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The Secret Lives of Credit Unions

by tim w. ferguson

tim w. ferguson, the former editor of Forbes’s Asia edition, writes about business, economics and society.

Published January 15, 2020


Media reports that Google will establish “smart checking accounts” for the digital-banking set starting next year included mention that it would partner with Citibank and the Stanford Federal Credit Union to handle the back end — which is to say, the financial side. Citibank is a rather obvious choice: though huge, it apparently lacks a retail presence large enough for its liking. But why the credit union that was created to serve the Stanford University community?

Therein lies a story — and a political riddle — about the modern credit union. Time was when credit unions were a solid if sleepy presence at large employers (there to help the unbanked put money away) and in rural areas where farm households lacked competitive access to capital. That’s why Congress created legislation in 1934 to favor the nascent credit union movement with federal charters and a nice tax break.

As late as the early 1990s, qualifying for membership was a perk even if you were welcome as a customer at a conventional retail bank. When I took a teaching job at UCLA Extension, I was delighted that it entitled me to join the nearby University Credit Union. That allowed me to skirt some petty fees still common at commercial banks, and also to take home a decent rate of interest on my account balance.

But Congress and the primary regulator of credit unions — the National Credit Union Administration — have widened the “field of membership” for such institutions. If you are the Stanford Federal Credit Union, you are free to solicit accounts from the employees of some 250 enterprises in the San Francisco Bay Area. (Google, of course, is one of those employers.) Credit union membership, which used to be open to a pretty well-defined affinity group, is now widely regional or occupational — and access to accounts extends to relatives of each qualified customer.

Where I live on New York’s Long Island, a mass postal mailing from “Suffolk Federal” touting its home-equity loan options makes only small-type reference to the fact that it’s a credit union. Membership, as the lender specifies in even smaller lettering, “is open to anyone who lives, works, worships, attends school or regularly conducts business in Suffolk County, NY.” A loan officer told me that “way back in the beginning,” you had to be a county employee to qualify.

Bigger, in the view of many credit union executives, seems to be better. Navy Federal reaches so many military-related households that it apparently pays to advertise on national football telecasts and even to sponsor a post-season college football bowl game. Not to be outdone, the San Diego County Credit Union — SDCCU — has its own bowl game and has leased naming rights to the stadium it is played in.

The welcoming vagueness of their charters isn’t about to turn one of these ambitious credit unions into the likes of Citigroup, which holds $2 trillion in assets. But 315 of them have more than $1 billion in assets each. And expect more giga-unions to come, since many credit unions are eyeing consolidation.

With more than 117 million Americans now enrolled in credit unions, one can see why the commercial banking industry is in a perpetual hissy fit over the subject. Credit unions are so well insinuated at the grassroots level, however, that they’ve proved every bit a match for the powerful commercial bank lobby — in no part because the banks have many other fish to fry in Washington and can’t afford to concentrate efforts on just this one.

What became of the national concern over scant personal savings, and all the hand-wringing about overstretched households? By blessing and universalizing credit unions, we seem only to be fostering debt, not thrift.

It’s not surprising, then, that credit unions still pay no federal income taxes; nor is there any prospect of their reach being reined in. The last significant restraint, a 1998 U.S. Supreme Court ruling that narrowed eligibility practices, was quickly rendered moot by the Credit Union Membership Access Act that same year.

Do any of the Depression-era justifications for the special care and feeding of credit unions still hold? With big banks such as Capital One touting the ease of opening accounts — and now, of course, with the digital-finance revolution in which Google will join — it’s increasingly hard to argue that contemporary credit unions are an essential point of entry to personal finance. Indeed, since the hungriest credit unions increasingly act like banks, whatever shortcomings or pitfalls for consumers that remain in retail banking are likely to be faults shared by credit unions.

For its part, Google claims to spot a difference:

Both of our initial partners are highly innovative, but different in terms of focus and scale. By partnering with both a large, global bank and a credit union with deep community ties, we can do a better job building products that meet a diverse set of needs.

Hmmm … Deep ties aside, it’s clear what the “focus” of today’s credit unions is. Of late, they account for nearly a third of all auto loans in the U.S., a borrowing category that is seen as increasingly risky. University Credit Union pushes car loans hard in its member messages. And nearly every promotion I receive is about the joys of borrowing. No shock, then, its rate on old-fashioned savings accounts and short-term CDs has dwindled nearly to zilch. Sure, interest rates aren’t anywhere near what they used to be in the good old days of gnawing inflation worries. But many banks do compete by paying decently on savings instruments.

What became of the national concern over scant personal savings, and all the hand-wringing about overstretched households? By blessing and universalizing credit unions, we seem only to be fostering debt, not thrift.

To be fair, at least one prominent credit union offers savers a bone, and does so with the kind of marketing that Google will have to work 24/7 to top. The outfit that goes by PenFed (from “Pentagon Federal”) widely advertises CD-like products that usually have some of the most attractive rates in the nation. It does so, confident that it won’t have to turn customers away. If by chance you can’t show some plausible tie to the military-industry complex, you can become a member (for $15) of Voices for America’s Troops, an advocacy group for the interests of the men and women in uniform. Then, welcome to PenFed and the gaping realm of official financial favoritism.

So how much does the favored treatment of credit unions really matter in the world of U.S. financial markets in which government benefits of one form or another are almost too complex and too varied to assess? Maybe not much — though it does dismay free-market policy nerds like me to see that the gravy offered to credit unions is sufficiently attractive that Google finds it worthwhile to get in the game. Meanwhile, shouldn’t someone try to shame credit union leaders for tempting marginally qualified households to borrow to the hilt?

main topic: Finance: Banking