schedule of  ten town hall meetings and handouts, a discussion at the Annual meeting,  a joint letter from both boards, a merger timeline, press releases,  special mailings to members, merger FAQ’s, credit union data comparisons and merger myths.

This four month concentrated marketing blitz  culminated in the mailing of almost 11,000 ballots with the Special Meeting Notice and letter detailing the merger plans.

Why Did the Members Reject the Merger?

Saint Lawrence FCU was established in 1954 for the employees of the St. Lawrence State Hospital and their families. It will be 70 years old in 2024.  It became a community charter in 2002. Mashaw arrived in 2005 and has been CEO for thirteen years.

He acknowledges in the video that the proposal was disruptive and caused some friction with staff and members.    He said members were passionate in  opposition deploying several hundred yard signs and wearing T-shirts opposing the plan.

Saint Lawrence FCU’s Facebook has multiple member questions about fees, possible branch closings, ratio comparisons, even  one objecting to press announcements “as if it is a done deal.”

Mashaw commented, and he chose the word carefully, that there were “conspiracy theories” promoted about the merger.  These  included questions about whether he was receiving any special benefit should it proceed.  This was responded to in merger myth # 7.

Members As Fans

Many factors undoubtedly influenced the outcome.

Despite the volume of information, some of the logic seems self-contradictory.  Both CEO’s argued change is inevitable to confront  industry trends, technology competitors and provide staff with enhanced professional opportunities.

Yet throughout the video both assure members they will experience virtually no changes:  the same branches remain open, no employee will lose their job and both organizations have similar cultures.

As they summarized in the video:  “These are two good credit union taking care of St. Lawrence country members right here that want to continue doing the same thing, but together.”

This effort to assure members even led the CEO’s to agree that the Saint Lawrence signage will stay on the branches and current head office.

There may be two other factors that influenced members’ voting.

Through June 30, 2023 Saint Lawrence has reported “off the charts” financial performance.   The 12-month growth rate in loans is 25%, shares 15%, members 5%, and loan originations for the first six months 47%.  The net worth ratio is 10.6%.  The average salary and benefits per employee has increased from $65,000 to $88,000 or 35%.

The growth numbers are three to four times the national averages at June 2023 for all credit unions.

These results were accomplished when the primary focus of the entire senior management team and board was on the merger effort, including meetings with SeaComm staff on potential organizational roles.

A second factor, is that especially in rural New York state, local matters.  People want to do business with firms they know and trust.

One FB member post summarized his opposition this way:

Maybe it’s small town thinking.

1- bigger is not better,

2- competition is a good thing especially in banking.

3- If it ain’t broke don’t fix it .

The SLFCU is as strong as its ever been. 

What’s Next?

Mashaw leaves at the end of the month, but is staying in the area, remains a member and is available per contract for one year.

The nine-person board will decide next steps whether that be an interim CEO and whether to initiate a full search.

When members campaign using yard signs, wearing T-shirts opposing the plan and post strong opposition on the credit union’s Facebook account, these actions suggest the board and senior leaders were not on the same page as the members.

As one member posted: Haven’t see a SLFCU member who is FOR this merger except the CEO and Bd.

The credit union has been a part of the community for 70 years.  It is locally controlled and intimately involved with dozens of charities, festivals and special events.

The member-owners fought to keep the organization they built, support and believe in.   This is the cooperative democratic process in action.  The people’s voice has spoken.

The effort to retain their own, very successful member-owned financial firm was possible because of credit union design.  More importantly this loyalty is the intangible but real goodwill that is the foundation of every credit union’s strength.

 

 

 

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The Top 100 Banks and Credit Unions: Risk, Opportunity, and Future Evolution

What do numbers mean?  We often interpret data to support what we believe the future will look like.  This is especially true when the debate is around scale, asset size and sustainability.  What do the largest 100 banks and credit unions suggest about the evolution of both systems?

At December 30, 2022, the largest 100 banks in the U.S. hold a combined $18.8 trillion in consolidated assets with the largest five having half that value.  The industry’s total assets were $23.6 trillion in 4,706 banks.  The top 100 are 80% of total assets. Here are the top five.

