Written by Anthony Demangone
With member business lending and supplemental capital in the headlines, it is just a matter of time before the critics of credit unions will launch attacks calling for one or more of the following:
- A freeze on our existing powers
- Tar and feathering
The rationale for the attacks? Here are the usual suspects:
- Quack, quack. If it walks like a duck, and it quacks like a duck, it must be a duck. The argument is that if we offer the same products and services as a taxed-bank, we should have to pay taxes as well.
- When I was a youngster. This argument uses both history and a very strong set of binoculars. Credit unions, our critics will argue, look nothing like they did when the industry was formally born in the 1930's with the passage of the Federal Credit Union Act. With each passing decade, credit unions have sought to offer more and more products and services for their memberships. You'll hear terms like "mission creep."
I understand why our critics make these arguments. Self interest. They are worried about their 1/2 acre of turf. Nothing more, and nothing less. The arguments against credit unions are either intentionally misleading, or grossly uninformed. (The smart money is likely on a combination of both.)
Both arguments against credit unions ignore the true difference-maker - corporate governance and structure. I'd ignore it, too, if I were them. First, it is a complex subject - not tailor-made for sound bites and full-page advertisements. Second, our critics never enter this realm, because their arguments would simply not stand up against the realities of credit union corporate governance and structure.
Corporate governance, and corporate structure, are strange, yet powerful concepts. How an organization makes its decisions greatly affects how it goes about its business. That's why you'll find privately-owned businesses think twice before going public. Dealing with a board and outside investors takes away one's flexibility.
Our industry's corporate governance and structure form a powerful rationale for our tax exemption. We are a member-owned, financial institution, with no outside ownership of capital. We have a volunteer board of directors, that comes from and is elected by the membership. Now, each of these points has an exception. Federal credit unions can pay one person to serve on their board, but I have yet to find one that does. Some low-income, community development credit unions can accept outside capital. But by and large, the characteristics I outlined above apply to our entire industry.
Those characteristics are very important.
- Member-focus. A board of the members and by the members, will certainly guide an organization to be member-focused. Remember, there are no outside investors demanding a return on their investment. Rather, as a financial cooperative, the goal is to maximize the member offerings.
- Anti-greed. The whole set-up does tap down greed, to a point. I'm sure you'll find some greedy folks within our industry, but if you want to become an overnight millionaire, the odds are against you in the credit union industry. First, there's no stock. Which means no stock-options. And it means no IPO. At least not without a change of charter. Profits roll back into the organization. Second, CEO salaries are set by a volunteer board. Does this mean that no credit union CEO enjoys a large salary and benefits package? No, of course not. But having a volunteer board of the membership is a nice counterweight to the possibility of excessive compensation.
- Congressional hand-cuffs. The tax break is a huge benefit to credit unions. But to be fair, one has to look at it in context. In creating our cooperative model, Congress went to great lengths to create further checks and balances that limit credit union powers. Federal credit unions have a usury ceiling of 18 percent. We have very limited investment choices. And we have a limited field of membership. All of these limitations tend to limit growth or trying to turn a fast buck, be it by making money quickly via high interest rates, risky investments, or by a rapid expansion of the membership. To be clear, none of this means that credit unions have not or will not get over their head in investments, growth strategies, etc. But those would be the outliers. The basic corporate governance model still rings true, even though it cannot prevent every excess or problem.
As for the common credit union attacks, here's how I generally respond:
Quack. Quack. If it looks like a duck, and quacks like a duck, it is a duck. Right? If credit unions want to act like a bank, they should be taxed like a bank. Right? I think the basic premise of this argument if flawed. Credit unions do not quack like a bank. The corporate governance and structure behind the credit union is completely different. Both a community bank and a credit union might offer commercial real estate loans. But the profit that a credit union makes off that loan flows back to the membership. And a member-populated board of directors made the decision to enter commercial lending at that credit union.
For that reason, I don't think a credit union quacks like a duck, or even resembles a duck. Just because two different groups deliver the same item, it would be sophomoric to equate the two without further analysis. Along those lines, one of my most favorite times on this beautiful planet is when I'm home, and my mother and I share a cup of coffee in the early hours of the morning. Just because my mother pours me a cup of coffee doesn't mean she should be treated like a barista at Starbucks.
When I was a youngster. As noted above, credit union critics love to look back on times when credit unions didn't offer checking accounts. Or mortgages. Their argument is this: Credit unions look nothing like those that were in the minds of Congress when the Federal Credit Union Act was signed into law.
Time marches on, and society changes with the times. When our stately Constitution was created, women could not vote, and slavery was legal. I'm not equating the last two issues with credit unions, but I hope my hyperbole makes a point. Time marches on, and society changes with the times. Both credit union and bank charters have expanded through the years. And why not?
Imagine a cooperative that was based on delivering transportation. As time moves on, that cooperative would have transitioned from horse and buggies, to trains, to autos, and then to airplanes. Why would time have to stand still for financial cooperatives? It simply makes no sense. Credit unions serve the financial needs of their members. Those needs will change. So should the credit unions that fill those needs.
Credit unions have an unfair advantage due to their tax exemption. The tax exemption certainly is an advantage, but you can't look at it in a vacuum. If credit unions were so unfairly privileged by the exemption, you'd see a long line of folks lining up to start credit unions. (Or banks converting to become a credit union.) But the numbers simply don't bear that out. Critics will say that a few banks are converting, and that it simply is too hard for existing banks to switch charters. But that's trying to use an exception to prove the rule. By and large, there is no long line of folks to start up credit unions or to convert from banks to credit unions. And I think I know why: You can't make that much money by doing so.
If you are still reading, I truly appreciate your patience, and I offer humble apologies for my lengthy ramblings. Also, I hope you don't mistake my words today to signal ill will toward my banking brethren. I wish them well. Banks serve a vital role within the American economy. But so do credit unions.
Too often in today's America, people judge a book by its cover. Only when you start reading and dig in, can you truly understand a book and the story it tells.
For credit unions, that story is corporate governance and structure. It isn't a sexy story, but it has served credit unions, and their members, well.