Chip Filson
| 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
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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.
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.
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?
Holidays remind us of past practices, events and stories that have made us who we are as individuals and a country.
But they can be confusing. For some may view these breaks from the working calendar as simply nostalgia, irrelevant to the present, without the correct lessons to carry us into the future.
Traditions are hard to maintain. That’s why holidays can help. People and cultures change. The song Tradition from Fiddler on the Roof presents this challenge “keeping balance” between past and present mores within a family and in society.
Credit unions were constructed around tradition. The founding stories tell of the sponsor group of employees, in a community, or with members of church drawing upon their existing “common bond” to create a novel way to improve their collective lives. In the process they evolve their separate institution, forming a culture of service and a reputation of trust. They develop their own traditions.
The current holiday season is always special. We rewatch movies that capture the Christmas spirit. The Inn on 34th Street, Holiday Inn (introducing the song White Christmas), the movie White Christmas, and Frank Capra’s classic, It’s a Wonderful Life have a staying power sometimes missing in contemporary Hallmark channel versions.
Whatever a film’s lasting artistic expression they all still share the same human story of redemption.
Literature classes in school recite Twas the night before Christmas, or Christina Rosettee’s poem in The Bleak Midwinter (set to music and now widely sung anthem by Gustaf Holst), or other works such as Ring Out Wild Bells from Tennyson and Old Christmas by Washington Irving.
Dickens story of Scrooge is staged again in cities large and small throughout the US. Its themes of personal hardship and insensitive wealth accumulation still speak to us.
Christian religious services begin with Advent. These four consecutive Sundays’ candle lightings celebrate love, hope, joy and light all in preparation for Christmas day.
Commerce rebounds. It starts with Black Friday. Retailers from department stores to car dealers all offer specials to draw in consumers. The holiday is filled with special sales offers. Giving Tuesday reminds that life is more than just getting.
The faiths celebrated at Christmas and Hannukah from which these literary and secular manifestations emerge, are stories of ancestors defining their beliefs in actions that inspire current generations.
These faith practices and commercial activities create traditions repeated over generations. From the lighting of the National Christmas tree to attending midnight mass, people remember. Whatever their circumstances they honor the values, spirit and sacrifices that are meaningful in their lives now.
These holiday traditions, sometimes with public parades and spectacles, reinforce meaning and renew hope. Or they can become a neglected past unrelated to current purpose.
The story of who the credit union is, is communicated by its culture and in the marketplace via a brand. The founding story is summarized on web sites showing the pioneers who began with no capital, only a desk drawer with founder’s shares, and the desire to serve members with loans.
Every organization must innovate and move away from prior practices to refresh or sometimes “start over” to remain relevant. New churches are founded outside current denominational structures to offer a different expression of faith practice, or recover what some feel is a faith lost. In movies this commercial effort is called a sequel. Even Scrooge’s stage story has been adapted to 21st century business settings with contemporary casting.
Both religious practice and commercial organizations must grapple with the reality of remaining relevant and potentially losing the power of their story.
Credit unions compete in open markets. No more protected FOM’s. Members change, so do their needs. Markets go through cycles.
In most coops the majority of funds are held by older generations, long standing members, many of whom do not borrow. Management seeks new members often with no previous connection to the credit union and its distinction versus other financial options. Just another consumer choice, perhaps attracted by price.
Examples are “indirect” lending for autos, student loans, and commercial participations where the business borrower may not even be in the credit union’s geographic market. No local advantage needed, just price.
Sometimes this balance of change and tradition is political. Some wish to conserve the best of the past versus progressives who believe that success was built on limits and concepts that no longer reflect current needs and market realities.
There is still one commonality whatever the balance between past and present circumstance. The choices each of us make in our professional or personal lives express our values, the beliefs we hold about life’s purpose.
Whether religious, commercial or just lifestyle driven, traditions are efforts to connect within oneself and externally, with others, through shared experience.
Whatever business strategy or “innovations” are introduced, and prior efforts ended, the results are presented as the new rituals for success.
The biggest error is erasing past connections. It is becoming more common today upon merger or the launch of a market expansion effort to rebrand and to reject past names, associations, and even partnerships in the search for growth.
To dismiss the past as no longer relevant to present circumstance negates shared purpose. Past experience no longer lights the future. It is stepping off a cliff not knowing how far down is; or taking Christ out of mas. This may appear a necessary and innovative relaunch for future success; but more likely not. Without a past, there can be no future.
Rebuking tradition without principles is a dead end. For values are the core of cooperative design. With no past, the future becomes a shot in the dark. Survival becomes nothing more than a financial contest attempting just to stay up with overall trends.
Washington Irving’s Old Christmas stories from 1876 remind us of the binding power of tradition.
“Of all the old festivals,” Irving wrote, “that of Christmas awakens the strongest and most heartfelt associations. There is a tone of solemn and sacred feeling that blends with our conviviality and lifts the spirit to a state of hallowed and elevated enjoyment.”
This “solemn and sacred tone” is accessible all year round to those who respect the legacy of prior generations that established their current opportunities.
It also adds to life’s enjoyment.
