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Research Brief
Credit Union
Development Education:
What Is It All About?
ideas grow here
PO Box 2998
Madison, WI 53701-2998
Phone (608) 665-8550
www.filene.org
PUBLICATION #276 (7/12)
About Us
Deeply embedded in the credit union tradition is an ongoing search
for better ways to understand and serve credit union members. Open
inquiry, the free flow of ideas, and debate are essential parts of the
true democratic process.
The Filene Research Institute is a 501(c)(3) not-for-profit research
organization dedicated to scientific and thoughtful analysis about
issues affecting the future of consumer finance. Through independent research and innovation programs, the Institute examines issues
vital to the future of credit unions.
Ideas grow through thoughtful and scientific analysis of top-priority
consumer, public policy, and credit union competitive issues.
Researchers are given considerable latitude in their exploration and
studies of these high-priority issues.
Traditionally, the Filene Research Institute focuses on long-term
research questions that can take months or years to research and publish. Occasionally Filene also publishes Research or Innovation briefs.
These briefs allow Filene to present important, time-sensitive, notorious, and unbiased topics to the credit union system. Oftentimes
these briefs present an opportunity to distribute original research or
innovation findings from Filene researchers or Fellows. We hope the
“brief ” format meets your need to obtain actionable and objective
information in a timely manner.
Copyright © 2012 by Filene Research Institute. All rights reserved.
Printed in U.S.A.
Acknowledgments
We would like to thank all Development Education facilitators for
making this essential program available to the worldwide credit
union system. Special thanks go to Vicky Franchino for her incredible writing skills. We would also like to thank the National Credit
Union Foundation, the primary sponsor of the Credit Union
Development Education program, and other program supporters,
including state credit union foundations and leagues, CUNA Mutual
Group, the Credit Union National Association, and the World
Council of Credit Unions.
iii
What goes on at the weeklong Credit Union Development Education Program (DE) is a bit of a mystery to many in the credit union
system. And that’s just the way Bob Schumacher likes it.
A senior consultant for the Paragon Group (a strategic consultancy
in the Seattle area), a longtime credit union advocate, and one of
the facilitators of the April 2012 DE session, Schumacher thinks it’s
better if participants don’t know too much going in: “We purposely
don’t promote the agenda or program materials ahead of time. We
want this to be an intense, 24/7 experience that takes participants
out of their comfort zone—we want them to trust the process.”
The week includes classroom sessions, hands-on activities, and a
wrap-up project that requires each small group to solve a realistic
(though fictional) case study that draws from recent happenings in
the financial services space.
Those who have gone through the weeklong session give it high
marks.
“I loved the fact that you checked your title at the door: You didn’t
know that the person you’d been working with all week was a CEO
until the end,” said Teresa Shively of GESA Credit Union in Richland, Washington. “The intensity of the week forced you to completely disconnect from your ‘real life’ and to bond with the group.”
“At first I was overwhelmed and not certain how I fit in, since I don’t
work in a credit union, but the mentors told me not to worry, that
I had a role to play,” said Jenni Pinney from the National Credit
Union Foundation in Madison, Wisconsin. “As I went through the
week, I began to see that they were right—that this was all about
discovering how to work together and learn from each other.”
“I’ve been through a wide variety of training, but this was different,”
said Creighton Blackwell of Coastal Federal Credit Union in Raleigh,
North Carolina. “You’re with the team every day, all day in what is
basically a credit union–centric universe. The ability to focus and
participate, plus the amazing group dynamics of the project, set this
apart.”
“After my years in the credit union industry, it was great to experience the infusion of energy that you get working with people from
other areas of the credit union movement, especially those who are
new to it,” said Mark Hohenstein of the Missouri Credit Union
Association in St. Louis.
“People come to DE because they’ve seen the amazing network of
people who belong to it,” said Lois Kitsch, national program manager of the REAL Solutions program at the National Credit Union
2
Foundation and a DE facilitator. “Participants go back to their
offices with rave reviews and others want to be part of it.”
In fact, most sessions have a waiting list and many of this year’s participants had tried to attend an earlier session. More than 1,000 people have completed the program in its 30‑year history.
What are the key messages that Kitsch and Schumacher hope this
year’s participants walked away with?
“That what they do every day is important,” said Kitsch. “That they
can be a catalyst for change or a reaffirmation of core credit union
values. I love the fact that these sessions create a group dynamic that
drives powerful individual outcomes.”
Schumacher knows that the program can be life changing. “One participant told me that after she went through DE it became the filter
through which she tried to make all of her decisions. It’s a revelation
for many.”
Case Studies
Imagine having just 18 hours to research a complex financial topic,
develop a recommendation, and present your ideas to an auditorium
of your credit union peers. (Oh, and did we mention that you also
need to find time for meals, caffeine breaks, and maybe a little sleep,
too?)
That’s the task that each year’s class of DE participants faces on the
last day of their weeklong session, and, like their predecessors, the
Class of 2012 delivered with aplomb. While the case studies may
have been fictional, they reflected real challenges in today’s credit
union world, and the 40 participants delivered provocative, yet balanced, solutions.
Case Study #1: National Branding
Group Members
Ruben Cisneros, Border Federal Credit Union, Del Rio, Texas
Shannon Mendes, Aventa Credit Union, Colorado Springs, Colorado
Bill Rockeman, Wisconsin Credit Union League, Pewaukee,
Wisconsin
Kevin Smith, Credit Union National Association, Madison,
Wisconsin
Mitzi Smith, Maps Credit Union, Salem, Oregon
3
Haylee Teeple, Finance Center Federal Credit Union, Indianapolis,
Indiana
Chelsie Zima, St. Mary’s and Affiliates Credit Union, Madison,
Wisconsin
The Backdrop
The future of credit unions depends on attracting new members,
but most nonmembers don’t understand how credit unions differ
from banks and have little motivation to learn more. The industry
has long embraced the idea that a national branding campaign could
be the tipping point that drives new membership; to date this hasn’t
been the case. Even programs that were successful in the short run
have largely been viewed as expensive, ineffective, and unsustainable
over time.
