24 July 2009

What Would Happen? A Fresh Start.

What would happen if credit unions started fresh? Fresh fresh...like 1852 Eilenburg and Delitzsch fresh. Or 1901 Lévis, Québec fresh. Or even 1908 Manchester, New Hampshire fresh.

If we could start again, what we would do differently? Would our leaders take the same path if they were given the opportunity?

Here's a sample of what I would have done (if of course the stupid law, and common sense, wouldn't get in the way).

I would make democratic control mean more on the individual credit union level. I would make ownership mean more than just an annual vote. I wouldn't pay monthly dividends. Instead of encouraging member investments in various share accounts, I would make member deposits THE investment. Members would get equity shares in the credit union instead of regular dividends, and would be able to cash out at any time as long as there is a willing buyer (which could be the credit union itself). As the credit union becomes more successful, the value of member shares increases. As the credit union makes poor decisions, those values dip. Thus, members would have a vested interest in the health of their credit union.

I would place a cap on an individual's deposits in any one credit union, and lower the share insurance on each account to, say, $50,000. No single member should be allowed to have excessive equity in, or control over, any credit union. Likewise, no member should be allowed to deposit less than the credit union's par share value each year. This membership requirement will encourage growth and member involvement, while weeding out the members who do not value their membership.

I would rethink the idea of dues based memberships in trade associations. We are a cooperative movement, directed by volunteers. Any trade group we form, then, should be on a free and voluntary basis. Don't want to share ideas? Cool, don't. Want to? Nice, welcome to the club. Credit unions shouldn't have to pay to collaborate with other credit unions.

Trade associations, instead, would take the form of think tanks...staffed by democratically-elected volunteers with strict term limits. These associations would help form a national brand, serve as representatives to community groups and government officials, come together to address concerns of the movement, and decide, with the help of their constituents, which technology investments to make. These investments would be the property of the credit union movement, and could be used at no charge by any credit union that contributed (personnel, money, or any other assets) to the project. Start up credit unions would also have access to these technologies for a period not to exceed five years. At that point in time, they would be required to pay their portion of the initial investment that all other credit unions made to develop the technologies.

Corporate credit unions would only be able to invest in or borrow from other credit unions. Likewise, natural person credit unions would only be able to invest in or borrow from other credit unions or their own members.

Finally, no member could apply for a loan unless he/she has been a credit union member for at least 12 months.

Of course, my credit union system probably wouldn't have survived 10 years...but I thought it would be fun to think about this. The fact of the matter is that most credit unions have done a very good job of staying true to our mission. That's what keeps me passionate about the movement. I do think, however, that we can do better. Your thoughts?


wazaroff said...

Hey Matt. Good post.

I think first of all, I wouldn't have called them credit unions. I would call them financial co-operatives, or co-operative banks, or something that really emphasizes that they are a co-operative.

I would have more tightly aligned them to other co-operatives in other sectors, as a way of partnering, providing credit to them to help them grow and prosper and keep them rooted in the community.

I would emphasize that buying a membership has real benefits and is not just a hurdle to jump through.

I would create a shared services model like we have in BC, so CUs can differentiate on a whole host of issues, but save costs to make them more efficient on a bunch of back office services that they all need.

There's a bunch of other stuff, and I'm formulating a post of my own about making membership optional that struck me as a counter-intuitive idea ion Bologna. But that's all I got in me right now.

Oh, and I'd locate the Financial Co-operative global headquarter in North Carolina (okay, now I'm pandering...).

Matt, the Credit Union Warrior said...

No harm in pandering! :)

Your idea of optional membership makes me downright intrigued. Membership could get you discounts and ownership rights, but anyone could use your services. What I also like about it is that you could potentially require things like voting or volunteering. Can't wait to read your thoughts!

The duplication of back office functions across the movement here in the U.S. drives me nuts...almost as much as our dependency on outside vendors. We should acquire quality vendors, or pool our money together to vertically integrate through a combination of acquisitions and internal innovation.