Rank Bank / Holding Co Name Consolidated Assets ($ Millions)
#1 JP Morgan Chase Bank $3,267,963
#2 Bank of America $2,518,290
#3 Citibank $1,721,547
#4 Wells Fargo $1,687,507
#5 US Bancorp $590,460

 

Typically, big banks are have more access to liquidity, greater asset diversity and in many cases are viewed as “too big to fail.” Smaller or  regional banks have narrower margins for error.

Recent bank failures have reinforced both the regulatory and public perception that larger institutions are more secure.

I believe it is important to note that all of the top ten banks were the result  of significant mergers, not organic growth.  These institutions are creations of financial markets and ambitious leaders who are driven to be a dominant force in their markets.   This is not an aspiration limited to financial firms in capitalist markets.

A Forty Year History of the Top 100 Credit Unions

A perspective on today’s largest credit unions is helpful when forecasting how the ongoing consolidation might evolve.  Will the same market forces shape the credit union system similar to banking?

At yearend December 1982 there were 5,036 state and 11,631 federal credit unions in operation.  The top 100 (.5% of the 19,788 total) had total assets of $17.01 billion, or 18.9% of all credit unions.  Only Navy Federal was over $1 billion.

Public employment dominated the fields of membership.  Defense credit unions totaled 28, other federal government were 7, and three served state and three municipal employees.  Educational employees (teachers) were the primary focus of 15 charters.  The total of FOM’s serving public employees was 56.

The complete list of the largest  100 with additional financial data and growth rates is from the June 1983 Credit Union Magazine and can be found here.

Four decades later the largest 100 credit unions (2% of the 4,863) held $1.0 trillion in total assets, or 46% of the industry’s total $2.190 trillion.  The listing can be found in Callahans’ State of the Credit Union Industry report for 2022.

Concentration: The opportunities and the Risks

Does this four decade increase of asset concentration  from 19% to 46% in the top 100  mean  the cooperative system is going the way of banking with its 80% concentration in the top 100?

Most data show that larger credit unions tend to grow faster, have broader service and product profiles, and develop larger average member relationships.  In some instances, their size supports a market profile that results in naming rights or public partnerships with local sports teams.  To the extent that size also enlarges community roles and political impact, this can be a plus.

In banking, the drive for market dominance through scale is a constant ambition.  Growth increases earnings and a bank’s stock price.  While the FDIC- labelled community banks ($4.3 trillion in 4,258 firms or 90%) dominate by number, their share of total banking assets hovers between 15-20%. Their role focuses on commercial clients that align in financial size with the banks.

A Cooperative Difference

A significant difference  with banking’s top 100 is that  except for First Tech ($16.7 billion) almost all of the other credit unions have relied primarily on organic growth.  Many larger credit unions have had mergers, albeit small.   PenFed has completed over two dozen in the past decade.  But in most instances these have not been a significant factor in recent growth.  A number of the largest credit unions-SECU, Alliant. BECU, Navy, Vystar have had no mergers—all growth has come through internal expansion.

Comparing the two credit union top 100 lists forty years apart, the evolution in fields of membership is clear. Marketplace identity with a local sponsor has disappeared.  Most credit unions today have community (open) charters. Many have moved away from their legacy affiliation name to a generic identity, eg from Teachers to Everwise, or Telephone Employees to Wescom.

The Member Impact

What does this transition to larger firms with expanding market goals mean for the credit union member-owner?

The major downside is the distancing from local knowledge, identity and personal-member affiliation. The goodwill and community support in times of uncertainty becomes attenuated.

As credit unions expand their market footprints, the transition to open membership puts them increasingly on  a par, in members’ eyes, with other financial options.  Credit unions position themselves as full alternatives to their banking competitors.

This transition from member to customer is often accelerated via indirect lending models where credit unions compete for loan via third party originators.

Cooperative Destiny or Fate? Forensic Analysis Helps

Are cooperatives  destined to follow the banking  system’s increased concentration?