The Assignment
Determine the best way to build a credit union awareness campaign.
If a national plan won out, the group’s recommendations had to
examine a number of elements, including: coordination among
national/local brands, cooperative marketing for overlapping fields
of membership, program management and financing, generational
elements, and program expectations.
If the group opted for an alternative program, they were asked to
share the following: why a national campaign wasn’t the better
option, existing programs they could build off of, the impact of
membership and branding crossing state lines, and whether dollars
spent on individual credit union marketing hurt or helped the overall
credit union brand.
A Look at Past Programs
Over the decades, the industry’s attempts to develop national
campaigns have met with mixed success. The “little man under the
umbrella” (first introduced in 1923) was used by credit unions across
the country to capture the industry’s ability to protect members
from financial hardship, and in the 1950s a national radio and print
campaign garnered nearly 30,000 consumer inquiries within a few
weeks of its launch. Although national campaigns continued to run
throughout the ’60s, ’70s, and ’80s—supported by voluntary contributions—there is little evidence that they were worth the millions
spent on them. CUNA’s decision in 2000 to provide a flexible marketing tool kit that promoted America’s Credit Union gained limited
acceptance from credit unions across the country.
4
The Case Against a National Campaign
There are three key reasons why a national campaign hasn’t been successful to date and is unlikely to be successful in the future:
• Cost: State leagues with more affiliated credit unions may feel
they’re carrying a disproportionately heavy percentage of overall
costs, and all credit unions may prefer to spend their limited marketing dollars on targeted campaigns.
• Collaboration: No two credit unions are alike and many see little
value in collaborative marketing efforts. For instance, both credit
unions with a dominant brand in their market and those whose
products/services/membership fall outside the mainstream may
feel a national brand has limited value to their credit union and
isn’t the best way to serve member needs.
• Consensus: These differences would make it very difficult to gain
consensus about campaign direction, funding, and channels.
Success at the Local, State, and Regional Levels
Although national programs have tended to struggle, there are a
number of strong state and regional programs worth taking a closer
look at:
• aSmarterChoice.org: An online educational tool with member
testimonials.
• Biz Kid$: A television program that supports financial literacy.
• iBelong: A multistate collaborative TV campaign backed by an
educational website that allows visitors to search for local credit
unions.
• CO-OP Financial Services: The “Credit Unions Do” campaign
includes customizable tools.
• You-Belong.org: A branding initiative in the state of Oregon.
• Opt-in state branding: A collaborative effort between the Filene
Research Institute and leagues in California and Nevada that
resulted in a marketing tool kit.
• California/Nevada in-state campaign.
These programs have been more successful than past national campaigns, largely because they have met the unique needs of their credit
union or league with a highly
targeted approach, rather than a
These programs have been more successful than past national
watered-­down, one-size-fits-all
campaigns, largely because they have met the unique needs of
effort.
their credit union or league with a highly targeted approach,
The credit union system
rather than a watered-­down, one-size-fits-all effort.
would also benefit from more
effective use of new media
5
channels—especially social media—and from tapping into the
lessons learned from the success of national events such as Bank
Transfer Day.
The Secret to More Effective Marketing: Collaboration
The credit union system is filled with smart, passionate people who
have done an exceptional job creating branding materials to support
local, state, and regional efforts. Unfortunately, the system has done
little to leverage this wealth of ideas and brainpower.
Instead of continuing to chase the holy grail of a national campaign,
the group recommended creating a National Collaborative Branding
Initiative.
This initiative would:
• Establish a clearinghouse for marketing materials: The branding
staff would filter and store materials provided by credit unions
and leagues from across the country. When a credit union or
league had a marketing need, it would connect with the team to
learn if there were existing materials that were a good fit for its
needs.
• Allow for easy customization of proven programs: As resources permit, the team could update the materials from existing campaigns
to meet the specific needs of a credit union/league.
• Be staffed by volunteers: These would be drawn from the CUNA
Marketing and Business Development Counsel and include
interns working toward their MBAs.
• Offer funding to leagues, based on need, to run state-­specific
programs.
A group member weighs in
“It was very interesting to learn about the
had mixed feelings at the start of our
history of national branding and the efforts
investigation, but once we did our research
that state leagues have made over the
it was clear to all that a new approach was
years—I’m a bit of a history buff so it was
needed.”
fun to see the elements from the different
campaigns. I think people were surprised
by our recommendation to give up the
long-held dream of a national branding
campaign. Even the people in our group
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Shannon Mendes
Aventa Credit Union
Colorado Springs, Colorado
• Provide human resource support to coordinate league efforts.
• Include a blog: This would provide an easy way for leagues and
credit unions to share insights about marketing challenges/
solutions.
Case Study #2: Member Business Lending
Group Members
Robin Brule, New Mexico Educators Federal Credit Union, Albuquerque, New Mexico
Brad Covey, Credit Union National Association, Madison,
Wisconsin
Liz Edmondson, Mississippi Credit Union Association, Jackson,
Mississippi
Chris Lumley, MECU of Baltimore, Inc., Baltimore, Maryland
Teresa Shively, GESA Credit Union, Richland, Washington
Lisa Totaro, Sunmark Federal Credit Union, Latham, New York
Chris Wolgammott, Meritrust Credit Union, Wichita, Kansas
The Backdrop
A $250 million (M) credit union has been offering member business loans (MBLs) for the past several years in an attempt to attract
and support small corporations and to offset losses incurred from a
downturn in consumer lending and employment. During its most
recent National Credit Union Administration (NCUA) exam, the
credit union was cited for failing to have appropriate business lending expertise on its staff, board, and supervisory committee levels.
