Let's Talk Credit Unions: Defining the Players and Landscape

How It Started: A Historical Perspective

Credit unions have provided their financial services to their members in the United States for more than 100 years already. The history of credit unions can be traced back to Germany in 1849, when Friedrich Raiffeisen, the pioneer of rural credit unions, established the first credit society also known as a people’s bank. The original intent was to create a credit cooperative to address the credit needs of farmers. By 1864, it transformed into the first rural credit union. Almost 40 years later, in 1900, the idea of credit unions migrated to Canada, where Alphonse Desjardins co-founded Caisse d'épargne Desjardins in Lévis, Quebec. The organization served as a model for current North American credit unions.

During the following 30 years, laws regulating credit unions began to take shape. In June 1934, President Roosevelt signed the FCU Act, which authorized federally chartered credit unions in all states. On March 10, 1970 the regulator of credit unions - NCUA, National Credit Union Administration - was formed to supervise federal credit unions. The National Credit Union Share Insurance Fund (NCUSIF) was established to insure credit union deposits. By 1979, in less than 10 years, the assets managed by credit unions tripled. Up until 1980, the membership was possible only by belonging to a certain community or working for a certain organization. On August 7, 1988, The Credit Union Membership Access Act signed by President Clinton gave membership flexibility to credit unions. Today, credit unions continue to grow and fulfill the original intent of Roosevelt’s law, which is to create a system of not-for-profit cooperatives that operate in the interest of their members and provide superior financial services and experience.

Features of a Credit Union

Credit unions are usually smaller than banks, which results in better customer service. Credit unions are not-for-profit institutions governed by their members. Membership in a credit union depends on belonging to a particular community, organization, club, etc.

Generally, fees and loan rates at credit unions are lower than in banks. In addition, deposit dividends and interest rates are generally higher. Credit unions are democratically operated by its members, and each member has an equal say in how the credit union is operated, regardless of the size of deposit.

To sum up, identifying features of the credit unions from the moment they were first established were:

- Democratically operated by members

- One-member-one-vote, regardless of the size of the deposit

- Board of directors elected by the members

- Volunteer based.

Types of Credit Unions in the U.S.

There are two types of credit unions: SEG based and Community based. Select Employer Group (SEG) based credit unions are formed by members of a certain industry, profession or trade. Community based credit unions consist of members that live, go to school, work, shop, go to church in one particular area.

Both types of credit unions in the U.S. are represented in a variety of sizes and the spectrum of services they can offer. CUNA categorizes typical credit unions by their asset size into five groups.

- $1 million to $2 million: Credit unions with less than $2 million in assets make up about 10% of all credit unions. They primarily offer their members shares and loans. The average membership for these credit unions is 459; the average savings per member is $2,662 and the average size of a loan outstanding is $4,638.

- $5 million to $10 million: Credit unions that have reached this asset size can offer share drafts and larger consumer loans. A third of them (31%) hold credit card loans and 55% offer ATM access. The average membership for these credit unions is 1,345; the average savings per member is $4,717 and the average size of a loan outstanding is $6,527.

- $50 million to $100 million: These credit unions are full-service financial institutions. Over 99% offer share drafts and 99% offer ATM access. Over 47% have more than one office. The average membership for these credit unions is 8,369; the average savings per member is $7,527 and the average size of a loan outstanding is $9,522.

- $500 million to $1 billion: Nearly 100% of them offer share drafts and ATM access. The average membership for these credit unions is 63,008; the average savings per member is $9,607 and the average size of a loan outstanding is $13,361.

- $5 billion to $10 billion: Nearly 100% of them offer share drafts, ATM access and business loans. The average membership for these credit unions is 430,484; the average savings per member is $12,192 and the average size of a loan outstanding is $15,951.