The value of the two credit union listings can perhaps shed some insights about this future evolution.

As I review the 1982 listing I find only seven that have merged and no longer exist, and one IBM Mid America, that converted to a mutual savings bank in the 2007.  Most have changed their names reflecting their expanding market reach.  Some have dropped out of the top 100 but are still operating.

A 93% success factor for individual institutions after 40 years of deregulation is a significant achievement. Especially as almost three quarters of the charters active in 1982 no longer exist.

A detail that readers may wish to pursue is how a credit union’s standing has changed within in this top flight. For example Patelco ranked 98th in 1982 and is 28th in size forty years later.  Identifying major changes within the top 100 can lead to examples of superior leadership or a loss of momentum.

A second analysis that may contribute to understanding the cooperative design’s dynamics is who is new to the top 100 in 2022 from decades earlier?  And how did they get there?  For example Apple FCU,  Canvas CU, NASA FCU or American Heritage.

How did these newcomers rise to the top of the industry?   What do their business models suggest for other credit unions?

I would encourage detailed analysis of the two listings and the changes that have taken place as a first step in thinking about how financial cooperatives succeed.

What strikes me is the stability of the largest credit unions especially compared with the banking system over these four decades.  When management’s loyalty is primarily to stockholders return and/or their own personal rewards, these priorities tend to drive one set of outcomes.   When the focus is on the member-owner’s well-being, there seems to be greater continuity in strategy.

The listings also show a wider diversity of business models. For example, Alliant’s one branch, all digital model has evolved into a financial intermediary for credit unions.  While Wright-Patt’s  traditional focus serving members living paycheck to paycheck has led to sustained growth.

This diversity can offer case studies for credit unions seeking options or even just sticking close to their knitting.

One other observation.  If a consumer were to choose from the top 100 credit unions or top 100 banks, which listing would seem more relevant?

 

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Asking Questions

According to Credit Union Magazine the top 1982 news story was the Penn Square Bank failure that involved more than 130 credit unions. (March 1983, pg 19)

The FDIC closing was over the 4th of July weekend.  NCUA had planned its second on-the-road board meeting for Chicago the following week.  The open board meeting was to coincide with NAFCU’s Annual convention.  For Ed, Bucky and me it was also a homecoming as Illinois was where we had been responsible for regulation of state credit union activity from 1977 until going to NCUA in late 1981.

As NCUA Chair, Ed had always held a post board meeting news conference.

This time the three of us were at the table.  The first question from a reporter was to me,  I think from Larry Blanchard. “With  all the CD exposure from investments over the $100,000 FDIC insurance, would NCUA now propose a rule limiting investments to the insured  amount?”

I had prepared for lots of “what-are-you-doing now?” kinds of questions, but not his one.  I instinctively said no.  Bucky and Ed were quick to describe how the agency would respond with both examiner on site reviews plus the CLF’s lending capacity.

Questions and Democracy

For anyone in authority, whether public or private positions, answering unscripted questions is part of the job.   It is how shareholders, the press, and interested stakeholders hold leaders accountable.

Questions are not always comfortable for the recipient.  They often challenge current happenings.  But the give and take is necessary.  They are part of a leader’s responsibility to a constituency. They help make democracy possible.

Many leaders, not in a public setting (press conference), will ignore these voices, hoping they will go away or grow tired.  Meanwhile the organization’s PR machine fills the airwaves with success stories, announcements and social media posts of positive activity.  Leaders will seek a friendly setting to put out their point of view rather than engage in a public dialogue.

Just Asking

Since February of this year, Jim Blaine the former CEO of State Employees NC has published a daily website challenging the leadership and direction of country’s second largest credit union.

Six initial questions about the credit union’s direction were posed at the 2022 Annual Meeting under new business.   The three motions requesting action  were passed by voice vote of all members.  Jim started his blog when the responses became increasingly different from the reality he was hearing from current and former employees, directors and members.

The Monday, June 26th  post describes his slow conversion to action after six years of retirement growing daffodils and chickens.  He describes his awakening as a matter of trust.

