The Taiwan Banker

Given the U.S.'s advanced banking system, its financial services infrastructure should be sufficient to serve the entire country. But because of problems in the free-market economy, many Americans (especially the disadvantaged) cannot access the mainstream financial system. This has led to financial exclusion. Credit unions, which exist as non-profit organizations that serve local communities, could play a role in helping less well-off Americans gain access to the financial services they need. When the savings rate in the U.S. dropped following the global financial crisis of 2008-09, the total savings rate of credit unions actually rose. According to Credit Union National Association (CUNA) statistics, while the types of credit units are falling, overall members are increasing. Compared to the 2010, the total number of members has risen 12.6%. Loyalty is also on the rise. More than 60% of members consider credit unions their primary financial institution. This phenomenon raises an important question: Given the U.S.'s advanced banking sector, with more than 6,000 banks and 100,000 bank branches, why is it impossible for the banking industry to serve certain customers? What is the key role played by credit unions and why do they play this role? The origin of credit unions Credit unions are non-profit organizations that help each other and aim to improve members' lives, offer them many benefits and promote community development. Credit unions offer both savings and lending services. They only serve their members and focus heavily on consumer loans. Members are both shareholders and clients. These members share one common bond, such as working in the same field or living in the same community. Credit unions return their profits to members in the form of favorable interest rates for lending (lower than what banks offer). Credit unions play an important role in providing loans to common people. Credit unions started in the south of Germany in 1894. At that time, there was a large gap between rich and poor. Farmers and others with low income had difficult lives and they all suffered from high-interest loans. To alleviate this problem, Friedrich Wilhelm Raiffeisen tried first to raise funding from the rich, but he was not very successful. At that point, he shifted gears and decided to found the first credit union, offering the poor a way to help themselves rather than rely on the largesse of others. Within 10 years, the trend spread to Canada, the U.S. and many other countries. The key features of American credit unions As a cooperative financial organization, the American credit union is quite different from a typical financial institution. Horizontal organization Members have equal voting rights (one man, one vote) and decision-making power. Credit unions have three important meetings: the main members' meeting, the board meeting and the board of supervisors' meeting. During the meeting in which all members participate, the management team is chosen. Members who serve on the management team are always unpaid. Members can leave the credit union and new members can join at any time provided they are in compliance with the credit union's charter and fulfill their member duties. The minimum share purchase requirement is US$5. Once you buy that, you can become a member and have access to the credit union's services. Non-profit and focused on member services Through their history, credit unions have been not for profit and have focused on serving their members. This is quite different from commercial banks which maximize profits for shareholders by charging a relatively high interest rate when they lend to their clients. Credit unions return profits to their members by offering high interest on savings deposits and low-interest loans. Prudent risk managementAlthough credit unions are non-profit organizations and focus on serving their members, they still employ a strict review process in their lending business. Loans are only extended to members and the tight-knit environment discourages defaults, as a default causes other members to experience losses. In recent years, the default rate has been fairly low. Supportive government policy The U.S. government provides favorable conditions to strengthen the competitiveness of credit unions. As non-profit organizations, under the Federal Credit Union Act, U.S. credit unions are exempt from paying federal taxes while stock profits are exempt from taxes on the earned interest of individuals. Three forces promote growth in credit unionsAccording to analysis by The Economist, there are at least three forces that help credit unions grow. Firstly, compared to banks, credit unions offer higher interest rates on savings deposits, and they lower borrower's interest burden. According to research by SNL Financial, over a three-year period, the average interest rate on credit-union loans for second-hand cars is 2.66% compared to bank loans in that category with an average interest rate of 5.13%. Credit unions also receive higher customer satisfaction ratings than banks. Secondly, while some credit unions were adversely affected by the global financial crisis of 2008-09 and went bankrupt, the vast majority weathered the crisis better than commercial banks. The reason for this is that credit unions are not focused on short-term profits, so in the years leading up to the crisis, they invested less in risky products like derivatives. From 2007-2010, the peak years of the financial crisis, total savings at U.S. credit unions grew 23%, bucking the trend at commercial banks. The third reason is that a change in regulations allowed credit unions to merge. Thus, while over the last decade the total number of U.S. credit unions has been falling, their asset scale and member numbers are rising. Further, credit unions are expanding the scope of their services, which includes offering ATM services and different types of financial products. These changes have made it easier to join credit unions. Serve local communities and help the less privileged members of society In terms of the scale of their operations, there is a large gap between commercial banks and credit unions. In 2016, the U.S. had 5289 banks, with each bank on average having 16 branches. There were just 6075 credit unions with each on average having 3 branches. Further, commercial banks on average have 13 times the amount of assets as credit unions. Looking just at these numbers, it seems it would be difficult for credit unions to compete with banks. But since credit unions are small, rooted in local communities, and give back to their members, they have a reputation for offering personalized services. A credit union can offer a wide variety of financial services, including checking accounts, savings accounts, personal credit cards, home mortgages, car loans and micro lending to companies. Of course, a typical bank can offer these services too but the interest rate on loans will be higher and the interest rate on savings deposits will be lower. For these reasons, credit unions are becoming a top choice for Americans' financial services needs. In contrast with commercial banks, credit unions offer financial services to the less privileged members of society. In this sense, they make a tangible contribution to the improvement of society. According to CUNA research, the approval rate for home mortgages for middle to low-income earners was 69% and 62% for minorities. The corresponding figures for commercial banks are 47% and 51%, respectively. Further, credit unions extend up to 25% of their loans to middle and low-income earners; for typical financial institutions, that figure is just 20%. Introducing FinTech with time How should the internet and mobile banking system be upgraded how should firms compete in a competitive e-payment market? Finding answers to these questions has been a priority for credit unions in the U.S. According to a 2015 research report by the Filene Research Institute, credit unions have less overall resources compared to banks, which may explain why they have been more eager to embrace fintech. At present, there are 120 relatively large (with more than 10,000,000 members) credit unions that use the CU wallet system and have developed their own mobile payment app. 54% of credit unions offer internet and mobile P2P payment services. For smaller credit unions, to reach economies of scale, it makes sense to cooperate with commercial banks and fintech providers. In conclusion, a credit union is a non-profit organization and its core strength its ability to take care of its members and provide warm, personalized services. Credit unions have a number of attributes (competitive interest rates on loans and savings deposits, inherent stability, relatively easy access to lending services for members) that they can draw upon as they work to integrate fintech with their existing services. If they can do that, not only will they continue to grow, but they will also be an important stabilizing force in society. The writer is the Dean of the Communications and Publishing Center of the Taiwan Academy of Banking and Finance