In the It’s a Wonderful Life movie classic, George Bailey is granted his wish and gets to see what life would’ve been like had he never been born. He’s shocked by the results.
There was no one to fight for market competition, equality, opportunity and ownership for the working poor and middle class. Bedford Falls is renamed Pottersville.
Pottersville is packed with bars, strip clubs, casinos, and pawn shops. It’s full of cops and traffic and lights and noise and strangers. It’s filled with colder, harder people, with more violence, gambling, mental illness, debt, and rampant consumerism.
As George Bailey stated:
“Just remember this, Mr. Potter: That this rabble you’re talking about, they do most of the working and paying and living and dying in this community.”
Yesterday’s post presented a long-standing loyal member’s critique of the Vermont State Employees (VSE) merger with New England FCU (NEFCU). His objections included:
How did this idea of merging two “financially strong” credit unions arise? In a May 2016 interview with VT Digger, Rob Miller talks of his “learnings” after being hired to the VSE CEO position, his first job in credit unions:
“I thought it would be boring, frankly, to work at a bank,” he said.
Then he learned about the organization’s mission, that it was a not-for-profit financial cooperative, and that anyone in Vermont could be a member.
“VSECU’s mission – to improve the lives of Vermonters – that really spoke to me.”
“I suddenly saw an organization that had the capacity and the resources to really fulfill its mission,” he said.
His background isn’t one that typically leads to the position like he now holds, he admits.
“My first day as CEO was my first day working at a credit union. That was a big step for the board to hire outside of the industry.”
He lights up when he talks about VSECU’s latest initiative, to offer equity financing to cooperatives in Vermont, which typically only have access to debt financing. (not an FCU option)
“Coops are an important part of any regional economic development strategy,” he said. “They are locally owned, and the owners are the customers – it’s a business model that is inherently more sustainable,” he said. “It’s like paying yourself. That’s a natural incentive for success.”
“At our core, we are a cooperative. We embody people coming together to help one another,” he said.
These sentiments are certainly proper. In light of his merger initiative, the remarks suggest that human nature cannot always be nurtured.
In contrast, the CEO of NEFCU has held the top position since 1987 (almost 36 years) and will continue in that role after merger. Miller, as CEO of VSECU arrived in 2014, inheriting 65 years of members’ loyalty, resources and institutional success. He will be President and COO of the newly combined operations.
Here is a 1.34 minute video of the two men talking about this “partnership” and why a new name is important to “building a new organization.”
It is easy to understand how the two CEO’s developed the transaction between themselves, and then sold it their boards and staff. Their motivations are straight forward. It was a succession plan and capstone for the CEO nearing retirement. For VSE’s Miller it was a personal opportunity to take over a firm almost three times the size of his current job. A win for both, at the members’ expense.
No one would want stop a CEO from moving to a new job at a larger credit union. Happens all the time. But in this case the circumstance of the CEO bringing his credit union with him to this new job is highly unusual.
In the video the two men talk smoothly about “building a new organization” of 500 people. This necessitates a new name since the legacy of the old ones would hinder this process. This marketing video was part of the sales campaign. All members need to do is just vote their approval.
If you believe this “new organization” is built on the movement’s uniqueness, listen for the number of times the words cooperative or credit union are used. Or how this merger helps members. Zero. There are no beliefs like those used in Miller’s Digger awakening interview above.
This short video is professionally staged, in a garden-like setting, background theme music, the casual dress and coffee cups on the table creating an impression of shared camaraderie. It is all part of the grift.
A transaction so shallow suggests this merger of these previously sound credit unions may not be as straight forward as presented. Without a carefully considered roadmap, all the hard issues have been kicked down the road.
Here are several reasons why this merger, like many, may end up reducing, not enhancing member value.
In September VSE reported $25.3 million in borrowings as 12-month share growth fell to just 1.8%. Even with a $20 million increase in shares, the credit union’s dollar dividends to members fell 28% from the prior year. Members are paying the price for this underperformance. The credit union reduced its average cost of funds to just 16 basis points, even though short term rates have risen to almost 4%. The unrealized loss on the $136 million of investments went from nil to $25 million over the past year.
Prospects are so poor in Vermont that the plan is to take members deposits and earnings and invest those out of state. A sure fire way to retain Vermonters loyalty!
Throwing members under the bus to support an undefined merger plan is not a sustainable strategy.
It’s a Wonderful Life portrays the eternal conflict in a market economy between self-interest and those who believe in community values and stability. These two CEO’s are following Potter’s model, putting their futures ahead of their responsibility to members. The two Boards bought into the shell game; the employees put their names in the merger Notice in contrast to the values they had expressed making VSE truly special.
As the shallowness of this effort becomes more exposed, it won’t just be the members who will pay the price; the employees will learn that $100,000 plus jobs are a luxury when institutional success is the primary goal.
VSE member Don Kreis foresaw this possibility in his comment letter: If the $1.1 billion Vermont State Employees Credit Union cannot stand alone, cannot be just as convenient as a bank while giving members more value and more control than a for-profit financial institution can, then combining with another credit union is a waste of time.