I know of no current CEO or credit union professional who openly supports Jim’s return to the fray.  Their criticisms come down to one principle:  he had his turn, now it is other’s responsibility.  Or specific defenses for the changes underway.

But this is not the Navy where when the officer of the deck takes the con, he alone is in control, unless relieved by the Captain.

Democracy is not just the careful selection of new leadership until they fill out their term and move on.  It is also a system of checks and balances on the exercise of power.   In credit unions, these checks and balances supposedly reside primarily in the board, elected by the members at every annual meeting.

However today most boards are in practice unelected.  The nomination process is controlled by incumbents.   So if a Chairman, as Jim asserts, is trying to implant a new strategic direction for the credit union, how is this plan to be presented to members for their support?

Credit union boards are not places comfortable for minority points of view.   I recall when the chair of the supervisory committee opposed the board’s vote to merge their $350 million firm, she resigned rather than make her position public. When the Chair of Cornerstone FCU overseeing the CEO selection committee nominated himself, no one objected.  Within the year this former chair, now CEO, was seeking a merger of this iconic credit union.

Credit union boards are more and more like country club elections-directors choose their friends and acquaintances to what should be a position of accountability. Marketplace competition while present, is not limiting as it is for a stock traded financial firms where performance affects price.

So when the democratic process is lacking, the one option is revolt, the public raising of questions that challenge both individual actions and direction.  For example Jim in his June 19th post asked about a $6,568,261 payment to Andrews FCU when their former CEO Jim Hayes was selected to run SECU.

The Almost 200 Credit Union Failures

NCUA’s first quarter 2023 data shows 191 fewer charters than one year earlier.   These are charter failures.  But not from the safety and soundness events most frequently believed to be the cause.  These are failures of morale.  Leaders are putting their comfort and well being ahead of responsibility to members.   One need only look at the list of mergers of sound well run credit unions with capital in double digits.

SECU’s situation is an example of leadership shortcomings, not yet a financial problem. It is a situation where democratic accountability was set aside and is now being resurrected in response.

Cooperative democracy is both a process for accountability and respect for member-owners. This public challenge  isn’t the first time this has occurred; it won’t be the last.

 

 

 

 

 

 

 

 

 

 

 

 

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Two Trends Deserving Debate

At the NCUA’s May board meeting, one trend jumped out at me.  Not new, but accelerating and read without comment.

In the first 90 days of 2023 there were 59 NCUSIF charter cancellations.  That is a rate of almost 5 per week, one every business day.  Without exception these charters are decades old, some surviving and most thriving.   Why?

These charters are the handiwork of generations of volunteers, whose current leadership have decided to give up.  It is a morale and ethical problem.   For it undercuts the coop premise that pays forward the members’ collective legacy for which the present leaders are  now the steward.

Many will suggest that the credit unions members are in better hands.  However these hands are not the leaders they know or elected, nor the organization that created their collective reserves.  Every charter cancellation eliminates an example of economic self help, self finance and self governance.

In most cases these are locally focused institutions which created unique relationships with their communities.   Financial services may continue, but not from the same roots.   Another civic organization so essential to a vibrant democratic political economy is no more.

What Can Be Done

Regulators should put the same time and effort into requests to cancel charters that  they extend to new charters.  If a merger is the strategy, show us the plan.  If the volunteer leadership is giving up, ask members for new volunteers.  If the sponsor has moved away, then seek a new group for re-energizing the charter.

Today the regulators have endorsed an exit strategy that benefits only the senior leaders who leave the membership in the lurch.  And retiring CEO’s especially, are taking advantage by transferring their legacy to another credit union, often for just a few more silver coins.

When quitting a business or long standing effort is easier than getting in, the movement will continue to close future growth options, create higher concentrations of risk, and remove financial services away from their local connections and knowledge.

No charter should be cancelled without an effort to find others who are willing to pick up the opportunity.

A Second Trend to Be Re-energized

No brand, business or opportunity can continue without the support of the next generation of consumers.