I need to write a whole post on the name "credit union". I seem to be one of the few voices in the CU blogosphere that truly don't think our name is a huge issue. Do I like "cooperative bank" better? Maybe. But it's not our name that has prevented us from being widely understood as a movement. Instead, it has been our inability to effectively and consistently communicate and demonstrate the benefits of membership.

Thanks for your comment, William...top notch.

wazaroff said...

One of the main things I learned in Bologna was the emphasis on quality. Cooperatives there deliver a service or product that enriches the community and has a strong social purpose, but is also of undeniably high quality. I think in North America we use our cooperative model as an excuse for inferior quality, and that is not right for our members. Our members deserve the highest quality because they own the place.

As far as the name Credit Union goes, it seems to me that we have all tried to make it work, and no one really has, so there must be some inherent barrier to success there. Not a huge element of what you are writing about, but it strikes me as a simple truth about what we're doing.

Thanks for the post, Matt!

Tim McApine said...

Some of this sounds good. Some of this sounds very odd to me. For instance:

"I would place a cap on an individual's deposits in any one credit union, and lower the share insurance on each account to, say, $50,000."

Don't most credit unions want to be the primary financial institution of their members? This policy would basically push those with money to banks and make credit unions far less attractive and competitive. Why should a member be penalized for having money? Credit unions talk about the desire to have deeper share of wallet with members because you need more than free checking account holders to survive. This policy runs counter to this desire.

"Finally, no member could apply for a loan unless he/she has been a credit union member for at least 12 months."

This may help with delinquencies, but how could this fly in a free-enterprise world? Why would someone wait for a year to get a loan when they can walk into numerous competitors and get money now?

"Any trade group we form, then, should be on a free and voluntary basis."

How would a trade association exist if there was not money to pay for employees or the rent?

"These investments would be the property of the credit union movement, and could be used at no charge by any credit union that contributed (personnel, money, or any other assets) to the project."

As the owner of a small company 100% committed to the credit union movement, I guess I can't wrap my head around a business model that doesn't encourage or have room for outside help.

Other than that, it sounds interesting. :)

Matt, the Credit Union Warrior said...

@Tim Your reaction is precisely what I was expecting. So, let me explain further.

The deposit cap would do two things. First, it would cap the influence any one member would have on a credit union. Remember, the entire intent of these changes is to make membership and democratic control truly mean something. A $50,000 cap would cover a ton of people. Deposits in excess of that figure could be deposited at another credit union, or in investment vehicles not offered by the credit union. The credit union mission isn't to be a PFI or have more wallet share...it's to promote thrift and provide an affordable source of credit. Second, limiting deposits by any individual depositor also keeps credit unions from providing excess benefits to any one member. One of the things that got the corporates in trouble was overpaying for deposits (and thus making risky investments to pay for them). I think this cap would allow for more sustainable and affordable growth.

The purpose of the 12-month waiting period has nothing to do with delinquencies. Instead, it has to do with making membership meaningful. It's my belief that in credit unions members should be loaning to members...not to people who have simply shopped around for the best rate.

Trade associations could and should exists, but on a voluntary (or pay per project) basis. I think in some cases our trade associations have way too much control/influence on our operations. That really should be the other way around. I'm not as opposed to dues based memberships as I am against the massive size and autonomy of some of these groups. We see tremendous benefits from NAFCU, NASCUS, CUNA, CUES, state leagues, etc...I've just always wondered why we weren't cooperating outside those structures.

I think my model has a ton of room for hiring firms just like yours. In fact, if we operated as lean as we should firms like yours would even more more desirable with my model than they are right now. The technology ownership that I was talking about in my post simply had to do with technologies that each and every credit union pays for - electronic statements, bill pay, statements, payment systems, core processors, etc. To truly capitalize on our cooperative structure, we must pool our money together to develop and own these technologies ourselves. We've done this with many of our CUSOs, but not to the extent that we have needed.