The problem is not size or resources. It is a market-based society’s ever-present challenge of balancing personal self interest and community. In an earlier blog, The Tragedy of the Commons, I expressed the view that this and similar mergers were a test of whether a unique credit union system can survive:
A coop system reliant on values as a differentiator cannot long continue with coops and market capitalist wannabes side by side. For the latter will continue to prey on the former until everyone joins in the rush to get their share of cooperative gold.
Democratic coops should deliver more than for-profit banks. We need more Don Keis’s in the movement– people of goodwill who serve, who are pro-human and who knit together the fabric of society.
We need more Bailey-like credit unions that give, that contribute, and that cement communal stability.
Taking easy money is brutally hard on members.
It’s also hard on the soul.
This is the comment George would have written about the Vermont State Employees Credit Union merger proposal with New England FCU.
We all remember George Bailey from the holiday film classic set in the fictional Bedford Falls. Here is a quick synopsis from a writer who maintains the story is a dire warning about today. And perhaps the credit union movement?
It’s A Wonderful Life (Jared Brock)
For those who haven’t seen the movie — no judgment, but what are you doing with your life?! — it’s a story about an angel who is sent from heaven to help a desperately frustrated businessman by showing him what life would have been like if he had never existed.
But the B-story is a prophecy about the times in which we live.
George Bailey (played by the great Jimmy Stewart) runs the Bailey Bros Buildings and Loan Association, a company that contributes to the community by building affordable homes for owner-occupiers.
Henry F. Potter hates George’s guts. Rather than contribute to the town of Bedford Falls, Potter’s full-time job is extraction — he owns the bank, the bus lines, the department stores, and plays slumlord to a tenement called Potter’s Field.
While Potter dreams of bankrupting the Baileys so he can create a housing monopoly to milk the middle class to permanent poverty, George Bailey dreams of building “airfields, skyscrapers a hundred stories high, bridges a mile long.”
But George Bailey’s day-to-day goal is singular:
To help every working family own their own home.
Donald Kreis, a long-time credit union fan, responded to VSE’s proposal to end the credit union’s 75-year charter. His comment letter as filed with NCUA:
From the other side of the Connecticut River, the plan to merge the Vermont State Employees Credit Union (VSECU) out of existence seems like a bad idea, and I will be voting “no” on the proposal. Here is why.
Why I care about VSECU
VSECU – which I first joined when serving a judicial clerkship at the Vermont Supreme Court in 1997 – is one of the five credit unions to which I belong. I have only one rule when it comes to financial services: I don’t do business with banks, at least not voluntarily.
Investor-owned banks are in business to extract profits from their customers. I have always wanted to share my financial resources with my neighbors (or fellow employees), and I would like them to share their resources with me. A credit union is a financial institution that exists to help my neighbors and me do that, in a manner that we democratically control for our mutual benefit.
Thus, when I needed to buy my first car almost 40 years ago because my employer, Associated Press, was transferring me to a place (Portland, Maine) where I could not function without an automobile, I secured my first-ever loan from the AP Employees’ Credit Union. I was still a kid, fresh out of school, and not terribly desirable as a credit risk.
But a loan committee comprised of my fellow AP employees understood the need as well as the high likelihood that a young wire service newsperson would not renege on a promise to his colleagues. So, I got the loan.
Unfortunately, the AP credit union is long gone. Almost every credit union to which I have ever joined since then is indistinguishable from a bank. The neighbor-to-neighbor, colleague-to-colleague quality is gone. The organs of democracy have atrophied, and annual elections have become an empty formality.
There is only one exception, and it’s the Vermont State Employees Credit Union. Over the years, it has taken the idea of democratic member control seriously. It is the only credit union to which I have ever belonged that actively and enthusiastically promotes its annual election process.
What Beats Jet-Skis and Snowmobiles?
I don’t think it’s a coincidence that the VSECU is the only one of my five credit unions that actively promotes “green” lending. While other credit unions send me flyers and e-mails urging me to borrow money for leisure purposes (snowmobiles, jet-skis, extra cars), VSECU understands that what consumers really ought to be doing is borrowing money to make their homes both more energy efficient and self-sufficient.
This resonates profoundly for me, as the state official in New Hampshire (the Consumer Advocate) whose job is to advocate for the interests of residential ratepayers. Electricity and fuel prices are soaring right now, a result of our over-reliance on natural gas and other fossil fuels. But consumers are reluctant to borrow money to pay for things they can’t see, hold or drive around.
A credit union that is serious about the welfare of its member-owners will strive to educate them and encourage them to make long-term commitments to things that will make them wealthier and more secure over the long run.
The Case for the Merger – Platitudes and Generalities
Thus I was frankly shocked to learn earlier this year that the board of the VSECU had voted unanimously to merge our democracy-and-green-energy loving credit union into the much larger (and much more bank-like) New England Federal Credit Union (NEFCU). It seemed so out of character.
Naturally I assumed there were facts and circumstances of which I was unaware. When I inquired, I was told that to the extent I am entitled to information that would help inform my vote, the insights would be contained in the official document I then received. It is entitled “Notice of Special Meeting of the Members of Vermont State Employees Credit Union and Plan of Merger.”
The official Notice document does indeed make a compelling case for the merger – but only if you are willing to accept platitudes and generalities.