While the credit union is well capitalized at 9.5% and has a return
on average assets (ROAA) of 0.5%, roughly 11% of its portfolio is in
MBLs and most of its delinquent loans (overall reflecting just above
2% of the portfolio) are with businesses. The NCUA is afraid that
the credit union doesn’t accurately grasp the scope of risk that MBLs
present.
The Assignment
The DE team played the role of credit union consultants. Their
task: to determine whether the credit union should continue to offer
MBLs. A “yes” recommendation had to include suggestions to ensure
that adequate business expertise was added to the staff/board and
that regulatory requirements were met without compromising credit
union culture; a “no” vote had to offer ideas for replacing the portion
of the portfolio currently in MBLs as well as how to exit current
business relationships.
7
The High Risks of Offering MBLs . . .
At first glance, the case for dropping the MBL program appeared
quite strong. The team identified the following downsides of offering
an MBL program:
• Lack of staff and board expertise.
• Few formalized policies and procedures, which has contributed to
high loan delinquency levels; putting more in place would require
an extensive investment in time/resources.
• Likelihood of increased regulatory scrutiny because of the upward
trend in delinquencies.
• High-risk assets and single points of failure can lead to loan
defaults.
. . . Are Largely Outweighed by the Advantages
Upon further investigation, the group felt the credit union had
a responsibility to continue to offer MBLs. At a time when the
economy is still struggling, increased unemployment is driving
higher levels of self-­employment, and banks are increasingly reluctant
to offer loans to small businesses, credit unions can make a powerful
difference in their communities.
Credit unions are more likely to provide loans for businesses that are
too small or risky to interest banks—the next Bill Gates might not
qualify for a bank loan!—and a recent report by Callahan & Associates showed that while most commercial lending banks focus on
business loans in the $250,000+
category, the average credit
Credit unions are more likely to provide loans for businesses
union MBL is $200,810.1
that are too small or risky to interest banks—the next Bill
The team also recommended
Gates might not qualify for a bank loan!
remaining in the MBL space
because the current economic
climate would make it difficult for the credit union to overcome an
11% gap in its portfolio. MBLs represent one of the fastest growing and most profitable segments of credit union growth and can
help offset a shrinking portfolio of consumer loans. With an existing MBL portfolio of $16.5M—and a current available cap of
$31.25M—there is significant room for the program to grow. Plus,
MBLs allow for healthy diversification.
Putting Safeguards in Place
The decision to continue offering MBLs can’t be made lightly. The
group stressed that the credit union must focus on three areas to
improve the safety of its program: risk mitigation, staff and board
recruitment and education, and expanded product and service
offerings.
8
Risk Mitigation
The NCUA’s Part 723 Member Business Loans recommends following a five-pronged approach to reduce risk:
1. Reverse delinquency trend. Risk-rate the existing portfolio and
focus on the following loan categories (in descending order):
■■
■■
■■
Substandard: Loans that are inadequately protected by the
current sound worth and paying capacity of the obligor.
Doubtful: Weaknesses in the loan make collection questionable and liquidation probable, but it is not yet qualified
as a loss because there is still the possibility of a positive
outcome.
Loss: Considered uncollectible and with little or no value.
These should be written off, regardless of possible partial
recovery.
Then, sell off the loans that are contributing most heavily to
delinquency, even if they must be sold below value.
2. Refocus the lending portfolio. The board should study local business needs, pinpoint credit union strengths, and limit future
MBLs to these areas.
3. Track the current portfolio. Tracking will help to pinpoint trends
and allow the credit union to recognize and address problems in a
timely manner.
4. Review current policies. Policies should be updated to restrict loans
to those identified as a good fit, require periodic updates of borrowers’ documentation, and regularly compare the credit union
business model against industry standards.
5. Ensure that the loan loss classification meets NCUA requirements.
Improved Staff and Board Recruitment and Education
The group strongly recommended the credit union hire an MBL
expert with at least 10 years of experience in the local area. Although
the NCUA requires only two years of expertise, hiring at this level
will help to ensure the new hire has exposure to the full business
lending cycle. To improve board recruiting, the group recommended
that the credit union partner with a local organization that is well
versed in effective recruitment—perhaps trading financial service
education or counseling.
Although the NCUA does not currently regulate required education or expertise for board members, the fact that the credit union
has been cited for risk management means it is critical to investigate
additional training for its board. Member Business Loans is a recognized leader in the field and its 15‑course program would prepare the
board to more effectively face a host of MBL-­related issues.
9
Expanded Product and Service Offerings
If the credit union is going to continue to offer its MBL program,
it should do so more aggressively and try to expand the variety of
MBL products and services it offers in order to build deposits and
enhance both fee and interest income. A business suite of services
that includes—at minimum—business savings, checking, and online
banking could be developed and added to as changing market conditions and organizational strategies demand.
Case Study #3: To Merge or Not to Merge?
Group Members
Creighton Blackwell, Coastal Federal Credit Union, Raleigh, North
Carolina
Robyn Darocha, Associated School ECU, Youngstown, Ohio
Jackie Ewing, CUNA Mutual Group, Madison, Wisconsin
Jeff Kunberger, Suncoast Schools Federal Credit Union, Tampa,
Florida
Steve Pagenstecher, Valley Credit Union, Salem, Oregon
Alicia Steindorf, Summit Credit Union, Madison, Wisconsin
Sheila Troxel, CP Federal Credit Union, Jackson, Michigan
The Backdrop
The board of T.H.E. Credit Union, a $10M credit union serving 3,200 members in the inner suburbs of Washington, DC, has
received a merger offer from a $150M credit union. The offer comes
at a time when the smaller credit union is in a moderate to weak
financial situation and dealing with the challenge of having no physical locations in the community it serves. A merger with the larger
A group member weighs in
“When we first got the assignment, the
called NCUA—and we learned. It was
initial reaction was, ‘Oh my gosh, we don’t
eye-­opening to discover more about what
know anything about this topic!’ But how
member business lending requires.”
we came together and got organized was
amazing. We tapped into our contacts—I
called my AVP of lending, someone else
10
Teresa Shively
GESA Credit Union
Richland, Washington
credit union could improve financial stability and would deliver
branches in the neighborhoods where members live and work. The
larger credit union would reap the benefits of a small but dedicated
staff that has made significant efforts to diversify the credit union’s
field of membership.