Glad you liked, err hated, my post.. :)

Tim McApine said...

Thanks for the further clarifications. I didn't hate your post, I just didn't understand some of the thinking. You've explained it well.

The part I still have most trouble understanding is capping member size. Given the choice, I don't want to deal with numerous financial institutions, I want to deal with my one credit union for business, mortgage, savings, investments. That may just be a Canadian thing... I don't know.

Can't you still have a one member, one vote and not let the size of someone's wallet equal more influence?

Matt, the Credit Union Warrior said...

@Tim Even with the best of intentions, a member with $50 on deposit is likely to be treated differently than one with $500,000 on deposit. My credit union does an excellent job of preventing that mentality, but it's easier said than done.

For "One member, one vote" to work as designed, membership has to be defined better than simply "has $25 on deposit." To me, being a member should have more meaning...thus, a vote would have more meaning. That's why I am halfway in support of a equity based ownership model. Why not let members own a portion of the credit union based on their participation (deposits, loan activity)? Again, this would make membership an investment and encourage participation. Capping deposits (or at least ownership shares) would cap the influence that any one member could have over the credit union, while still giving him/her adequate ownership rights.

I don't think what I spelled out in this post is the answer, or even an answer. The point was to get us thinking about how things could have been done differently. My goal was to address a few concerns I have about what we communicate versus how we operate. Ownership, cooperation, vertical integration, and democratic control are four items that I think we have lost track of.

Barb Kachelski said...

You have an intriguing theory, and I agree that collaboration among credit unions can take place at no charge.

However, I believe that the value an association brings is beyond collaboration among its members. In CUES case, we provide members with venues (both in person and remote) to interact and share knowledge with fellow members. Undoubtedly free avenues exist for this particular application. However, the free social media sites bear an expense of time to the member... Many of the individuals who post are selling something, so the reader needs to wade through messages that may be less pertinent.

The strongest values of membership are education, research and providing a mechanism for credit union leaders to help grow the leaders of the future. CUES institutes, free-to-the movement research efforts and recognition of future leaders would be very difficult to carry out through volunteers alone... After all, credit unions themselves were once run by volunteers. But as the number of members they served and offerings they supported grew, the volunteers began to hire staff members. It simply took too much volunteer time to remain as it was.

As our VP/Professional Development Kevin Davies pointed out to me a few weeks ago, Chris Anderson's book "Free: The Future of a Radical Price" is sold on Amazon for $26.99.

Matt, the Credit Union Warrior said...

@Barb - Thank you so much for your response. I was really hoping to hear from trade associations in response to this post, and I'm not surprised at all that CUES would be the first to do so.

The fact that even though membership in our trade associations is optional you are still strong, indicates the true power of what you all are doing for individual credit unions and the overall movement. CUES in particular consistently offers excellent educational and collaboration opportunities for members. Your free resources, such as the Skybox and Nexus blogs are top quality as well.

My beef isn't with the trade associations. Instead, it's more aimed at the laziness with which credit unions have handled our trade associations. Many are reluctant to collaborate outside these associations. Worse, too many see dues paid to these associations as satisfactorily meeting our obligations to cooperate with one another. Worse still, we have allowed certain trade associations to speak for the movement, even though they are clearly speaking for the credit union aristocracy (or protecting their own interests alone).

If anything, trade associations have done too good of a job in some cases. This has allowed credit unions to become passive in important aspects such as public relations, political action, and education. Sites like everythingcu.com and banktastic.com have proven that there is quite an appetite for collaboration outside these structures. I'm not going to argue that we would be better off without our trade associations (not even close). Rather, I'd argue that we would be better off if we'd all look for additional ways to collaborate - formally, informally, organized, and not. We'd also be better off if we'd pay closer attention to our democratic control of these organizations. As we saw from the TARP debate, some trades cared more about dues dollars than the future of the movement.

Thank you for your input - and for all you do at CUES!