In the section of the Notice labeled “Reasons for merger,” VSECU states that “both credit unions are financially strong” but “face many of the same obstacles and challenges, including an aging Vermont population with slow to no growth; rapid and accelerated technology changes; environmental, economic and social change; and increased competition from out-of-state financial institutions.”
Fair enough, but this begs the question of what advantages the merger would confer as the new mega-CU seeks to confront those challenges. Answer: having swallowed up VSECU, the former NEFCU will be “better equipped to tackle the challenges facing financial institutions in a rural state.”
The Notice goes on to promise “economies of scale and combined resources” that will lead to unspecified “further improvement and opportunities” in eight listed areas – everything from “expanded branch and ATM access,” to “improved homeownership and financing initiatives to reduce energy consumption and environmental impact,” to “favorable rates and lower fees to members.”
These justifications are unpersuasive. Note the lack of promises or concrete examples of things that VSECU cannot simply do as a stand-alone billion-dollar credit union.
Economies of Scale and the CU Merger Frenzy
The “economies of scale” claim is especially troubling. The usual route to merger-related economies of scale is for the newer and bigger organization to trim staff to avoid duplication of effort. But in this instance the Notice promises that “all employees will keep their jobs and current salaries as part of the proposed merger.”
Economies of scale are indeed a ‘thing’ in the world of credit unions, but the proposed demise of the VSECU stands out. According to the trade publication Credit Union Times, the National Credit Union Administration (NCUA) approved no fewer than 86 credit union mergers during the first half of 2022 – overall, credit unions are stampeding to combine with one another – but the proposed VSECU deal is bigger than all but one of them. And in that biggest deal of the first half of 2022, VSECU’s New York counterpart – the $5.5 billion State Employees Credit Union – is taking over the smaller Cap Com Federal Credit Union.
Most of the credit union mergers in the current frenzy involve much smaller institutions. And, indeed, the consensus among industry insiders is that a credit union with less than $300 million in assets should indeed consider merging with another CU in the interest of amassing the resources to confront technological change and industry competition.
A $1.1 billion institution like VSECU already has, or already should have, all the economies of scale it needs.
Not a Merger of Equals-Equity Transfer
Although VSECU claims the proposed deal is not a takeover of our CU by the NEFCU, here is how you know that claim is wrong. If this were truly a merger of equals, then the members of both CUs would have to approve it. Because VSECU members are surrendering control of their financial institution, they and only they get to vote.
If you don’t believe me, consider what this deal would look like if both institutions were publicly traded, investor-owned businesses. The board of the ‘new’ credit union will have 11 members, six of which are from NEFCU. In the for-profit would, that would be considered a surrender of control – effectively, a takeover.
The $3 billion NEFCU intends to pay no consideration whatsoever to the current owners of the VSECU for the right to control what used to be their credit union. According to the latest 2021 balance sheet in the required Notice, VSECU members have built up $95.3 million in equity over the years – not a dime would be paid out to them in exchange for surrendering control of their credit union to its bigger and more bank-like Vermont competitor.
Such a payout would be easy enough to achieve by liquidating some of the $434 million in investments the combined credit union would have, above and beyond the $2.5 billion in loans on the books.
But, instead, the proponents of the merger are asking the members of the VSECU to surrender control of their credit union to a former competitor for free. No board of an investor-owned business would ever dare recommend such a proposal to its shareholders.
What’s at Stake? The Very Soul of the Credit Union Movement
In a sense, the impending vote on the takeover of VSECU should be seen as a referendum on the future of the U.S. credit union movement itself.
As I have already noted, VSECU stands out as a credit union that takes its cooperative identity seriously, along with its fidelity to the Cooperative Principles – the key principle being democratic member control. The New England Federal Credit Union is just another credit union that is content to operate like a bank does.
Why is this so important to me? After all, I no longer live in Vermont. I belong to four other credit unions and I even serve on the supervisory committee of one of them. So I could easily just sign and turn my back on VSECU.
I care about this because of something said to me by the CEO of the credit union on whose supervisory committee I serve. When I first met the CEO, I told him about how much democratic member control, and the other six Cooperative Principles, meant to me as a volunteer credit union leader.
In response, the CEO pulled out a cell phone and waved it in my face. The CEO mentioned an adult daughter – this executive’s go-to proxy for a typical credit union member. “Do you know what she cares about?,” asked the CEO. “It’s not voting. It’s this.”
The “this” to which the CEO was referring was the credit union’s phone app that allows members to do their banking from the device they carry around with them in their pockets and purses.
If that’s truly what all of this comes down to, then I give up and so should everyone else in the credit union movement. Credit unions can and should strive to keep up with the convenience-enabling technology deployed by the mega-banks.
But if credit unions can’t deliver value to members above and beyond the convenience that for-profit financial institutions already offer, there is no reason for them to exist.
In other words, if the $1.1 billion Vermont State Employees Credit Union cannot stand alone, cannot be just as convenient as a bank while giving members more value and more control than a for-profit financial institution can, then combining with another credit union is a waste of time. Instead, the Board of VSECU should just pay out that $95 million in member equity and turn over its loan portfolio, its deposits, and its checking accounts to some ultra-convenient bank.
