Credit unions facing the challenges

Sandra Garcia is clearly a satisfied member of her credit union, Canada’s Vancity. “Just used the @vancity app to deposit a cheque by taking a picture with my...

Sandra Garcia is clearly a satisfied member of her credit union, Canada’s Vancity. “Just used the @vancity app to deposit a cheque by taking a picture with my iPhone. Bam. #thefuture,” she tweeted happily recently.

Paying in cheques to your account by photographing them and just sending in the photo is something British banks haven’t yet begun to offer, let alone credit unions, but it is just one of the facilities which Vancity is now providing for those of its customers with smart phones. A full range of internet banking services, including bill paying and accessing statements, is available and the credit union also offers a straightforward texting facility to check recent transactions. Easy. As Sandra Garcia might say, this is #thefuture.

Vancity’s use of mobile technology is an example of the way that credit unions in other parts of the world are determinedly trying to ensure they keep their members’ loyalty. Vancity itself has the scale to manage this: what began in 1946 when 14 Vancouver residents came together has now grown to a member-owned financial institution with half a million members across British Columbia, with total assets of over CAD $18bn.

Nevertheless, Vancity remains a very strong advocate of the co-operative movement, committed to supporting the wider co-operative economy and building a values-based alternative to conventional banking.

“This commitment is reflected in Vancity’s vision to redefine wealth by supporting environmental sustainability, social justice and financial inclusion, co-operative principles and practices, and business development for co-operatives,” the credit union states.

Vancity’s interest in harnessing technology to strengthen its practice as a credit union is one which the wider credit union movement is actively discussing at the moment. Participants in the 2014 World Credit Union Conference held in Queensland, Australia, heard a call to action from Rachel Botsman, a lecturer on what she calls the ‘collaborative economy’ at Oxford University’s Saïd Business School. She told her credit union audience to take note of new collaborative developments such as peer-to-peer lending and crowd funding. “Think of this as a huge opportunity to recreate services that are built around humans,” she said. “Technology can help bring back things we’ve lost in society and business: trust, empowerment, community and humanness.”

Vancity is not the only credit union to explore new ways of servicing members’ needs. In New Zealand, credit unions launched a mobile banking app last year and reported several thousand immediate downloads.

In Britain, too, there have been steps forward. Brent Shrine credit union, for example, pioneered a (somewhat more limited) mobile app in 2012. 

There are significant areas of the world, including those with strong co-operative traditions, entirely outside the credit union system. In much of Europe, for example, co-operative history was different and the outcome was an alternative model. Only the UK, Ireland, Poland and some other eastern European countries participate today in credit union networks. In Germany the co-operative movement established instead the local network of co-operative banks. In France and Spain, the role of credit unions has been traditionally been performed by savings banks (the caisses and cajas) or by banks with co-operative roots such as Crédit Agricole and Crédit Mutuel.

Nevertheless the global credit union movement, represented at its apex by the World Council of Credit Unions (Woccu), claims that worldwide over 200 million people are members of credit unions. Woccu says that it knows of around 57,000 credit unions operating in 103 countries. The United States (where Woccu has its head office) is the jewel in the crown, with over 6,000 credit unions and around 100 million members; almost half the world’s total. Canada also has a strong movement, with credit unions there (as in the US) reaching more than 40% of the population. Australia is another country with a large credit union sector, with 4.5 million members. In Africa, SACCOs (Savings and Credit Cooperatives) play a key role in countries such as Kenya, Tanzania and Uganda, and credit unions are also important in several francophone African countries, including Senegal and Burkina Faso.

Woccu has a strong tradition of cross-border co-operation to develop the sector. Earlier this year, for example, the Idaho Credit Union League signed up to partner the emerging credit union sector in Moldova, one of 20 such partnerships established to exchange technical expertise and to support weaker credit union movements. But Woccu and its affiliates also want to ensure that the traditionally strong areas of the movement maintain their strength. One of the challenges currently being discussed is how to ensure younger people – the so-called Generation Y, born in the 1980s and 1990s – find the credit union idea still attractive and relevant.

Brian Branch, Woccu’s president and chief executive, points out that this demographic group will be the largest source of financial services business in the future. “Young adults are undergoing life transitions: pursuing their education, getting a job, getting married, buying a home, starting a business, having children. These life events offer financial opportunities to help young adults achieve their goals,” he says. “Our challenge is to serve this market profitably.”

A recent study undertaken by the specialist US-based credit union think tank Filene reinforces the need for credit unions to stay in touch with the young. In Australia, for example, it found that the average age of credit union members was 51.5, significantly higher than the average age of customers of traditional banks. And, as Filene pointed out, traditional banks are themselves losing customers to alternative financial institutions such as payday lenders and online-only banks. Gen Y-ers have to be embraced by credit unions, Filene’s report concluded.

