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E Pluribus Unum or the Reverse?

“Out of many, one” is the motto of the United states. The many states joining to form one union.

This is often how we approach any project, piece by piece, brick by brick, member by member.

Yet cooperative design rests on a different premise.  From a place of community (later called field of membership), the credit union emerges to serve individual needs.

Community is the foundation of cooperative design. Even as individual credit unions become financially self sufficient (post sponsor era), and accountable for their individual performance, sustainability requires continuing to create a sense of community. This may be geographic, values based, common employment or even shared purpose.

A shared commonality is the key to maintaining member relationships, which are the real capital on which every credit union depends.

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Junk

This play by Ayad Akhtar is a story of the financial industry in the mid-1980s and the disruption caused by the creation of junk bond financing. The play is loosely based on the career of Michael Milken who perfected the technique of leveraged buyouts funded by high-risk high reward bonds.  It introduced a whole new means of financing outside the traditional options provided by the “white shoe” Wall Street investment firms that had dominated market access.

The play’s leading character describes this financial innovation by his repeated assertion that “debt is an asset.”

As credit unions increasingly push access to “secondary capital” to the top of their regulatory or strategic priorities, it may be useful to remember that “secondary capital” is nothing more than an unsecured term borrowing at rates much higher than credit unions pay their members for shares.

Calling these long term, high cost financial borrowings capital, because of payment priority in the very remote event of liquidation by NCUA, seems akin to calling “debt an asset.”

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The New Capital: Member Data

Member data is an asset. It is so potentially valuable that FDIC Chair Jelena McWilliams calls it the “new capital.” But that asset is nowhere on the balance sheet. However, it might be inferred from traditional institutional numbers such as average loan and share balances.

Because member data is not recorded financially, the necessity to convert this “capital” into a member service opportunity is often opaque. That is, until an outside party comes and wants access to some information to promote a new service or solution such as a software to manage an aspect of member’s life such as teen spending.

The member-owner design can help position credit unions as trusted fiduciaries with this information. Fintech innovators often view credit unions as valuable partners for targeted solutions because of their trove of member information and assumed trust.

What is the opportunity within the cooperative movement for the stewardship of this “capital?” How can credit unions both teach the value of and facilitate member benefit from their information?

Several countries including the United Kingdom have implemented the concept of “open banking.” https://www.americanbanker.com/opinion/us-way-behind-the-curve-on-open-banking

One way to explore this concept would be for credit unions to provide members the ability to grant permission of their financial data to other third parties. Under this concept, members would gain the ability to seamlessly and securely allow trusted third parties access to their member information.

Today this process is partially accomplished by aggregators such as Yodlee, but this is an uncertain process subject to operational disruptions. It is frequently limited to traditional product information available by screen scrapping.

By teaching members to value their data, credit unions can initiate member experiences that can help test new financial tools or solutions—thus enhancing the cooperative’s role as an intermediary.

As a member, I would certainly be interested in participating in these kinds of consumer innovations. Increasing my financial awareness, can only enhance my relationship to the cooperative.

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Why Financial Disruption is an Attractive Fintech Opportunity

Many factors are powering the multiple fintech startups in the financial sector.

The advantages of internet-based platforms are clear: low startup costs, rapid and continuing market responsiveness, easy scalability, preferred channel for younger demographics just entering markets, etc.

An example of the fintech ecosystem’s many segments can be read here.

But another reason financial services are subject to such extensive external disruptive efforts is that the barriers to entry for traditional charters are enormous. New charters for both banks and credit unions are costly, time consuming and closely monitored.

As a result, de novo charters are few and far between. Five new CU charters have been approved by NCUA in the last decade. The average organizational effort is more than four years, and often longer.

For cooperatives, incumbent credit unions are protected from new entrants by a massive regulatory chartering obstacle that effectively prevents new competitors, no matter how much needed by organizers.

However, if one looks at the number of new and innovative CUSO startups by credit unions, the appetite for innovation and new solutions is clearly understood. But without an openness to new charters, these ventures will be outside the traditional charter structure. While that may be a necessary short-term path for innovation, is that approach hindering a credit union’s ability to change themselves?

Outsourcing technology innovation and solutions to new organizations is expedient. But will it stymie more dynamic and necessary approaches in traditional credit union operations and services?