Do Not Succumb to Cynicism and Fear
Indeed, maybe we no longer deserve VSECU as we have come to know and love it. Maybe we are unworthy of a democratically controlled financial institution.
When VSECU first announced the merger, and the skeptics began speaking out, the Board and management circled the wagons instead of treating member activism the way it deserves to be treated – as a welcome expression of commitment to the institution they collectively own.
In that sense, the leaders of VSECU are no different than the board and management of every other cooperative that has had to deal with members who flex their ‘democratic control’ muscles and question their elected representatives.
Maybe it’s just human nature – but, if so, then maybe “democratic member control,” and other Cooperative Principles like “education, training, and information” (which suggests members should be fully informed about the business realities their cooperatives confront), are just outdated platitudes.
We live in cynical times. So, it is not surprising that, even in Vermont, both the proponents and the opponents of the buy-out of VSECU by a bigger credit union question the motives and integrity of the other side in this discussion. I refuse to succumb to that cynicism.
Thus, I am grateful to the VSECU Board of Directors for presenting this proposed merger to us for a vote, and for making its best case for why we should ratify the deal. They, in turn, should understand my frustration over not having access to all of the information they had at their disposal as they deliberated.
Lacking that information, or any other compelling reason to vote in favor of consigning the Vermont State Employees Credit Union and all it stands for to oblivion, I vote “no.” I urge my fellow VSECU members to do likewise, in the hope that the VSECU of the future will look less like a bank and more like a cooperative.
If this credit union, with its commitment to cooperative culture and public service, cannot survive and thrive as an independent, community-owned, democratically controlled financial institution, then all is lost. I refuse to believe that.
END
He has served since 2016 as New Hampshire’s Consumer Advocate, heading up a small but feisty state agency whose purpose is to advocate on behalf of the interests of residential utility customers before the state’s PUC and other bodies (including FERC). Previously he served as general counsel at the New Hampshire PUC, as a hearing officer at the Vermont PUC, and as a professor at Vermont Law School, where he still teaches on a part-time adjunct basis.
Prior to becoming a lawyer, he was a full time journalist for nearly a decade, first with Associated Press and then at the fabled newsweekly Maine Times.
He served for eleven years on the board of the nation’s second biggest retail food co-op (the Hanover Consumer Cooperative Society) including three years as president. He was a nine-year trustee of what is now known as the Cooperative Fund of the Northeast, a CDFI that loans money to cooperatives.
He believes credit unions ought to live by the cooperative principles – and take democratic member control seriously.
His custom when joining a new credit union is to follow up about a week later with a request for the CU’s bylaws and express interest in seeking election to the board. That has inevitably been met with something on the continuum between bewilderment and hostility, except at the CU that invited him to join its ALCO and Supervisory committees.
Anything that can’t go on forever will eventually come to an end.
“The idea that we could strip-mine useful and productive businesses forever has an obvious flaw: eventually you will run out of productive businesses.
But there’s another, slightly less obvious flaw: long before the entire productive economy grinds to a halt, everyone who relies on it will get very, very angry.” (Cory Doctorow on November 20, 2022)
Last Friday’s blog described the multiple losses should the merger of Vermont State Employees (VSECU) with New England FCU proceed on January 1, 2023.
The members lose their credit union; 190 employees their career paths and individual agency; local communities– their partnerships; the state of Vermont– its leading cooperative financial institution; and the overall credit union system, another pubic example of purpose compromised by leaders’ self-interest.
The tragedy of the commons occurs when persons in positions of responsibility exploit the common resources of the community which they oversee for personal gain.
Should credit union leaders continually seek to acquire and merge sound, long serving credit unions, like VSECU, to fulfill their individual ambitions, I believe this will lead to the demise of the cooperative credit union movement.
VSECU’s example and innovative track record were so successful, that it was the subject of a 15- page analysis by Callahan’s September 2021 Quarterly Report. Several of these accomplishments were republished in five articles in January 2022 on cu.com, for example this description responding to the COVID crisis.
At September 30, 2022 the credit union reported $1.1 billion in assets; 71,625 members and 9 branches; $6.5 million in YTD net income and $102 million in equity. Average salary and benefits per employee exceeded $100,000.
Against this documented track record of long-term innovative performance, VSECU’s merger information offered nothing about the future. The credit union was already more than full service; it had pioneered special initiatives pursing a “greener” environment.
The continuing credit union’s leaders at NEFCU made no commitments to VSECU’s 71,000 credit union members’ who hold $922 million loans and $980 million savings. These members will be under the full sway of a board they did not elect and management that has no connection with their firm.
So undefined is this transaction that both CEO’s admitted in this twitter post, the consolidation would take over a full year to conclude and will require a completely new brand identity and name.
The back office conversions, product/service alignments and leadership selections will be the top priority at a time when members of both credit unions face economic uncertainty and anxiety from decades-high inflation.
In the Calling All Members website, the opponents point out that the two credit unions have very different fields of membership, histories, and market focus:
The continuing federal credit union’s Field of Membership will not be based on geography or residency. It will be numerous employer groups and organizations located in Vt, MA, ME, RI, CT, MI and even groups headquarters in San Diego and San Francisco. . . our statewide cooperative built by Vermonters for Vermonters will be gone—forever.
