Will expanded Field of Membership (FOM) rules disrupt cooperative spirit of credit unions?

Credit unions have always epitomized the spirit of collaboration. Sharing tips and tricks, best practices, aggregating volumes to shared vendors, are all hallmarks of the U.S. credit union industry. But there is a recently made change which has the potential to disrupt this cooperation, and pit credit unions against each other. Or these same changes could be used to grow and strengthen credit unions, to make credit unions an even more compelling alternative to banks. These changes relate to who a credit union can allow to become a member – the field of membership. Federally-chartered credit unions must adhere to restrictions set by the National Credit Union Association (NCUA), and some of these restrictions are being relaxed, opening up expansion possibilities for many credit unions. How credit unions who choose to take advantage of the loosening of restrictions to expand use their gains will either keep and grow the spirit, or break it.

Background on field of membership

Credit unions are chartered to serve a specified group, called a field of membership (FOM). Membership is limited to a group, or multiple groups, defined in the credit union’s charter, each of which have a common bond of occupation or association or are located within a well-defined neighborhood, community, or rural district. Some of the types of FOM’s are:

• Single occupational: This could be a company (XYZ Corp.) or a trade, industry or professional group, such as teachers’ credit union.
• Single associational: A credit union can serve a single group, such as the Knights of Columbus.
• Multiple common bond: A credit union serves more than one group, each of which share a common bond and/or association.
• Community: A credit union can be chartered to serve a city or county, and usually has the name of the geographic entity in its name.

Why does this matter? Because credit unions are restricted to issuing credit cards, granting loans, and opening accounts to members within the field of membership specified in their charter. The NCUA defines the field of membership rules for federally charted credit unions. And earlier in November, the NCUA eased many restrictions regarding some definitions. This has the potential net effect of some credit unions being granted the ability to expand into other credit unions’ “territories”. Conversely, some credit unions may find themselves facing new competition in their own backyard, from a credit union previously restricted from doing so.

The changes are far-reaching and involved a lot of details. To help understand the changes, the NCUA created a 6 page summary with a “before and after” comparison in a document which can be found here. One of the most frequently cited changes is in the definition of the core statistic area that a community-based charter can include. Under the previous rules, the NCUA used a core-based requirement to demonstrate an area is a well-defined local community. The area could be a single political jurisdiction (such as a city or county), or an area consisting of multiple political jurisdictions. The Core Based Statistical Area was subject to a population limit of 2.5 million persons. However, Los Angeles County (the most populous single county in the U.S.) has a population of over 10 million, and many other single political jurisdictions are at least greater than the 2.5 million limitation. Under the revised rules, federal credit unions may now apply to serve an area adjacent to its existing core-based statistical area or single political jurisdiction, opening up wide swaths of populations to many community credit unions. However, those wide swaths of population are likely already being serviced by other credit unions. This opens up the potential for competition among credit unions where none existed before.

Credit unions – the spirit of collaboration

Credit unions have historically had a propensity to collaborate, with the understanding that credit unions don’t compete against each other, but rather they exist for the benefit of their members. If anything, credit unions see banks as the competition.

This collaboration takes on many forms in the industry. Credit unions purchase services from entities who aggregate credit union volume and exist to provide service to the vendors’ member credit unions. These are called credit union service organizations. By aggregating volumes, credit unions get pricing on par with larger financial institutions, and have access to technologies usually reserved for bigger banks and credit unions.

Credit unions attend several conferences where they share their success and failures, war stories and tips and tricks with each other. CSCU’s annual conference for credit unions, Solutions, is a perennial example of this level of collaboration.

The spirit of collaboration that is exemplified in purchasing of services, and sharing data at conferences makes credit unions more effective at gaining and keeping members. Competition could harm that advantage. But there are some steps that credit unions can take to take advantage of the expanded rules.

Time to Step-Up the Game?

Credit unions that seek to expand their footprint to attract new members, especially if they want to compete against well-established banks with the resources to have state of the art technology and rich rewards, will need to assess their own offerings. Luckily there are many ways to do this.

• Consumer card controls: Members are increasingly looking to have control in their own hands, that is, on their smart phones, to prevent fraud on their credit or debit cards. Apps that allow a cardholder to “turn on and off” their card, of prevent the card from being used online or in international transactions are growing in popularity and are available from a credit union’s processor.
• Rewards: Many credit unions offer some form of rewards on their credit cards, fewer do on their debit cards, and some do not offer rewards at all. To be competitive in an expanded environment, credit unions need to meet consumer expectations, to be rewarded for spending activity. Richer rewards, including rewards on debit spending, as well as a one point per dollar spent on credit and two points for dining are becoming the bar to which consumers expect their financial institutions to meet.
• Mobile banking: A cohesive mobile banking app, with consistent look and feel throughout the app for transaction history with details, bill pay, and check deposit, is table stakes. The newer generation of mobile banking apps offer features such as inline offers, automatic image capture for check deposit, and mobile chat for immediate response queries.

The Undesired Element of Competition

The best way for credit unions to win is to work together. Even through expansion into communities served by other existing credit unions, collaborating through local chapters, partnering with each other for shared services such as shared branches and ATMs, and viewing banks as the competition, can turn the undesired element of competition into a strength that has always been the foundation of the credit union movement

https://www.ncua.gov/About/Documents/Agenda%20Items/AG20161027Item4c.pdf