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Understanding Disruption Within a Full Economic Cycle

At the FDIC’s April 23 Fintech conference, frequent reference was made to the growing role of “marketplace lenders”; firms using internet technology to reach customers directly versus traditional branch based, depository strategies.

Two frequent credit disruptors were cited: Quicken and peer lenders such as Lending Tree, Sofi, etc.

One estimate is that 40% of unsecured consumer credit was provided by fintech firms last year. Quicken was the number one mortgage originator in 2018.

While the advantages of internet based providers were easily listed–convenience, speed, ease of use, targeted market capabilities–the potential challenges were also noted. Most internet providers rely on external funding, which could disappear in a sectoral or broader economic downturn. Moreover the majority of marketplace lending innovation has been done in the very low and benign post-2008-crisis interest rate environment. Would their funding strategies be as viable in a higher or more volatile rate climate?

More importantly, the credit quality of most unsecured consumer lenders has not been subject to the stress of a economic downturn with rising unemployment. This part of the cycle is when capital adequacy is most tested.

There are real consumer benefits from financial innovation. However the lesson is to be careful about concluding that disruption in the short term will necessarily reshape markets over a full cycle. Market shakeouts may seem immediate, but the ultimate restructuring may not be known until incumbent firms and innovators experience a full cycle of financial competition.

Might such a perspective have informed credit unions’ and NCUA’s responses to the disruption of the taxi medallion industry? A subject for ongoing examination.

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Treasury Secretary Mnuchin Says Financial Regulatory Consolidation Not an Administration Goal

As the opening speaker at the FDIC’s Fintech conference on April 23, Treasury Secretary Mnuchin was asked by an attendee if consolidation of the financial regulatory agencies was an administration objective. He replied that it had been evaluated early on in the administration but was no longer an issue.

If the topic of regulatory consolidation arises, NCUA might be the most vulnerable of the independent agencies. A precedent has been set by the Savings and Loan industry in which FSLIC was merged into the FDIC and the OCC became the chartering, supervising authority for federal charters. The FHLB system was “spun off” the S&L system in the late 1980s when its charter was opened to serve all mortgage related financial providers.

When asked to comment on the recent OMB suggestion that all independent agency rules be submitted for review prior to issuance, Mnuchin suggested this was not an area for him to comment.

So the question remains: to whom is the NCUA answerable to, if anyone? Or does independence imply free of all accountability?

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The Entrepreneurs: Attracting the Next Cohort of Credit Union Leaders

Every business from Coca-Cola to Ford Motors faces the same marketplace reality. How does successfully serving one generation of customers transition to the next? Will consumers have the same tastes? Have the same transportation needs? Respond to similar messages?

At the George Washington University’s New Venture Competition, the guest speaker portrayed a different challenge in attracting today’s students.

Tim Hwang graduated from Princeton in 2013 and is today the CEO of Fiscal Notes a technology application for select areas of legal case research.

He described his age as the entrepreneurial generation. Students across the country are demonstrating widespread interest in building startups to change the status quo.

Today major universities see this student interest. From Ivy league schools to smaller liberal arts, university administrations are sponsoring new ventures and rewarding winning startups with cash prizes and offers of future help.

A sample of winners from GW’s recent contest are illuminating, even inspiring. From the winners list students are creating technology, engineering, social, and network business startups serving almost every area of society.

I was aware of this growing university commitment because one year earlier a group of freshmen who wanted to start a credit union for GW students, became one of the nine finalists out of hundreds of startup proposals in the new competition final.

These students have significant faculty and formal university endorsement. They have researched and met with numerous credit union vendors willing to help, often at little or no initial expense.

The most difficult part is the regulatory approval. They plan to spend the next three years of their college careers to this startup, and then leave it as a legacy for future students.

In addition to specific capital requirements, NCUA’s drawn out, detailed approval schedule would discourage even the most gung-ho organizers.

In the last decade there have been fewer than ten new charters. If this is the pace of new entries, will the cooperative model miss recruiting this generation of members?

As a member does your credit union actively serve startups? How does it encourage entrepreneurs of all ages seeking to create new solutions for their communities?

The questions are important. For the mindset to seek out and encourage member innovators, may be an important indicator of management’s ability to renew the credit union’s organizational design.