Two typical industry reactions to this latest example of a successful credit union being acquired by another include: “Not my problem” and “Didn’t the members approve?”
I believe this pattern of sellouts and acquisitions by cooperative leaders will ultimately lead to the end of a cooperative financial system in America. Here’s why.
The foundation of every credit union is member relationships. Almost all credit unions were started with no capital. They earned the loyalty of members by promising to be a different kind of financial firm.
Member-owners were invited to put their trust in their leaders and board. The affirmation of this process is the democratic one-member, one-vote design.
This merger now places VSECU’s relationships under the direction of strangers.
The action is based on the illusion that size is all that matters. Credit unions have never competed on size. It is a unique coop fantasy that coops can marry two mice and produce an elephant.
When size is the dominate goal, it becomes a trap of endless growth not creation of member value.
VSECU’s members have continually contributed more than sufficient resources to continue a long-term vision of hope empowered by local control and focus. The credit union has become a financial “sanctuary” established by members’ belief and trust.
Now their leaders (senior management and board) have abandoned them for the “Golden Calf” of “instant mass,” not substance. There has been no planning or discernment with those that built the institution and who own it.
The process of voting is nothing but an administrative fig leaf completely under the control and oversight of those temporarily in power and who have a vested conflict of interest. Only 21% of members voted. Of the total membership. just 316 votes (.4%) is the difference between those supporting and those opposing. This was certainly no vote of confidence in charter cancellation.
It would seem fool hardy to decide the fate of a 75-year old, high performing coop with such a micro thin margin of owner approval. It also raises the question of how the voting was managed by those who advocated only their side of the issue.
Regulators continue turning a blind eye and washing their hands of responsibility.
Mergers are the wild west of today’s financial markets. Second only to Crypto transactions, until that industry’s implosion is over.
Coop CEOs/boards are literally buying and selling millions of member relationships to firms with no connections, increasingly out of state, and who are unconstrained with what they can do with them. These kinds of hollow transactions and disclosures would normally attract the intense scrutiny of an SEC or FTC regulator if these were stock owned institutions.
Coop regulators would rather talk about inflation, consumer protection, fintech, DEI or other current topics rather than the elephant in their room.
Contrary to their assertion that this is just the free market at work, these are back-room deals, negotiated in private, devoid of transparency and without any public attempt to find the “best” deal for members.
Regulators avert their gaze pretending to be deaf, dumb and mute as they oversee the disintegration of the coop system.
VSECU’s leaders betrayed the trust members gave them. Credit unions embody the spirit of community. This action dissolves this special bond built by three generations of members.
The merger destroys the fundamental foundation of a cooperative leaving a financial eunuch in its place. It has no cooperative character or roots. Unlike a stock transaction, it lacks the credibility of a market affirming price. In these transactions, coops have devolved into purely private entities, controlled by individuals acting to consolidate and accrete their own power.
These are not people helping people; rather these mergers demonstrate CEO’s helping themselves.
One can understand why NEFCU’s CEO wants control of 71,000 member accounts with average combined member loan and savings balances of over $43,000. And to be given over $100 million of their collective savings while eliminating this vigorous, innovative competitor. No more “free” market choice for either firm’s members, or the general public.
This kind of transaction has no economic rationale or “market” driven basis. There is not a firm anywhere in America, coop or otherwise, who would not line up to accept such a generous “gift.”
VSECU’s leadership had embraced the Global Alliance for Banking Values (GABV) vision of “Finance at the service of people and the planet for the real economy.”
Their collective decision to transfer their fiduciary responsibilities to another firm show that corporate and personal values need not align. It certainly refutes the biblical adage that a person cannot serve God and mammon at the same time.
Self-interest may appear to succeed in the short term, but in the long term, it fails as a strategy. When the vision of the cooperative is “all I want is everything” personal ambition will fail for what only a community can sustain.
People are not stupid nor uninformed about these sham transactions. Most members follow their personal financial situation as a top priority. It is a heightened concern especially in a time of rising rates. When member generosity and loyalty is compromised by self-interested mergers, their support will fade away.
These transactions will end the unique public role for credit unions. Acting like banks, they will be treated like their for-profit competitors.
Regulators who have approved these pillages of common wealth for private gain will find themselves thrown in with all other financial overseers. The playing field will indeed be level.
There will be no credit unions on it. No tax exemption. Just wealth seeking institutions led by similarly motivated individuals.
The practice of buying and selling relationships is not new. It is part of the capitalist markets drive for greater and greater market share.
It is why the states and Congress authorized the tax exempt cooperatives as an option to prevent this exploitation.
A coop system reliant on values as a differentiator cannot long continue with coops and market capitalist wannabes side by side. For the latter will continue to prey on the former until everyone joins in the rush to get their share of cooperative gold.
Nothing will stop this pattern of private theft until persons of courage and confidence step up to call out this rapacious behavior. If this fails to occur, then as predicted on the Calling All Members site the national system of cooperatives, just like VSECU, will be gone-“forever.”
The elections this week were full of last minute drama. There will be many consequences yet to be sorted out from the results.