Student run and led credit unions have been part of the educational and financial services of cooperatives from the beginning.

Yesterday I learned about a scholarship program to identify young persons often from disadvantaged backgrounds (poverty, refugees, disabled) who are given the opportunity to become part of a special education effort.

The premise is that brilliance is equally distributed in persons,  but opportunity is not.  The focus is on 15-17 years old.  This is an age when  “ideation,” the willingness to consider new ideas and become doers is formed.

This educational support is for four years.   The time frame for measuring success is in decades.  It may take ten years or more to see if those chosen in the program will become leaders in their chosen professions.

The program called Rise recognizes that leadership will be manifested in many different ways but over time.  But the investment in this generation must be made now.

The cooperative model is designed to attract this kind of self starter.  But today again, the regulatory community discourages new charters.  The application has become a compliance drill, not support for people with passion to serve a community.  The next student chartered credit union will be the first since the 1980’s.

In the meantime these young change makers are engaging their start up  fervor elsewhere sometimes in other innovative finance-related endeavors.

The Common Thread

Credit union leaders, regulators and professional staffs, have become captured by the short term focus that drives most performance reporting.   What are the latest quarterly numbers?  How will we expand the market reach of our FOM?   What Fintech partner will give us short erm lead on innovation?

All these efforts while necessary overlook the longer term outcomes.   Without  this awareness, the movement will become just another increasingly concentrated, and limited,  financial service option in ten years.  The number of active charters will be halved.

Tomorrow’s  innovative financial models will have been created by the high school and college generation outside the movement. Credit unions will be seen as  old fashioned “banking” firms just tending to their own, stand alone, self interests.

Both of these trends today are shaping what the movement will be a decade from now. There will be other cooperative solutions designed to serve consumers’ financial needs; however they may not be called credit unions.

 

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A Priest, a Barrio and a “Credit Union that Should Have Continued”

The story below is by a local El Paso reporter. It portrays a special credit union that served its community for four decades.  Its work mattered.

The coop system is more than current assets and member numbers. We are also the experiences and memories that we pass down.  This example raises the challenge today, who will remember our story?

The Forgotten Credit Union that Served Thousands of Unbanked El Pasoans

By Christian Bentancourt.  Published April 9, 2023 by El Paso Matters and  Next City

 

If you walk around El Paso’s Segundo Barrio neighborhood, it’s hard to avoid the legacy of the city’s beloved bicycle priest. Father Harold Joseph Rahm came to the city in 1952 and served as an assistant pastor at the historic Sacred Heart Church for 12 years.

In that short time, Rahm created a legacy that is still celebrated by residents: founding the Our Lady’s Youth Center to serve impoverished locals, creating outreach programs for low-income youth, working with gang members to clear their differences in the ring instead of the streets, riding his red bicycle around to reach community members in need.

Today, his efforts are memorialized in this Mexican and Mexican American barrio through several iconic murals, as well as a street that’s been named after him.

But one of Rahm’s most critical contributions to the neighborhood has been largely forgotten: Creating the Tepeyac Credit Union, a pioneering financial institution to serve Segundo Barrio’s unbanked residents and protect them from loan sharks.

A Forgotten Legacy

It’s a legacy that has largely been forgotten by El Pasoans. . . But through archival research and an interview with one of the credit union’s early board members, El Paso Matters and Next City have begun to unravel that history.

It’s a history that illustrates community-based financial institutions’ power to support unbanked and impoverished people – and shows how such economic initiatives were a core part of major movements for social justice in the city.

The historic neighborhood in which Rahm served was known as South El Paso until several pockets were designated as Segundo Barrio, Chihuahuita and Duranguito in the 1970s. Banks redlined the community, making it challenging for residents to obtain financial services.

“People needed loans, and the banks at that time discriminated against South El Paso,” local historian David Dorado Romo says. “There were redlining maps in the 1940s that deliberately neglected areas marked in red. Since people couldn’t qualify for any kind of loans, especially not for home improvement…the community had to create its own credit union.”