Financial Report
Recent past: Was under NCUA’s Prompt Corrective Action three
years ago because the credit union’s capital levels fell below 7% (well
capitalized).
Current status: Impaired by NCUA Stabilization assessment.
• 6.75% net capital.
• 0.4% return on assets.
• 0.75% delinquent loan ratio.
• 1% charge-off ratio.
The Assignment
Decide if the smaller credit union should accept the merger offer. If
it should, specify the terms and conditions that would protect current members’ level of service and develop a plan that would ensure
they benefit from the merger. If the merger offer is rejected, deliver
a strategic plan for revitalizing the institution that identifies three to
five key areas for growth or innovation. Think neither option is right
for the credit union? Share your thoughts on an alternative proposal.
Does Independence Make Sense?
It’s clear that something has to change in order for this credit union
to survive, but its ability to remain independent is strongly handicapped by a lack of capital. Choices that could support its independence are largely unattainable at present:
• Reducing assets/expenses: The credit union is operating at a barebones level—any additional cuts could result in the loss of products or services, have a negative impact on members’ current and
future savings, and open the credit union up to reputation risk.
• Shared branching: Similarly sized credit unions have incurred
shared branching implementation costs of $25,000, plus roughly
$10,000 in annual expenses. If the credit union joins as an
acquirer, it risks compromising service levels for its own members;
if it joins as an issuer, it misses out on opportunities for cost savings and revenue.
• Mobile banking, virtual banking, and kiosks: These options would
allow the credit union to provide broader member access and
potential cost savings (through digital channels) but might not be
11
embraced by the membership without extensive education. They
would entail both implementation and ongoing maintenance
costs that the credit union may not be able to justify.
Alternatives to a Merger
The team considered three merger alternatives:
• Partnership: The benefits of convenient geographic locations are
offset by the dilution of brand/identity, the potential for additional operating expenses or decreased member service, and the
likely costs and logistics issues associated with incompatible IT
systems.
• Bank conversion: Access to more lending products and the ability
to raise capital are countered by strong negatives: the huge costs
associated with bailing out the FDIC, federal taxes, inferior rates
for members, and, most importantly, the need to give up the
cooperative structure.
• Franchise or DBA (doing business as) model: A strong contender at
first blush, this option allows the credit union to keep its identity and focus on member service while turning over back-­office
duties and sharing expenses. Unfortunately, there are downsides,
including the potential for regulatory compliance risks, the likely
need for IT investments, and probable standardization issues.
There’s inconclusive research to support the value of moving to
a franchise model, and the credit union still wouldn’t be able to
offer members convenient branch access.
Weighing the Value of a Merger
There are a number of strong arguments on each side of the issue.
A merger would deliver convenient branch access, allow the credit
union to offer members more
products and services, provide
employees with opportunities
Although the recent trend toward mergers is likely not what
for professional growth, and
credit union founders envisioned as the best path forward,
offer strong economies of scale.
member benefit must trump personal ideals.
On the flip side, there are concerns about cultural changes,
the potential for negative member reaction, and the inevitable costs
associated with changes to policies and procedures, core systems, and
vendor contracts.
The Most Important Question: Does This Merger Benefit the Members?
Although the recent trend toward mergers is likely not what credit
union founders envisioned as the best path forward, member benefit
must trump personal ideals.
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Figure 1: Decision Matrix
Signficance of total score:
1–66 = Not an acceptable option
67–132 = Acceptable
133–198 = Significant positive impact
Stakeholders
Points
Factors
Total
Members
27
2
54
Board/credit union entity
22
2
44
Employees
24
1
24
Regulatory
12
1
12
Total
134
To evaluate this decision in the most objective
way possible, the team created a decision matrix
that weighed the impact on members, the board/
credit union, and employees as well as regulatory
concerns.
Based on this highly positive total score, the team
recommended moving forward with the merger.
After the conclusion of appropriate due diligence
and preliminary regulatory approval, the decision will be put to a member vote and followed
by ongoing communication with members and
employees to ensure smooth integration.
Negotiated Terms and Conditions
To ensure the merger would move forward as smoothly as possible,
without compromising T.H.E. culture or finances, the team recommended the following:
• Retain existing employees for 12 months.
• Change the name to DC Credit Union (the larger credit union).
• Keep the branch location open for 12 months.
• Adopt DCCU data processing and core systems at DCCU’s
expense.
• Have T.H.E. board members nominate two directors to serve
their remaining term.
A group member weighs in
“The DE program attracts a lot of Type A,
As we worked our way through the case
‘get it done’ sort of people. And when
study, we constantly forced ourselves
you’re in a group like this you’re forced to
to look at our options through the prism
evaluate when it makes sense to take the
of ‘what is in the best interest of the
lead and when you need to step back for
member.’”
the group to function effectively. As far as
the project itself, it reinforced something
that we talk about all the time at our credit
union: Everything is about the member.
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Creighton Blackwell
Coastal Federal Credit Union
Raleigh, North Carolina
Case Study #4: Providing Emerging Markets Access to
Credit
Group Members
Josh Bergman, Washington State ECU, Olympia, Washington
Jennifer Crawford, Randolph-­Brooks Federal Credit Union, Universal City, Texas
Kathy Day Shelton, MECU of Baltimore, Baltimore, Maryland
Andrea Gabel, CUNA Mutual Group, Madison, Wisconsin
Mark Hohenstein, Missouri Credit Union Association, St. Louis,
Missouri
Mike Read, People’s Trust Federal Credit Union, Houston, Texas
The Backdrop
The Latino population in Camden, New Jersey, is growing rapidly.