In one case the vote was especially close. Only 318 votes separated the two sides. The percentages were 51.1% versus 48.9%. Certainly one of the closest elections ever.
Voting participation however was not particularly high in this critical ballot. Of the eligible voters, only 21% cast votes.
The results were announced in this document on November 9th after polling had closed.
However this was not a republican vs. democrat political election. It was a vote to extinguish the charter of a 75-year, innovative state chartered financial cooperative.
The official tally was 7,622 for the merger and 7,304 against. The result is that $1.1 billion VSECU and its 71,000 member-owners will no longer have their own credit union.
It will be merged into the $1.9 billion New England FCU, officially on January 1, 2023.
Voting matters. By law the charter belongs to the member-owners, not management or the board. The leader’s duty is fiduciary, to always act in the members’ best interest. Voting is the core of democratic design.
So when almost 50% of members vote against a strategy that management has tried to sell them for almost a year, such a no confidence result would cause most responsible leaders to rethink their plan.
When announced in February, the opposition was visible, public and well thought out by conscientious members who launched their own website, Calling all Members. The State Employees Association Board of trustees voted to oppose the merger.
Even controlling all the communication and marketing resources, member contacts and legacy relationships, the vote barely exceeded the required majority. The members sense there is something that doesn’t add up in this charter cancellation.
The merger explanation contained two specific benefits: the NSF fee would be reduced by $10 and access to NEFCU branches would be opened. Both “benefits” could have been done immediately without merger.
The reasons for merging was given in rhetorical phrases about future plans and a new partnership, but no specifics.
The math for coop mergers is simple, 1 + 1 = 1. There is no increase in members, loans, capital or any objective market share measure. Instead one charter goes away along with its independent leadership and business strategy. VSECU relationships, good will and member loyalty is dissolved after 75 years and three generations of building its unique identity.
There was not even a thank you dividend for the $100 million in collective equity now transferred to the control of a new board and management with their own financial priorities and strategy. They have no operational or political connection with the 70,000 members who created this common wealth.
The merger announcement included the VSECU CEO’s observation: Our membership is highly engaged in the democratic process as member-owners evidenced by the highest credit union voter turnout ever in our history,” noted Miller. “As we look toward the future, we are excited about the opportunity this partnership promises and ready to take VSECU into our united future for all of our members.”
There are other consequential problems with this transaction. The first rule of financial soundness is to not put all one’s eggs in a single basket. This merger increases concentration and reduces diversification for both credit union members and the Vermont system.
Separately these two credit unions competed for market leadership and innovation. Now they are 47% of the Vermont credit union market by assets and 40% of members. That concentration should raise both financial as well as public policy issues. As the American Banker’s lead story on February 23, 2022 described the situation, Vermont’s Largest Credit Union Merging with Rival.
Vermont’s credit union system is smaller, losing it largest state charter with total credit unions numbering just 17. Traditionally, the state charter has been more innovative and flexible than the federal option, but the largest example of that difference is now gone. The political sway in state debates is lessened both institutionally and by members.
From VSECU’s press release:
The two credit unions will continue to operate separately as VSECU and NEFCU until January 1, 2023. On that date, VSECU will become a division of New England Federal Credit Union. No changes will occur for members of either credit union while integration of systems, services, and products occurs. While there is no firm deadline for the conclusion of the integration, it is expected that the combined credit union will operate as one entity later in 2023.
Currently, it’s banking as usual at VSECU, soon to be a division of New England Federal Credit Union, until we identify and create a new name for our combined organization.”
With 50% of “highly engaged” members opposing this cancellation of their independent charter, how many others feel the same way? The new name, organization and operational integration is over a year away. How many will wait around to see what this new identify and “vision’ looks like?
A number of years ago VSECU became one of a very few American credit unions to join the Global Alliance for Banking Values.
The vision of this global network is: Finance at the service of people and the planet.
Our collective goal is to change the banking system so that it is more transparent, supports economic, social and environmental sustainability, and is composed of a diverse range of banking institutions serving the real economy.
In support of this effort VSECU announced its own expanded vision five years ago:
“To inspire a movement that brings people together to empower the possibilities for greater financial, environmental, and social prosperity.”
The goal? To align our organization with a larger movement of values-based and impact-driven organizations in Vermont and around the world.”
Two major initiatives were begun as part of this restated purpose. One was called Powered by VSECU to stimulate social and economic opportunities through innovative partnerships around the state.
The second was Alternative Capital, to help small businesses and coops raise financing including direct investments in coops. VSECU was one of the few credit unions making these coop investments.
This new vision from 2016 lasted just five years. The merger has no expressed vision. The credit unions will continue what they were doing until they figure out the combined operations and develop a new name and brand. Both credit unions are giving up their historical legacies.
Many VSECU’s members sensed that this combination promised nothing and took away what the valued. The fact VSECU management gave up on their vision less than five years for an undefined merger, foreshadows a challenge retaining the trust of the members who built this organization.
More is at stake than just member-owner patronage.
At a time of increasing economic uncertainty and record inflation, the one institution members have counted on is no longer theirs.
Members have lost their capital, their independent leadership, their long established relationships and their unique identity.
