The Time Is Ripe for Credit Unions: Just Do It
A recent CUNA white paper got me thinking on the subject. I hear many things in my position-everything from the credit union business model is on life support to credit unions can serve as the next gold standard of doing business.
It has been said that credit unions remain relevant in their local markets, but as an industry, the case is hard to make. I agree with the former while challenging the later. I 100% believe niche credit unions exist, ranging in assets from a few hundred thousand dollars up into the billions, and will always be relevant so long as they continue to adapt to the needs of their particular field of membership. Additionally, these and all credit unions must continue attracting new and younger members.
Credit unions must pursue Gen Y, a key area of focus for future viability, by keeping up with trends in technology and marketing while molding the financial futures of this young generation as well as their own. At the same time, credit unions must not lose sight of what they were founded upon, another draw for the socially cognizant Gen Y.
SECU of North Carolina is a good example of a credit union that is not only growing by living the credit union life but has also established a hometown atmosphere, despite being $16.7 billion in assets. The credit union has its thumb on the pulse of its community because it has inserted itself as part of the community.
This strategy, combined with credit unions' cooperative structure, has the potential to propel credit unions to become the standard of operations. For example, the NCUF's Steve Delfin cited a Feb. 24 article from Strategy and Business Magazine in a recent blog. The article stated that the "managerial hierarchy" structure has been efficient in getting things done quickly, "But this shareholder-centric model has also contributed over the years to what former Citigroup CEO John Reed has called the 'iron triangle of short-term pressures'-hedge funds, stock options, and stock analysts-that keeps companies narrowly focused on quarterly profits." According to the article, the best way to be rid of the greed problem is for the business model to evolve.
The governance models that then "emerge" are cooperatives, employee-owned firms, and government-sponsored enterprises, the article stated. While these are certainly more socially responsible ways of doing business with greater, built-in checks and balances, I do take issue with the term emerge, since credit unions and other cooperatives have been functioning like this for more than 100 years. Perhaps, however, these models will become the standard.
As the article demonstrates, credit unions and their operating structure is not that well known or understood outside the industry. But that is less important than acting like cooperative financial institutions.
Obviously some people know and understand that credit unions are the safe place to park their hard-earned money; deposits are flooding in during this current flight to safety. Shares were up 7.71% last year among the nation's federally insured credit unions, according to the NCUA.
Take SECU. The credit union has historically targeted 7% net worth. At year-end, SECU was just over that goal, but CEO Jim Blaine said the credit union has decided to adjust its net worth ratio target to the 6%-7% range due to the current "flight to quality."
Year-to-date, Blaine said SECU has taken in over $1 billion in deposits, but the credit union would have to earn $70 million in order to capitalize it. Meanwhile, he said there will be no let up in March. This scenario demonstrates credit unions' need for new capital options. "Our capital ratio is going down because we're safe and sound...We need other capital tools because we're strong, not weak," he said.
So for credit unions and their business model to become the so-called new way of conducting business, they will need room to expand, which means modern methods of capital treatment while maintaining the ethics of their structure. Probably the easiest and most logical way of accomplishing this would be for a legislative change to permit risk-based capital accounting. This change would not only free up credit union capital for the most part, but also provide credit unions and their regulators a more accurate picture of what's going on inside the credit union. Since credit unions have only asked for a system comparable to the banks, they should not be opposed to it for any logical reasons other than competitive concerns.
Secondly, access to alternative sources of capital has served low-income credit unions well. There is no reason that, when used in moderation and under strict guidelines that do not permit member interest to be diluted, credit unions should not have access to alternative capital.
The Strategy and Business article contained a subheading that struck me: "The Soul of a New Design," referring to the core values of the aforementioned emerging business models. Credit unions can and should pursue expanded access to capital in order to grow and maintain relevancy with their soul intact.
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