Documented and undocumented Latinos from a variety of countries currently make up 43% of the overall population, and this
percentage is expected to grow. The median income of the area is
$26,752—less than half that of the state as a whole and below the
federal poverty level. Over half of area residents are either unbanked
or underbanked and many turn to predatory alternative financial
service (AFS) providers for their financial needs. The NCUA recently
assigned the local $100M community-­based credit union a Low
Income designation, which allows the credit union to accept nonmember deposits and offer secondary capital.
The Assignment
The credit union’s board mandated a study to pinpoint why
unbanked and underbanked Latino members and potential members
are using expensive AFS providers instead of the credit union, which
products and services this population values, and which of these
products and services, if any, the credit union should work to provide. The analysis was to include a summary of the risks and benefits
of attempting to serve this market and suggestions for doing so.
Perceived Benefits of AFS Providers
Across the United States, unbanked and underbanked populations
spend more than $10.4 billion (B) annually on AFS products. The
Latino market is typically attracted to these providers based on
proximity and convenience: A consumer can get everything from a
loan to a money wire to bus tickets at many AFS locations, the staff
is likely to speak fluent Spanish, and their offices are conveniently
sprinkled throughout the community. But the AFS providers’ strongest attraction is the fact that they require minimal documentation.
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The Notre Dame Latino Studies Report of 2006 showed that
immigrants who have a social security card or driver’s license use
traditional financial services at nearly double the rate of those who
do not.2
Perceived Barriers to Credit Union Membership
Although there are many reasons why the unbanked and underbanked don’t use a financial services institution, a study by the FDIC
pinpointed these as the top three: a perception that credit union
policies and services don’t meet their needs (for instance, minimum
balances and requisite documentation), a lack of trust in or understanding of traditional financial institutions (especially among the
undocumented), and a willingness to pay high fees for the one-stopshop convenience offered by AFS providers.3
Overcoming Membership Barriers
Although the credit union won’t gain the trust and business of immigrants overnight, there are a number of steps it can take to address
the most critical barriers to membership:
• Documentation: Rather than requiring a social security number,
the credit union could accept the more widely held matricula
consular documents.
• Trust issues: The Latino population places substantial trust in
religious organizations, usually the Catholic Church, and Latino
nonprofit organizations. Partnering with these groups could help
the credit union gain entrée into the Latino marketplace.
• Product and service gaps: The credit union should offer the most
valued financial services at rates that are lower than those offered
by the AFS providers.
Proposed Product and Service Offerings
There are three products and services that are very popular with this
segment and would be easy for the credit union to provide: check
cashing, international remittance services, and branded prepaid debit
cards. These three products are estimated to present a strong income
opportunity with little investment on the part of the credit union,
and according to research done by REAL Solutions—a program sponsored by the National Credit Union Foundation to meet the financial
needs of low-wealth households—they present either very low risk
(check cashing) or no risk (remittance and prepaid debit cards).4
There is one product that the credit union already offers that may
be of interest to this population, especially the undocumented,
who are estimated to make up roughly 35% of the local immigrant
population (approximately 12,000 people): Safe Accounts. These
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Figure 2: Program Pro Forma
Product or service
User cost
Profit
Check cashing
Payroll checks: 1% of face value
Personal checks: 3% of face value
$45,000 in the first year
Prepaid debit cards
$6 to open the card
$2 to reload the card
$2 monthly service fee
$4
$2
$0.50
Remittance
$10
$7,000 in the first year
$9.60
$24,000 in the first year
Total profits
$76,000 in the first year
are non-interest-­bearing savings accounts that do not have
to be reported to the IRS. These
accounts overcome barriers posed
by documentation concerns and
offer immigrants a safe place to
keep their funds until they can
obtain a social security number or
individual tax identification number. These accounts could serve as
an important step toward a fullfledged member relationship.
Estimated Program Profits
With minimal investment on the part of the credit union, it’s estimated that these three offerings would generate $76,000 in profit
in the first year. In addition, accessing these services through the
credit union rather than an AFS
provider would save the average
With minimal investment on the part of the credit union, it’s
member of the target populaestimated that these three offerings would generate $76,000 in
tion $1,000 annually—nearly
profit in the first year.
4% of the average income for
this segment.
Building Trust and Long-Term Relationships Through Community
Partners
Low-risk entry-level financial services are just the first step in what
the credit union hopes will be a long and mutually beneficial partnership with the local Latino population. As a next step, the credit
A group member weighs in
“Prior to this assignment, I hadn’t com-
and it will require a strong commitment to
pletely grasped just how much money
education, but we have an opportunity not
the unbanked are spending at alternative
just to offer them checking accounts but
financial service providers: People who are
to give them alternatives that will improve
only earning $20,000 a year are spend-
their lives and the lives of their families.”
ing $1,000 on check cashing fees alone.
It won’t be easy to overcome some of
the leeriness of the immigrant population,
16
Mark Hohenstein
Missouri Credit Union Association
St. Louis, Missouri
union plans to provide educational programs on credit and budgeting in partnership with trusted local groups, including the Latin
American Economic Development Association, the Hispanic Family
Center, and the local Catholic parish. The credit union’s ultimate
goal is to provide higher-­risk services such as micro loans.
Case Study #5: The International Credit Union System:
Haiti
Group Members
Karen Bejarano, TruWest Credit Union, Scottsdale, Arizona
Windy Campbell, Electric Cooperatives Federal Credit Union, Little
Rock, Arkansas
Don Cohenour, Missouri Credit Union Association, St. Louis,
Missouri
Ken Gardner, Greater Texas Federal Credit Union, Austin, Texas
Joe Mecca, Coastal Federal Credit Union, Raleigh, North Carolina
Jenni Pinney, National Credit Union Foundation, Madison,
Wisconsin
The Backdrop
When the World Council of Credit Unions (WOCCU) launched a
three-year program in 2009 to extend financial services to the rural
poor of Haiti, it already faced a tough assignment. Little did it know
that its job was about to become exponentially more difficult. On
January 12, 2010, a devastating 7.0 magnitude earthquake hit the
country, with the capital city of Port-au-Prince at its epicenter. More
than 200,000 people were killed and 1.6 million were left homeless.