Credit unions have also been trying to tackle the challenging task of becoming more professional and financially secure while – hopefully – not losing their distinctive democratic character. In some countries regulators have begun to intervene to improve stability and internal governance. In Ireland, for example, the finance minister Michael Noonan reported to Parliament in late 2013 that the Irish Central Bank had put 100 credit unions (roughly one in four) on a watch list because of concerns over bad debts or poor governance. Of these, 20 were deemed not to have even the minimum reserves required by regulation.

Concerned about strengthening the movement, the Irish government has invested €250m in a Credit Union Fund to help restructuring and has also introduced a compulsory levy on credit unions for a new stabilisation fund. With this has gone a strong drive towards encouraging individual credit unions to merge into larger organisations, a trend which has also been a feature recently in the UK. Two large north Dublin credit unions, Coolock-Artane and Swords, merged last September to create the new 45,000-strong Member First union and the government’s Credit Union Restructuring Board (ReBo) is actively working to bring about other mergers.

Mergers are not new: the US for example has around 14,000 fewer credit unions today than it once did and there has been a similar trend towards amalgamations in Canada. Large credit unions, such as Vancity, demonstrate that size does not necessarily have to mean a loss of co-operative principles. However some in the movement are unhappy that the drive towards ever larger credit unions may be coming from regulators who are trying to pick up the pieces after the 2007-8 banking crisis, but who do not understand the particular nature of credit unions. A study last year by two European economics academics, Giovanni Ferri and Panu Kalmi, reported an increased regulatory burden for credit unions in the US and Canada and argued that regulation could be creating artificial economies of scale which were changing both the business model and what the authors called the ‘essence’ of credit unions. 39% of US credit unions consulted were considering merger as were 22% of Canadian credit unions, the authors found, and although there were other motivations behind these moves regulatory pressures were cited as a key factor by a significant number of credit unions.

Particular regulatory challenges where Woccu has been fighting the corner for credit unions (with some success) in recent years include the details of the draft requirements under the new banking regulatory regime Basel III for greater capital reserves and for greater liquidity. Woccu has tried to ensure that tighter international money laundering rules and controls on financing terrorism do not create unrealistically high compliance costs for credit unions. It also reports success in gaining exemption for most credit unions from the US’s tax agency IRS’s swingeing new powers to oblige foreign financial institutions to register with and provide data to the agency.

A similar lobbying effort is underway in Europe, where the cross-party European Parliament Credit Union Interest Group was established by the European Network of Credit Unions (ENCU) late last year. ENCU is engaging in debates with parliamentarians and policy-makers on Basel III, on anti-money laundering measures and on consumer credit regulation. More positively, ENCU is also drawing attention to credit unions’ role in fighting against financial exclusion and in promoting a greater understanding of money matters. “Enhancing members’ financial literacy is a crucial part of the work done by credit unions,” it maintains. It also stresses the voluntary nature of most credit union activity: “Credit unions are partially run and fully governed by volunteers constituting the board of directors. In credit unions’ experience, volunteering plays a crucial role in modern society, with positive impacts not only on people’s personal lives, but also on the whole community.”

Just how desirable a reliance on volunteerism is, particularly as credit unions become larger, is a live debate, particularly in the US. Credit unions there operating under federal law are not permitted to pay their directors remuneration (payments made to a single executive officer on the board are permitted) but 12 of the 50 US states do allow directors to be paid for those credit unions regulated at state level. There has been a gradual move in this direction in recent years. Matt Fullbrook of the University of Toronto who researched the issue for a study published by Filene found 125 credit unions in these twelve states paying on average a little over $4,000 to their board members.

“Director pay is a divisive issue. Many feel that paying boards is anathema to the co-operative spirit of credit unions,” he wrote. However he added “a credit union’s primary fiduciary responsibility is to protect the interests of the credit union’s members. If this can be better achieved by implementing director compensation policies, then it is in fact the board’s duty to do so within the regulatory allowances.”

For Ben Rogers, Filene’s Research Director, the issue of compensation for board members is right at the heart of a wider debate on how to improve and renew credit union governance. He says that the vast majority of US credit unions understand at some level the co-operative idea, but adds that only a minority have boards and management teams that actively promote this.

Direct member participation is low and there are few examples of collective action by members bringing any significant changes to credit unions, except perhaps where boards are advocating radical changes to their charter of incorporation. This may, of course, mean simply that members are happy with the way things are being run, but it does raise long-term issues for the movement. “Boards and management teams have to find ways to engage with their members,” Ben Rogers suggests.

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