Lessons from Cheesesteaks

Last year, the Credit Union Skeptic and I had a relatively public debate about the appeal of the credit union structure to the public. The Skeptic's take was essentially (paraphrased), "who cares what your structure is? People care about the products, services, and experiences you offer them."

My take was (and is) essentially "everything that makes credit unions great starts with their structure. I’m not talking about organizational structure, I’m talking about constitution – the basic building blocks of what credit unions are. The democratic control of an individual CU, and how each individual institution puts their philosophy into action is what causes differentiation and unique appeal to FOMs."

According to Frank Olivieri of Pat's Famous Steaks in Philadelphia, the Skeptic won that round. Frank says of his legendary steak sandwiches, "if the sandwich wasn't tasty and good, no matter how much passion you have no one would come back to buy it again."

He's right. The structure of Geno's and Pat's would mean absolutely nothing if their food was terrible. Their attitudes wouldn't matter. Their passion for cooking philly cheesesteaks wouldn't matter. While structure does mean something, long lines wrap around these two establishments because people love the product being sold.

Here's why I'm still right. The people in those lines aren't just buying cheesesteaks. Instead, they're buying a piece of Philadelphia. They are buying an experience. If Subway could create an equally great philly cheesesteak, I'd bet you an ice cold Mountain Dew that they still wouldn't be able to attract the huge lines of customers that Geno's and Pat's enjoy.

Structure is important for credit unions not only because of how it engineers our service offerings, but also for how it creates a distinction between what/who we are in business for versus what/who banks are in business for. For the cases in which credit union sandwiches look similar and taste similar to bank sandwiches, structure can be the sales incentive. It's why we buy the ProjectRED iPod instead of the blue one (or Zune). It's why we buy the pink Campbell's Soup can, instead of Progresso brand. It's why we buy our outdoor gear at REI instead of Cabela's.

While our sandwiches should taste better anyway, it's nice to know that we have the power of our structure behind us to sweeten the deal.

P2I2I2P Lending? Why Not Just Return to Our Credit Union Roots?

I really like the idea of Peer-to-Peer lending. Based on what I know of the history of credit unions, that's pretty much what we were formed to do: cooperatively save money to provide ourselves with an affordable source of credit. Member owners (peers) lend to other member owners (peers). Of course, there's an intermediary - whether that be credit union loan officers, a branch manager, or a paid/unpaid (perhaps elected) credit committee. But it's still P2P lending.

I'm told that this isn't as sexy as allowing an individual member to select an individual borrower, using a credit union as an intermediary (taking a percentage of the transaction as compensation). As an individual investor or potential borrower, I totally get that. This is precisely why I have always been a fan of the P2P models that have come to the United States in the past several years. I've just never seen them as true P2P arrangements. Instead, they are more like Peer-to-Intermediary-to-Peer lending (P2I2P).

Why do I spend any time at all pointing out this distinction? Because it indicates that this mindset is somehow different from what credit unions, by definition, already do - albeit Peers-to-Intermediary-to-Peer as opposed to Peer-to-Intermediary-to-Peer lending. Truth is, most loans in the supposed P2P landscape are Peers-to-Intermediary-to-Peer arrangements anyway. (I'd even argue that the current P2P models are really P2I2I2P arrangements, but that's another topic for another day). The mindset is exactly the same as the credit union model.

"Wait, you idiot," you're thinking, "credit union members don't get to pick an individual borrower. That's a big difference."

True. But there's nothing stopping us from doing that. In fact, early credit unions kind of did pick individual borrowers. They knew their members and used credit committees to evaluate potential borrowers' risk profiles (used to be known as the 4 C's of credit - collateral, capacity, character, and capital). It was members loaning to members - arguably even more intimately than today's P2P models. There's nothing stopping a credit union from returning to the days of credit committees comprised of members who are empowered to make lending decisions.

"That's the dumbest thing I've ever heard," you laugh...considering clicking away from this post. "What do members know about making loans? Loan decisions should be made by trained loan officers."

I agree. In fact, Desjardins himself said that there is no greater responsibility a credit union has than making smart lending decisions. Loans are investments, and there is no quicker way to bring down a financial institution than poor investments. I wonder, though, why couldn't members be the trained loan officers? Why couldn't they be taught how to make smart lending decisions and enjoy the rewards and risks of their actions?

"Uhhh...that's what the P2P models do, dummy."

I guess that's what I was suggesting last year when I proposed that credit unions allow members to form sub-credit unions:

I’ve always wanted to do that as a promotion at my credit union: “Start your own credit union.” Part P2P lending, part membership “pods,” I think it would be neat to allow users/members/etc. to form their own “virtual credit unions” housed within an existing credit union.

Here’s how it would work. Joe Blow and his softball team want to create “Raging Rhino Credit Union.” They pool their money together (say, $10,000) and deposit it into ABC Credit Union under the name “Raging Rhino Credit Union” (RRCU). ABC facilitates transactions, prints statements, etc. in exchange for a monthly fee based on assets within the RRCU (say, two basis points annually, charged on a monthly basis). Collections and other CU functions can be charged at separate rates.

RRCU as a sub-credit union with its own board can set deposit types/rates and loan types/rates in any way they see fit as long as they have the assets to support their decisions. This way, a parent credit union could contain hundreds of “pod” CU’s operating semi-autonomously. Their own websites. Their own marketing. Their own corner of the cooperative universe.

My point is simply that we aren't embracing the principles that originally attracted members to credit unions. The fact that many people don't see credit unions already as P2P lenders highlights this point. That's exactly what we are (should be). It doesn't matter if you decide that a Kiva, Prosper, LendingClub, etc. model is right for your credit union/members, my crazy idea about virtual credit unions may work, or that business as usual satisfies the public that you are a P2P lender. We must make sure that that's what we are seen as: financial institutions that empower members, through democratic control and cooperation, to help each other save and borrow more affordably. It's mutual self-help: precisely what we should have been promoting all along.

Our Structure 'Tis of Thee

I reject the notion that America's greatness comes from its people alone. Don't get me wrong, our nation can boast some of the finest human beings the world has ever seen. But I believe that every country has great people. Our people simply aren't, by themselves, a competitive advantage.

We are a country rich with natural resources: vast, fertile farmland, plentiful water sources, oil, natural gas, coal, etc. But other countries certainly have their fair share of mother nature's blessings. That's not it either.

I contend that it is the United States' Constitution, our structure, that makes us truly special. It's a system that rewards hard work, protects those who can't protect themselves, and gives our citizens a voice in how we are governed. It's a structure that encourages entrepreneurship, innovation, and self actualization. It's a government that, while far from perfect, has allowed America to be one of the most prosperous, generous, and socially responsible nations this world has ever seen.

Credit Union insiders often claim that it is our people that make us special. I halfway agree. I DO think we have great people - the best employees the financial services industry has to offer, and the best group of members on the planet. But it's our structure that attracts those employees. It's the sincere belief that we are making a difference in people's lives that drives our workforce's passion. Trust me, most of us could make a lot more money in other fields. But we love what we do. We have our structure to thank for that.

It's our structure that attracts members by the millions. Our member owners like knowing they have a say in how their financial institution is run. They like knowing that our business purpose is not to take advantage of unwilling customers with high fees and unfavorable rates. Rather, credit unions' mission is simply to help members become better savers, wiser consumers, and more comfortable borrowers. We serve our communities with financial literacy education, outreach programs, and cooperative missions because our member owners demand it - not because of any associated tax implications.

See, to me it is our structure that makes credit unions special. Thankfully, it's a structure that attracts the best resources, the best people, and a better alternative to traditional banking.