The country has yet to recover from the disaster due to both the
severity of the damage and the country’s reliance on a highly volatile
government.
The Assignment
This group was recruited by WOCCU to work with local credit
union leaders and relevant nongovernmental organizations (NGOs)
to create a plan to rebuild the country’s credit union system. The
group had to expect only limited assistance from WOCCU and the
NGOs. Its recommendations had to address three areas: short-term
needs (food, water, tents), medium-­term needs (teaching credit
unions how to rebuild their capital and analyze member needs), and
long-term needs (physical rebuilding of credit unions and members’
homes and businesses).
17
All suggestions were required to reflect the realities of working in this
impoverished country, including:
• Little to no regulatory infrastructure exists to support the credit
union movement. Assess current supervisory and regulatory oversight and make recommendations for improvement.
• Virtually no infrastructure exists at the national level, including
electricity, roads, and communication resources. How can available resources be leveraged?
• Very few Haitians have the experience and skills to run a cooperative financial institution. Establish a program or structure to
address both rural and urban capacity needs for knowledge and
skills for credit union staff and officials.
Choosing a Geographic Starting Point
The group had to select the region best suited to its efforts. Given
the limited resources of the group and the overwhelming challenges
posed by the devastation and chaos in the Port-au-Prince area, the
group opted to work out of a rural area: Verrettes. This choice is consistent with the Credit Union Building Model, which recommends
starting in rural areas. Located in the largely undamaged northeast
region of Haiti, Verrettes offered a number of strong benefits:
• An established credit union (CAPOSOV, with 10,700 members
and $3M [US] in assets): This credit union already has solid
product and service offerings (savings and consumer and business
loans), remittance capabilities, and a Le Leviers computer processing system. Although the credit union has a higher than desired
level of delinquencies, the level is consistent with other developing credit union systems, and its other strengths are sufficient to
overcome this disadvantage.
• Existing infrastructure: The area suffered little damage from the
earthquake; most of its farms, businesses, and homes are intact
and its airport is still operational. The area is known for its educational system: There are six schools and one college and many
rural Haitians will relocate to this area for schooling. Those who
cannot afford the costs of the schools have access to other community programs such as youth development and mentoring.
Three Critical Challenges
Reestablishing a viable credit union will not be easy. The group faces
three difficult issues:
• Building confidence in the credit union system: In rural areas, cash
is the only means for conducting transactions, yet it poses huge
security risks. To provide Haitians with a safer way to access funds
and build trust in credit unions, the group proposed tapping
18
into biometric technology funded by USAID, a combination of
a thumbprint and an identification card that a member could pre­
sent at a credit union location.
• Providing access to payment systems: WOCCU currently supports
HIFIVE, a mobile money initiative. This is a cell phone preloaded with credits that uses texts to send and receive payments.
The mobile phone penetration rate is currently 35% and growing
rapidly and is seen as an effective way to deliver services to rural
areas.
• Addressing lending needs: Farmers are often forced to burn their
crops for charcoal as a source of short-term cash rather than
taking their crops to full harvest, a situation that greatly reduces
their income. Short-term loans through the existing Kredi Mango
program—which targets mango farmers—could tide the farmers
over until their primary crops can go to harvest.
Creating Partnerships
The first partner is, of course, the existing credit union: CAPOSOV.
The group’s decision to work with CAPOSOV rather than build
a new credit union was substantially driven by the opportunity to
build off existing partnerships such as USAID and HIFIVE. The
group also reached out to:
• WOCCU: The World Council was asked to provide a staff member to assist in building a relationship with CAPOSOV, confirm
previous assumptions, and educate credit union volunteers.
• Pennsylvania Credit Union Association: This league was already in
the process of developing partnerships with credit unions in the
urban and southern regions of Haiti, and the group hoped to rely
on them for help with volunteer training and staff education.
Cost and Funding Resources
The group estimated a launch cost of roughly $350,000 for training,
travel, and program setup. The European Union has already made a
grant of $387,000 to CAPOSOV, which will help with its capitalization needs. Additional funds may be available through the Canadian
International Development Agency and the Pennsylvania Credit
Union Association.
Training and Adoption
The first step will be training volunteers and staff. Buy-in from these
two sectors is critical to program success, as they will be vital to
area-wide adoption of credit union programs. The group will start
by using the biometric technology to demonstrate that the credit
union is a safe and convenient place for them to keep their money.
19
Next, the group will show volunteers and staff that the credit union
is a reliable place to conduct transactions—either at a credit union
location or using the mobile money product. The last step is training
volunteers and staff on small business education and loans.
After training, the program will roll out in three stages:
• Existing members: Their acceptance and word-of-mouth support
will be critical to adoption by others.
• Local community gathering areas: Verrettes is the local business and
social hub. Both the local church and the central marketplace are
excellent places for the credit union to promote its services.
• Outlying farms: Credit union staff will go directly to prospective
members on surrounding farms. If mobile service is available in
these areas, the mobile product would be an ideal solution for
daily transactional needs; otherwise, staff can rely on traditional
paper record keeping.
Mid- and Long-Term Project Goals
The group recognizes that replication of the Verrettes program will
be extremely challenging in areas that continue to face shortages
of food, electricity, water, shelter, and transportation/distribution
channels (typically the areas close to Port-au-Prince). Reintroduction
of credit unions in these areas will require resources that are largely
beyond the group’s ability to address.