The 1961 Founding with a Chicano Cheerleader

In 1961, Father Rahm banded together with a group of local residents and activists to create the Tepeyac Credit Union. According to historian Romo, one of these collaborators was Abelardo “Lalo” Delgado, the prominent Chicano poet from El Paso, who served as one of the credit union’s first presidents.

“He was one of the people that would go throughout the community and let them know that these kinds of services were available,” says Romo. . .  “Lalo, he was a great activist and also a very well-known poet.”

Delgado, who died in 2004, is considered the “abuelito” (grandfather) of the Chicano literature movement, pioneering writing that reflected a commitment to social justice and illuminated Mexican American heritage and struggles.

“He was our cheerleader,” says Felipe Peralta, an early board member of Tepeyac.  Peralta had been a youth worker at the Our Lady Youth Center when he was invited to serve on the credit union’s board. “He was always motivating us to do more things.”

Father Rahm and Delgado collaborated at the Our Lady Youth Center. The center, created in 1953 and located at 515 S. Kansas, served as a home to programs for Segundo Barrio residents, including an employment center and the Tepeyac Credit Union.

“That was a place that generated a lot of social movement,” Romo says. “They had a lot of outreach projects for youths, they had the employment center — they would find jobs for people at Segundo Barrio — and they created the Tepeyac Credit Union. It was a religious, social work project in South El Paso.”

An Unusual Creation

Today, the notion of creating a credit union is unusual. In the past decade, only 25 credit unions have been chartered in the United States. . .Before 1970, it was common to see 500 or 600 new credit unions chartered every year.
Tepeyac only had two employees, according to former director Peralta: office manager Teresa Cordero and Mr. Flores, who was in charge of debt collection.“(Cordero) did a lot of work for the credit union,” Peralta says. “Mr. Flores, whenever he was around the neighborhood … you would not see anybody else because his job was to collect delinquent accounts. I can’t remember too many people defaulting on their loans.” Indeed, a 1971 El Paso Times article records that only 18 of 1,448 loans had gone uncollected.

“I remember even borrowing money for my second car,” Peralta says. “If I remember correctly, at one point, we had over a million dollars. It helped a lot of people to generate their credit. Once they establish credit with us, we will trust them with a little more money. It really helped a lot of people.”

 Making the News

A March 1961 newspaper article from the El Paso Herald-Post showed the Tepeyac Credit Union had potentially 30,000 members, between congregants in the parish at the Sacred Heart Catholic Church and employees and staff of Our Lady’s Youth Center.

“Much time, effort, and sacrifice went into the organization of this unique credit union,” the article reads. “Realizing the problems involved in setting up a credit union which serves a large low-income group, volunteer workers, El Paso Chapter of Credit Unions personnel and many others devoting themselves to the task of solving those problems.”

”Father Rahm and a man named Ed Morrisey raised interest amongst the potential members,” the El Paso Herald-Post article reads, “while others held workshops to explain the idea and principles of operation of a credit union.”

“Tepeyac Federal is considered a pioneer type credit union,” the news clipping says. “Prior to organization, its potential members had no access to credit union benefits and services. Experienced credit union workers now believe Tepeyac Federal Credit Union will not only succeed but will serve as a model … for the organization of similar credit unions elsewhere.”

The efforts of these activists helped create El Paso’s Chicano Movement for Mexican American civil rights, Romo explains: “They were serving the needs directly of the community that this local city government or state or federal governments were not meeting.”

“In 1972, when the La Raza Unida Party was organized, (Delgado) stood up and read his poetry to begin the whole conference.”

Building on a Legacy

In El Paso, the credit union built upon the legacy of Mexican American sociedades mutualistas. These mutual aid societies focused on economic cooperation and community service, flourishing from the 1890s onward.

“It worked a little bit like credit unions,” Romo says. “Whenever people had an emergency sickness in the family, definitely for funerals. They were almost like community insurance groups. There’s a long tradition that goes back to the late 19th century, here on the border of Mexican American communities looking out for each other.”

