In Chicago, where I live, this article titled ‘The Middle Class is Shrinking Everywhere – In Chicago It’s Almost Gone’ has been shared widely in community development circles. It is an interesting read on the changes in demographics in Chicago, similar to those that are also occurring in major cities across the United States. In summary, the article highlights the fact that in Chicago there are wide economic disparities by neighborhood. Few existing neighborhoods can be considered solidly middle class, with most having become either wealthy neighborhoods or low-to-moderate income neighborhoods. This also leads to increasing polarization of perspective, since residents become more likely to interact either with people who are in their income bracket or on the opposite extreme. It is difficult to watch or listen to the news without hearing messages about growing economic divides and polarization of viewpoints.
Income inequality matters to credit unions. Regardless of your institution’s approach to managing this reality, it is impossible to avoid as a business issue. As a credit union, your organization has a charter. With a shrinking middle class, this means your member demographic is more likely to fall on one side of the socioeconomic spectrum than the middle. This means a lot for your strategy. If you are serving a predominately high income demographic, what is setting you apart from significantly larger financial institutions? Large banks have no problems serving high net-worth individuals, and with more resources than your credit union, your institution needs a strong competitive advantage. It can be done, but it is important to understand what sets your credit union apart.
You may have more members who are struggling financially than your strategic plan recognizes. Even if you are in a higher income charter, there are probably potential members who are financially challenged. Income inequality also means that these members may have higher debt-to-income ratios, collections, or credit challenges. It does not mean that your members are bad at managing money. The opposite is true. Your members might be very good at watching their daily balances very closely and managing expenses on a cash basis. It means that people who fall in this category are living much closer to the financial edge, and circumstances that might be a small challenge for a better-off individual may put this person at significant risk. Many credit unions across the industry are proactively thinking about how to lend more deeply and more broadly, and this is a positive trend.
Thinking about serving underserved and financially challenged members makes good business sense because it provides a competitive advantage, a socially responsible focus, and growth opportunities. However, responding to these sorts of challenges should include discussions that are broader than board policies and underwriting standards. It should include conversations around income inequality and the reasons behind it. It should include challenging our own assumptions. It should include a diversity of viewpoints and backgrounds around the table. The causes of economic disparities are wide-ranging, and include tough topics ranging from discrimination, bias, policies that favor specific demographics, automation, and technological advances that displace jobs. Responsibly serving underserved and financially challenged members requires a philosophical commitment to deep thinking. Every credit union and each region will have different opinions on how to best tackle these issues locally. This will be the case because the specific challenges will vary based on local policies, culture, geography, politics, and resources. However, if your credit union does not approach this with the thoughtfulness to understand why your community is struggling, at best it will be difficult to provide financial solutions that alleviate real challenges. At worst, it will provide a temporary boost to your bottom line while creating unintended consequences for those you intended to serve.
Financial institutions are key community stakeholders, and when one serves a struggling community it matters. Credit unions, with our cooperative missions and thoughtful outreach, are the best situated to make a real difference with real people with real needs when we serve well.