In the mid-term, the group will focus on expanding its rural model,
training opportunities, and product development. This will require
additional due diligence, staff/volunteers (WOCCU is a likely
A group member weighs in
“When you consider the magnitude of the
understand what we had to tackle. The
issues that the credit union system in Haiti
exercise brought home the message that
is dealing with, it’s overwhelming and you
our disparate backgrounds and perspec-
hardly know where to begin in determin-
tives improved the quality of our final
ing how to help them. We were able to
recommendations.”
tap into excellent resources—someone
from the Pennsylvania credit union league
and WOCCU—and that gave us direction. Not working in a credit union, I relied
on other people in the group to help me
20
Jenni Pinney
National Credit Union Foundation
Madison, Wisconsin
partner for both), and larger, more robust funding sources. Potential avenues to tap include the Bill and Melinda Gates Foundation
(already involved with HIFIVE), CUAID, USDA, and others.
Supervision through the regulator has been all but suspended since
the earthquake; it is hoped that as the country becomes more stable,
standards will once again be put in place.
In the long term, the group believes that its program will provide a
better infrastructure for the nationwide credit union system and will
help to drive recapitalization, a return of liquidity, and, ultimately,
long-term sustainability.
Case Study #6: The Cooperative Bank Charter: To
Convert or Not to Convert?
Group Members
Carrie Allen, Heritage Family Federal Credit Union, Rutland, Vermont
Kevin Brueseke, Missouri Credit Union Association, St. Louis,
Missouri
Amanda Canon, Advancial Federal Credit Union, Dallas, Texas
Anthony Emerson, Credit Union League of Connecticut, Meriden,
Connecticut
Sasha Kemble, Verity Credit Union, Seattle, Washington
Beatrice Ongalo, Finnlem Sacco, Nairobi, Kenya
Ken Worthey, Jr., Belvoir Federal Credit Union, Woodbridge,
Virginia
The Backdrop
A $2.2B credit union serving 450,000 members is located in a state
that permits conversion to a cooperative bank. The state-­chartered
credit union serves multiple select employee groups (SEGs) and three
counties; it has nine branches throughout the metropolitan area and
participates in shared branching.
The credit union had a negative ROA in 2009 and 2010 but finished
at a positive level in 2011; net worth is 8.5%. The credit union has
seen significant growth in some areas, but loan and member growth
have been down over the last two years. The senior management
team has come to the board of directors with a strong recommendation to convert to a community bank.
The Assignment
The board of directors must decide if conversion is the best option
for the credit union and, if it is, the steps that must be taken to
21
manage the conversion process. Whether the board decides that it’s
better for the credit union to retain its cooperative structure or convert to a bank, it must develop a plan that ensures the institution’s
short- and long-term sustainability. It must address the following
concerns for each option:
• Impact on current membership.
• Regulatory considerations.
• Option pros and cons.
• Potential for products now and in the future and the impact each
choice will have on them.
What Is a Cooperative Bank?
After extensive research, the group determined that there was no
widely recognized definition of a cooperative bank. They did find
that the legal definition of a mutual savings bank appeared to capture
many of the attributes they felt a cooperative bank would have:
A Mutual Savings Bank is a bank without capital stock transacting
a savings bank business . . . the net earnings of which inure wholly
to the benefit of its depositors after payment of obligations for any
advances by its organizers.5
The following are key ways in which mutual savings banks differ
from credit unions:
• Able to convert directly to a stock corporation: In some areas,
once a credit union converts to a mutual savings bank, it can convert directly to a stock corporation. This changes the focus from
the members/owners of the credit union to the stockholders, who
may or may not be customers of the bank.
• Paid directors can allocate funds that would traditionally have
benefited the members/owners.
• Able to raise secondary sources of capital.
• Subject to taxation.
S.W.O.T. Analysis of a Bank Conversion
Pros
Conversion to a cooperative bank offers a number of compelling
advantages, including:
• Increased capital potential: Cooperative banks have a number of
funding options that are either not available to credit unions or
available on a more limited basis, including:
■■
22
Business lending: The credit union cap of 12.25% on business lending would not exist under the cooperative bank
structure. This would increase opportunities in this area,
especially for larger ($1M+) business loans, which currently
make up 16% of the business portfolios of credit unions
and 68% of those of banks.
■■
■■
■■
Fee revenues: Cooperative banks have fewer limits on allowable fees, which should increase the level of fee income.
Lower capital ratio requirements: The NCUA requires a
minimum of 7% capital to assets while the FDIC requires
only 5%. The credit union would be a very well-­capitalized
bank and could choose to use some of its capital for expansion or new product development. If the credit union chose
to lower its net worth ratio for FDIC assessment down to
6%—still a full 100 basis points above minimum—this
would free up $55M of current capital.
More avenues for raising secondary capital: As a cooperative
bank, the institution could raise capital through bonds and
grants and even by converting to a stock-­issuing bank.
• Decreased regulatory burden: There is a perception that the level
of NCUA regulations is on the upswing and that FDIC regulations—which the credit union would fall under as a cooperative
bank—will be less onerous.
• Deductible expenses: Certain expenses will be deductible as a cooperative bank.
• Broader market reach: Industry field of membership rules allow
the credit union to serve multiple SEGs but only in a threecounty region. Conversion to a cooperative bank would eliminate
geographic restrictions and enhance membership opportunities.
Cons
Conversion is not without its disadvantages, which include:
• Threat to democratic control: A stock-based model has the potential to threaten, and potentially eliminate, this core credit union
tenet.
• Challenge to existing member programs: The traditional credit
union model takes a member-­first approach that allows credit
unions to deliver attractive fees and low-ROI services such as
community outreach and financial education. Under a for-­profit
model, especially if the credit union issues stock, there is no guarantee of any member-­level benefits.
• Exposure to corporate taxation: The credit union can expect to pay
taxes in the neighborhood of 30%–33% of income.