Information on key figures within the credit union is difficult to come by, but a few names stand out . . .Former director Peralta remembers John Falke – the credit union president in a 1967 . . . as a vital part of Tepeyac.“He was a veteran or involved in the military and did a lot of the groundwork. He would go out of his way to set up the whole thing.”

Another leader of Tepeyac was Henry Rayas, who served as president and is showcased in newspaper clippings from the early ‘60s . . .“He and his wife had 18 children,” Peralta recalls. “Once the children grew up and were a little bit more responsible, they would come and volunteer there.”

No Longer Operating

Today, the credit union is no longer operating. Tepeyac’s last statement of financial condition filed with the National Credit Union Administration was dated Dec. 31, 2003, showing $194,730 in total assets, 220 members and one part-time employee.

In December 2003, the Texas Credit Union Department received an application for Tepeyac to be absorbed into El Paso’s West Texas Credit Union, which had been chartered in 1964 to serve state employees in the area.

The state-chartered credit union “made a special effort to reach out to minority populations by offering a range of products that meet their particular needs,” according to a May 2002 hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. . .”These products including low-cost remittances back to Mexico, an affordable housing program and Individual Development Accounts, a form of savings account aimed at helping low-income individuals save toward assets and build long-term financial stability through matching funds.”

The CEO said that “credit unions like West Texas recognize that consumers and their members must give viable options to avoid the traps of predatory lenders. Credit unions have stepped up their efforts to combat predatory lenders in neighborhoods by offering affordable alternatives for both payday loans and mortgage loans.”

West Texas CU Liquidated

But after the credit union was “hammered by bad indirect loans,” per a Credit Union Times report, the National Credit Union Administration announced in 2009 that West Texas Credit Union had been liquidated “after determining the credit union was insolvent and [had] no prospects for restoring viable operations.”

San Antonio’s Security Service Federal Credit Union purchased the assets that year and assumed the member shares of West Texas, which had had $78 million in assets and was serving 25,000 members at that point.

“We Should Have Continued”

Peralta himself continues to be active in the community. . . “Everything that I have been fortunate to do, it has been because of El Segundo Barrio.”

After moving on from the credit union, he was involved with the Chicano movement. “My degree was in education. My goal was to teach at the public schools in South El Paso. But when I did my student teaching, I realized I was in over my head. Those kids were doing so badly that I knew that I couldn’t help them. So I went to try to help them with other stuff like housing.”

He looks back at Tepeyac’s board meetings, which also served as the credit union’s committee to approve loans, with nostalgia. “It was a really effective operation. It was one of the best things that we had going.”

“Now that I look back, it’s something that I feel we should have continued with.”
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Are Credit Unions Being Disrupted?

Disruption is both an adjective and a noun.  A word to describe changes upsetting the status quo in a market.  And a way to compete against larger and stronger foes.

The business theory with this name was formalized by Clayton Christensen. In this interview with MIT magazine the essential ideas are laid out.  He describes the circumstances as follows:

Disruptive innovation describes a process by which a product or service powered by a technology enabler initially takes root in simple applications at the low end of a market — typically by being less expensive and more accessible — and then relentlessly moves upmarket, eventually displacing established competitors.

Disruptive innovations are not breakthrough innovations or “ambitious upstarts” that dramatically alter how business is done but, rather, consist of products and services that are simple, accessible, and affordable.

In this process identifying the “job to be done” for the consumer is an important insight.  See below for the example of a disruptive example coming at credit unions from below.

The Adjective

A second approach to understanding disruption is to identify some consequences that become visible in markets when the process is at work.   Is the credit union system being disrupted?  What would be indicators?  Who is doing it?

Author and speaker Greg Satell wrote in an April 1, 2023 article “4 Signs Your Industry is Being Disrupted.” Among the four are events that may be familiar.  Note he is not writing about credit unions or even financial services.  Some of his terminology may seem more appropriate to manufacturing, but I believe his observations are still helpful in understanding where competitors are emerging.