Moreover in this stressed economic moment, members of both institutions will spend millions of dollars on vendor contract cancellations, product and operational conversions, and payments due when benefit plans are terminated.
Both sets of employees will eventually be rationalized. No organization needs two marketing, HR, mortgage lending, and operational leaders. There is no efficiency from scale without redundancy reduction. Aspirational professional career paths are eliminated.
The credit union system in Vermont loses its state leader and its ability to influence local regulatory and political institutions when change is desired. Larger credit unions tend to separate their self interest from the system that spawned their creation in the beginning.
The national credit unions system has lost one of its examples of green leadership. VSECU Eyes a Green Future in Vermont, is just one story of a series at creditunions.com portraying the credit union’s business innovations. The stories exist no more. The institution is gone. Size becomes the goal, not values.
With widespread opposition and an absence of any concrete benefits or plans, the merger has cost thousands of members and multiple interdependent organizations real losses. The transaction comes at a time of heightened vulnerability for members and institutions.
Positive momentum is lost. Priorities become institutional assimilation projects, not serving local communities.
As one member read the posted results he wrote that within a year or so employees will be gone to “pursue other opportunities” and collect the benefits from their terminated plans. He ended saying: The board and senior leaders were hired to serve the members. What makes me deeply sad is not the money, it’s the betrayal.”
To build a successful credit union on a foundation on member loyalty and trust takes years. Both can be lost overnight. In a single election.
It is an accepted truism for NCUA board members presenting their credentials for Senate confirmation, or whenever the agency is justifying a new rule, reg or policy, to state their ultimate goal is “to protect the insurance fund.”
Current board members have even called that objective their goal or North Star. Their primary job.
This assertion turns upside down the logic of means and ends.
NCUA’s primary responsibility, its purpose, is encouraging and sustaining the resilience and integrity of a cooperative financial system for American consumers. The FCU Act states:
The term Federal credit union means a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident and productive purposes
To achieve this end, NCUA was given multiple means in the law: chartering, examinations, supervision, administration of charter changes, issuing regulations and providing expert guidance. The tool least used, as it is rarely needed, is calling upon NCUSIF.
Most importantly, the FCU act specifically states the NCUSIF’s financial solvency is protected by the full faith and credit of the credit union system. All members must deposit and maintain 1 cent of each share dollar in a credit union with the NCUSIF. Every member is part of this collective guarantee ensuring all other member shares are indeed safe. This is a cooperative movement commitment, unique to the NCUSIF. It is the law.
If all of NCUA’s every day tools ( the other “means”) are effectively managed, then the members should never be called upon to provide additional resources. That is how NCUA protects the Fund.
The first four-decades of regulatory responsibility to maintain cooperative system integrity from 1934-1971 did not require the share insurance tool.
One aspect of “integrity” was certainly promoting credit union solvency as there has always been reserving and net worth requirements in the law.
But just as important, system “integrity” (as a source of credit) also included vital cooperative components to provide a distinct financial alternative for members. These include democratic governance, values such as education and collaboration, volunteer leadership (unpaid directors and committee members), access for all Americans regardless of financial circumstance (capital), focus on community (common bond), and contrary to the capitalist model, building common wealth versus private equity, to be used by future generations .
Over time additional characteristics have been developed including interdependence (corporates and CUSO’s) and system support augmenting the critical initial role of sponsors.
When Congress approved the NCUSIF for credit unions in 1971, it was a reward for their performance. As stated at that time, insurance was not due to financial problems with credit unions or the cooperative system. Rather it recognized their growing contribution to the American economy and that they might not perceived by the public as the equal of their FSLIC/FDIC alternatives.
For NCUA to faithfully fulfill its mission to protect the integrity of this cooperative financial alternative, an appropriate regulatory policy framework is necessary. Such a framework should be nonpartisan and multi-administration. Past examples are the deregulation of shares by NCUA or the redesign of the NCUSIF.
Without a thoughtful and evolving framework, NCUA becomes a mishmash of regulatory justifications or each Chairman’s personal priorities. What do the banking regulators do? Or let the “free market” work its will. Or elevating suboptimal tasks and agency operations to define priorities.
Absent a policy framework, the unique role of cooperatives becomes increasingly confused with all the other financial activity in the marketplace. No longer are the well-being and rights of member-owners front and center. Bright shiny objects such as innovation and new technologies take center stage.
The ambitions of managers and boards seeking to outgrow their for-profit competitors become the industry’s defining priority. Some credit union leaders chart success not by developing a better alternative to attract members, but rather using their decades of member reserves for buying out bank owners at a premium.
That activity would certainly seem contrary to the spirit of the Act. And therefore worthy of public debate.
Credit union CEO’s, nearing retirement, game the system for personal enrichment “selling their credit union” via merger. They capitalize on the transfer of members’ accumulated wealth and loyalty for additional bonuses and extended payments beyond those merited as CEO.
In these transactions, the financial and relationship legacy, its goodwill, is turned over to boards and CEO’s with no prior connection. And justified only with vague future promises that bigger is better. The unique character of the charter and its local legacy and traditional focus are eliminated.
Tomorrow Part II, developing a policy framework.