• Conversion expenses: The exact dollar amount cannot be determined at this time, but it is expected to be significant and to have
a strong impact on short-term operating expenses.
23
• FDIC assessments: Although increased NCUA assessments (due to
corporate stabilization) have been an expensive burden in recent
years, the NCUA has indicated there should be relief from this
in the future. Given the severity of challenges to the banking
industry in recent years as well as historically higher FDIC vs.
NCUA assessments, this cannot be said of the banking industry.
The FDIC uses a tiered pricing structure based on risk levels, and
given the credit union’s desire for growth, it’s likely that they will
be at the higher end of the risk/pricing levels. As a newly charted
bank, it would likely face an FDIC assessment of between 9 and
45 basis points per year over the next five years.
• Loss of system collaboration: Credit unions have a history of working together on marketing initiatives, best practices, products and
services, and training and education. The same cannot be said of
the banking industry.
• Profit-driven decision making: The board’s greatest concern is
that future decision making will only be driven by profit. In the
past, a member-­first philosophy drove decisions about member
dividends, operating matters, and product and service offerings.
If profit becomes the overarching driver, the board worries that
products and pricing may become predatory to members.
• Collapse of the cooperative model: According to CU Financial Services data, since 1995, 35 credit unions have changed to a bank
charter or merged with a bank.6 Only seven of them have been
able to maintain their cooperative model. Loss of the cooperative
model would affect all consumers, not just current credit union
members. According to Datatrac, a collector of deposit and loan
rate data, credit unions outpay banks by 26–50 basis points on
five different savings and certificate accounts.7 Numerous research
studies have shown that the presence of credit unions in a marketplace results in lower interest rates throughout the community.
Financial Implications of a Bank Conversion
A number of the pros and cons must be weighed in conjunction
with one another. For instance, the tax burdens that the credit union
would face as a cooperative bank could be offset by being able to
deduct conversion expenses. But these deductions would, in turn,
complicate the business model, require adoption of additional generally accepted accounting principles and the IRS tax code, and drive
higher audit fees and operating expenses.
In addition, the credit union is likely to pursue growth opportunities
that will be easier to fund with the additional capital channels of the
banking world, but the one that it is most likely to embrace—stock
issuance—will undermine its ability to remain a cooperative financial
organization.
24
Business vs. Philosophy
Given its historical members-­first commitment, it is impossible for
the credit union to weigh this decision strictly on a financial basis.
Edward Filene, one of the pioneers of the US credit union movement, had great foresight on the issues the industry would face when
he offered this critical decree: “Keep purpose constant.”
But the credit union’s desire to remain true to its mandate to serve
people ahead of profit is more than quixotic: This commitment
drove the credit union system to make more conservative choices
that helped it to survive the tumult of the past few years and allowed
the credit union to realize a net worth ratio of 8.5% in 2011. Negative ROA in 2009 and 2010 was certainly disappointing, but it was
consistent with the experience of many financial institutions during
this challenging period. These skewed financial results are not a sufficient reason to seek a new charter.
The credit union is proud of its dedication to members and strongly
believes that keeping credit union operating principles at the forefront of its decision making has been a critical factor in its ongoing
success.
The Final Decision: Remain a Credit Union
Although the conversion offers potential financial benefits, a thorough review of relevant industry data and potential member detriments led to the decision to maintain the credit union charter. The
credit union structure has been financially beneficial to the credit
union, and a decision that takes away the benefits members have
known since the organization’s inception and silences their voice in
governance can hardly be viewed as a net positive.
As Dan Egan, president of the Massachusetts Credit Union League,
says: “The League strongly believes the member-­owned, not for
A group member weighs in
“I’ve been involved in development work in
practice and I appreciated the chance to
my role with the credit union league and it
get out of my daily routine and look at the
was exciting to connect with people who
movement from a macro perspective.”
are newer to the industry and to be able
to point them in the right direction in terms
of resources and connections. DE does
an exceptional job of turning theory into
25
Anthony Emerson
Credit Union League of Connecticut
Meriden, Connecticut
profit, credit union charter is the charter of choice for providing the
public with consumer-­friendly financial products and services, and
allows credit unions to offer a far better economic return.”8
The credit union recognizes that it needs to improve both loan and
member growth and is taking proactive steps to do so. It convened
a Process Action Team to review these areas of weakness and report
back to the board with viable strategies for improvement.
26
Endnotes
1. Bailey Reutzel, “MBL Bill Moves Closer To Vote,” Callahan &
Associates, April 16, 2012, www.creditunions.com/article.
aspx?articleid=4986.
2. D. Garth Taylor, Mari Gallagher, Francisco Menchaca, and
Robin Newberger, “Emerging Markets and Financial Services
in the Latino Community: Problems and Strategies,” Latino
Research @ ND 3(1), February 2006.
3. Federal Deposit Insurance Corporation, “2009 FDIC National
Survey of Unbanked and Underbanked Households,” December
2009, www.fdic.gov/householdsurvey/full_report.pdf.
4. REAL Solutions, “In-Depth Report—Credit Unions: Focused
on Financial Capability Across the Nation,” realsolutions.coop/
solutions/financial-literacy/financial-programs-counseling/
in-depth-report-credit-unions-focused-on-financial-capabilityacross-the-nation.
5. Federal Deposit Insurance Act, 12 U.S.C. 1813(f ) (1950).
6. CU Financial Services, “CU-to-Bank Conversion Update,” February 15, 2012, www.cufinancial.com/meetconverted.html.
7. Datatrac, www.datatrac.net.
8. Credit Union National Association, “Mass. CU Considers Conversion to Mutual Co‑op Bank,” February 17, 2012, wwwdev.
cuna.org/newsnow/archive/list.php?date=021712#54385.
27
Research Brief
Credit Union
Development Education:
What Is It All About?
ideas grow here
PO Box 2998
Madison, WI 53701-2998
Phone (608) 665-8550
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PUBLICATION #276 (7/12)