One sign is maturing technology.  The truth is that every major technology has a similar life cycle called an S-curve. It emerges weak, buggy and flawed. Adoption is slow. In time, it hits its stride and enters a period of rapid growth until maturity and an inevitable slowdown. That’s what’s happening now with digital technology and we can expect many areas to slow down in the years to come.

A second is consolidation, or mergers.  Yet when an industry is in decline, the forces external to the industry get the upper hand. With new market entrants and substitutes becoming more attractive, customers and suppliers are in a position to negotiate better deals, margins get squeezed and profits come under pressure.

That’s why a lot of consolidation in an industry is usually a bad sign. It means that firms within the industry don’t see enough opportunities to improve their business by serving their customers more effectively, through innovating their products or their business models. To maintain margins, they need to combine with each other to control supply (or I might call it vendor relationships). 

The third response he calls “rent seeking and regulatory capture.”

The goal of every business is to defy markets. Any firm at the mercy of supply and demand will find itself unable to make an economic profit — that is profit over and above its cost of capital. . .

That leaves entrepreneurs and managers with two viable strategies. The first is innovation. Firms can create new and better products that produce new value. The second, rent seeking, is associated with activities like lobbying and regulatory capture, which seeks to earn a profit without creating added value. In fact, rent seeking often makes industries less competitive. . .

It seems like they (rent seeking industries) are getting their money’s worth. . .Occupational licensing, (read new charters) . . . restrictions have coincided with a decrease in the establishment of new firms. If your industry is more focused on protecting existing markets than creating new ones, that is one sign that it is vulnerable to disruption.

His fourth indicator he calls the Inevitable Scandals.   He cites Thernos and WeWork as examples.

He might have included the ongoing compliance problems at Wells Fargo or the recent failures of well capitalized institutions such as Silicon Valley and Signature banks as “scandals”—although it is still unclear who all the contributors to these failures are.

Who Is Coming After Credit Unions’ Members?

Disruption is a constant factor in competitive markets.  Firms try to respond to these pressures in both self-protective ways as well as the more formal response in Christensen’s theory.

Where is credit union competition coming that  would fit both descriptions?  In many credit union consolidations scale is cited as the dominant motive, suggesting that bigger players are the greatest threat to credit unions’ future.   Apple Pay, Walmart Financials services, even some recent fintech firms such as Rocket Mortgage, SoFI or other product centric online platforms will take away critical member-product segments.

But my two favorite examples of disruptive competitors using Christensen’s analysis are Venmo’s peer to peer payment transfer and Chime, a neo bank.

Venmo was described by a 21 year old financial writer in an article last year.   The person-to-person payment application requires a depository account, but then begins to function as a broader transaction option overtime.  While it must synch with an existing account from which to draw funds, this would seem just the first step in becoming a dominant player in processing multiple kinds of consumer financial transactions.

My favorite example is Chime which describes itself as the #1 Most Loved Banking App.   The firm’s goal is to be the entry point to a person’s financial institution by making digital banking easy.  It lists some benefits as follows:

Online banking made easy

No minimum balance requirement or monthly service fees

 Manage money 24/7 with the #1 most loved banking app

 Get paid up to two days early with direct deposit

 Deposit checks from anywhere

One of the most enlightening interviews about Chime is from January 2022 in which founder Chris Britt is interviewed by the CEO of Goldman Sachs.

The whole strategy is easily followed in this 17 minute interview.   Listen carefully to how Britt describes his addressable market description (paycheck to paycheck); “we are not a bank”;  how incumbent providers pay attention to only the top 20% of users;  how direct deposit is the pathway to his customers; and designing the firm’s services to match unmet consumer needs.  Listen also to the role of core values.

Chime is a classic example of Christensen’s theory.  There is nothing in this model that credit unions could not do or have not done in the past.   I believe however that many credit unions have moved “up market.” Now firms like Chime are after the market credit unions were originally designed to serve.

Review again this disrupter’s description of financial strategy–a transaction business with a subscription service.   Note his relationship with regulators: Respect the Rules.

This model is what credit unions were designed to be.   Is Chime signaling that  we left our core members and purpose behind?