The Credit Union System

Credit Union National Association (CUNA) is a national trade association for all credit unions and their state-level organizations. CUNA publishes annual reports on credit unions’ performance with extensive statistical data on services provided. The association provides a clear explanation of the way the credit union system is organized. According to CUNA, the U.S. credit union system consists of state and national organizations, which include:

- Regulators

- Share insurers (protect the savings of credit union members just as FDIC protects the savings of bank customers)

- Trade associations (provide legislative and regulatory support, training, and forums for discussion of issues among credit unions),

- Correspondent credit unions, known as corporate credit unions (provide correspondent bank services to their members)

- Service organizations

The most prominent national organizations are NCUA (National Credit Union Administration), CUNA (Credit Union National Association), and CUNA Mutual Group. CUNA Mutual Group is the national provider of insurance products for credit unions. NCUA is a U.S. government agency and the federal credit union regulator and administrator of the National Credit Union Share Insurance Fund (NCUSIF), which is the federal share insurance fund.

U.S. Credit Unions in Numbers

A report published by CUNA on credit union statistics by the end of 2014 provides the following information:

- Number of credit unions: 6,513 (3,924 are chartered under federal law, 2,589 under laws of various states and Puerto Rico)

- Total membership: 101.4 million

- Assets exceed $1,144 billion

- Credit union savings: $971 billion

- Loans - Lending outstanding: $728 billion

- Total credit union assets at year-end 2014 were about 108% of total FDIC-insured savings institution assets and about 8% of total FDIC-insured commercial bank assets

- 85% of credit unions in the states and DC (except Puerto Rico) are affiliated with a state trade association that is a member of CUNA.

Credit Unions’ Operational Results by Mid-Year 2015

According to the Second Quarter 2015 Results by CUNA, U.S. credit union memberships increased by 1.3% in Q2 2015, outpacing the first quarter by 0.9%. Q2 2015 signifies the fastest annual increase of the nation’s twelve-month membership reaching 3.1%.

U.S. credit union loan growth accelerated in the second quarter. The three‐month 3.4% increase in loans was substantially faster than the 1.4% increase in the first quarter. U.S. credit union loans increased by 10.4% in the year ending June 2015.

Loan growth was based on strong quarterly increases in all types of loans. New auto loans led the way with a 4.1% three-month increase. Used auto loans and unsecured personal loans each reflected 4.0% three‐month increases. First mortgages were up 3.2% and member business loans increased 3.0% in the quarter. Credit card balances grew 2.6%. Loan quality remained high. Loan losses declined marginally from 0.47% in the first quarter to 0.46% in the second quarter. U.S. credit union delinquency remains near all‐time lows.

U.S. credit union earnings results were strong with annualized ROA of 0.82% in the second quarter (0.78% reported in the first quarter). Overall, 97% of U.S. credit unions reported net worth ratios above the 7% of required minimum to be defined as well capitalized by credit union regulators.

The Upcoming Decline

According to CUNA Mutual report, as of February 2015, during the last 12 months the number of credit unions fell by 309, above the 301 annual decline set one year ago. There are several factors leading to the growing pace of consolidation in credit union system:

- Retiring baby-boomer CEOs

- Rising regulatory/compliance burden

- Record low net interest margins

- Rising concerns over scale and operating efficiency

- Rising competitive pressures and members’ demand for more products, services and access channels.

Year-end 2014 NCUA call report data shows 4,878 credit unions with less than $100 million in assets, or 76% of all credit unions. These credit unions are typically not growing their deposits and assets fast enough to keep pace with the growth in the overall economy, which facilitates the market share loss and inability to afford the upgrades necessary to enhance their mobile and online banking platforms.

There have always been traditional players in the financial services industry such as commercial banks, investment banks, insurance companies, brokerages, investment companies and nonbank financial institutions where credit unions belong. However, over the years of existence of those institutions, the marketplace has changed and it is changing now in a pace we have never seen before. In order not to become extinct, financial organizations have to keep up with upcoming changes.

In addition to the competitive environment, there are major industry disruptors emerging from the FinTech startups sector. Companies like Venmo, Square, PayPal, Kreditech, Ledge and many others bring new experiences to consumers and define new trends. Credit unions have always been part of traditional institutions with their competitive advantage: strong community focus, intimate relationships with members and focus on specific large groups of people (industry, organization, community, etc.). However, with the fierce competition and technological improvements happening at a fast pace, credit unions’ strength and scale will decline unless they keep up with the market.