On Tuesday, I read an opinion piece from CUNA President/CEO Jim Nussle suggesting that we eliminate field of membership (FOM) requirements. This was based upon the Supreme Court upholding the NCUA’s 2016 field of membership rule.
Nussle goes on to point out that the Federal Credit Union Act focuses more on our overall mission “to promote thrift and provide access to credit for provident purposes” than field of membership. He also suggests that FOM definitions were directly tied to credit-worthiness, at a time when we didn’t have the tools we have today. When I was explaining what a credit union really is to a marketing friend of mine that knew nothing about our structure he summed it up pretty nicely “It’s like borrowing from your friends, co-workers, family or neighbors, only in a less awkward way.” Precisely! That is what field of membership did for us.
I started my career in credit unions 40 years ago, and I can tell you that “common bond” matters when it comes to the success of a credit union, especially in the early stages. Early on I worked for United Grocers Credit Union, $4 million in assets. It was really a co-op for co-ops. United Grocers was designed to help independent grocers (mom and pop shops) compete with the big chains by pooling resources and leveraging buying power with volume. When a new employee started at UG they were instructed to open an account at their credit union so they could deposit their paycheck automatically. You can’t get better marketing than that.
We promoted thrift by encouraging new members to “pay themselves first” before dumping their entire paycheck into checking. We had a credit committee (a kind of jury of their peers) that reviewed loans outside of our guidelines and decisions were indeed made based on their employment history, their probability of future employment, what they were purchasing (was it a provident purpose?), what is their history with the credit union?
By his argument FOM definitions have become obsolete because we have this great tool called the credit score now so we can manage risk another way. Let me first say that I’ve always admired Mr. Nussle and don’t envy his position today as the leader of the trade association that is charged with representing all credit unions in the United States. However, I was really taken aback at the notion that we should eliminate completely one of the few differentiators left to help define our unique cooperative structure.
There are two points of contention in my view. First is the notion-the credit scoring system we use today is sufficient.
Under the old system (clearly defined common bond) we would make a 20-year-old a loan to buy their first car in a heartbeat. We knew them, we knew where they worked, the likelihood they would be able to pay off the car based on that information. They had no credit, they were just starting out. We also knew that by taking a chance on this young kid starting out, we were likely building lifetime loyalty. Today we won’t touch that loan because everyone is born with a credit score of zero. If you look at most credit unions’ balance sheets, their loan yields are woefully low because they are primarily loaning to A and A+ paper (older people with established credit history). The average age of a credit union borrower is 3 – 5 years OLDER than the average age of the credit union member (which nationally is still 47, or too old). Credit scores, in my opinion, are flawed and have hurt us more than helped us. They were originally intended to help “price” the risk, but were used to judge and deny, especially by the banks who did not have the type of relationship with a customer that a credit union has with a member.
I have argued that the loosening of common bond has interfered with the true definition of a target audience (from a strategic marketing perspective). When it was teachers, that was pretty specific and easy to market. When you have a FOM description that states “Anyone who lives, works or worships in a five county area”….well, not so much. Thus the proliferation of “shiny happy people stock art” on most credit union’s websites. They all pretty much look the same.
The second notion I’m not a fan of is eliminating our history. In other words, many times I’ll go to a credit union’s website and click on the “About Us” page only to read this rhetoric “We are a not-for-profit financial institution owned and operated by our members with a volunteer board of directors.” What I love to read is “In 1936, five school teachers deposited 6 dollars each to charter the credit union.” This was field of membership, the founders, our history. Let’s not erase it.
Also, we need to START new credit unions and the timing couldn’t be better. History is repeating itself and we are dangerously close to mirroring the Great Depression in terms of overall unemployment rates. Credit unions BOOMED after the Great Depression. Why? Common bond. People really needed to help other people. I do see a great opportunity with the looser common bond definition but still see it is a critical piece to defining the market, or the cause if you will.
Consider this…one of the hardest hit industries in America right now is hospitality. Restaurants, hotels, transportation. They are bonded in this crisis. And credit unions in their purest form can be summed up in this way: those that are able to deposit money in the credit union will get a reasonable rate of return so that those members that need to borrow money can get a loan (regardless of their score) also at a reasonable rate. If a new credit union were to start today, say the National Restaurant Association CU, I would imagine with our financial cooperative structure that it could be very successful and a wonderful way to tell the REAL story of the financial cooperative movement. All tied to a common bond and people helping people in a time of financial crisis.