Stifling Credit Unions Stifles the American Dream

By Louis Hernandez, Jr.

Credit unions have a long and rich heritage of serving as trusted financial intermediaries for Main Street America. They also have exceptional member satisfaction rates and membership growth. Yet, despite such enviable qualities, America’s policy-makers seem determined to destroy the credit union industry in the United States and, in the process, dismantle the very engines of the American dream.

Ever since the financial crisis, we have witnessed a series of broad-stroke financial regulations with compliance requirements and costs that have severely threatened credit unions’ ability to do what they do best, which is to drive economic growth and stability in local communities, and to support the fundamental tenets of the American Dream--home ownership, getting an education, starting a business and achieving financial security.

It’s a simple equation: 70 percent of the U.S. economy is consumer spending, which is strongly correlated with jobs and employment; 65 percent of new jobs are created by entrepreneurs and small business; and 60 percent of the loans to small businesses come from Main Street banks and credit unions. Main Street institutions also disproportionately provide loans for houses, autos, education and the basic credit that supports the national economy.

But recent polices, which were supposed to de-risk the banking industry, stabilize the economy, create jobs and protect the consumer, have instead undermined all these areas while creating a growing disconnect between the needs of our Wall Street and Main Street financial institutions. Instead of doing more to support our credit unions and rebuild the American Dream, these policies are crippling them.

Part of the reason is that policy-makers are oblivious to the disadvantages credit unions face in complying with the demanding regulations introduced since the financial crisis. Historically, the cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small financial institutions than for large ones. Additionally, while large banks have extensive access to capital and numerous sources of income to cover increased compliance costs, credit unions have limited access to capital and considerably fewer sources of income, as they focus on the basic needs of their communities. 

Along with this, every dollar spent on regulatory compliance at a credit union means one dollar less is channeled back to member-owners or used to provide loans that help consumers and small businesses. And every minute spent on compliance means one minute less is devoted to serving members, which is what credit unions are supposed to be doing. It’s no wonder that we have seen record mergers in the credit union industry in recent years, and a dwindling number of new credit unions being started.

The unfairness of recent policies seems hard to miss. What isn’t hard to miss is the fact that credit unions and other community-based financial institutions entered the financial crisis better off, with higher capital, lower charge-offs and lower default rates than Wall Street banks, and exited worse off because of reactionary policies that reduced their income and raised their costs--placing the viability of many credit unions in jeopardy. 

It is time to take our cause to America’s leaders in a single voice that Washington cannot fail to hear, which is why I started a movement and petition to build awareness and strengthen support for our Main Street institutions at SavingTheAmericanDream.org. I ask everyone to take part in this movement and to sign our petition, so that we can press Congress and the President to end the legislative threats to our Main Street businesses and community financial institutions, and work to rebuild their strengths in the interests of preserving the American Dream.

We can no longer ignore the significant differences between Main Street credit unions and Too Big to Fail megabanks and need polices that address these differences. To preserve the unique role credit unions play in supporting the financial needs of individuals and small businesses in their communities – in short, in supporting the American Dream – policy makers must be mindful of the unintended consequences of our current regulatory requirements and the harm they are inflicting on the national economy.

Louis Hernandez Jr., is chairman and CEO of CUES Supplier member Open Solutions Inc., as well as author of Too Small To Fail and the recently released Saving the American Dream: Main Street’s Last Stand.

No Chip, No Service

By Lisa Hochgraf

Thanks to CUES' amazing workplace flexibility and colleagues willing to work creatively to get the July issue of Credit Union Management out on time, my husband, son and I were in The Netherlands and Germany in early June, and in Europe the entire month.

While I wasn't required to work while I was away (thanks again, everyone!), I thought you might be interested to hear about how difficult it was to use our magnetic strip Visa card in The Netherlands. In two restaurants and two grocery stores, the cashiers have told us that the chip card is the only kind accepted. 

My husband is a clever guy and so he was able to look at the card device in the restaurants and put together how it could be used for just a regular old U.S.-style swipe. And that sufficed, but not without one waitress explaining to him that it was illegal for them to swipe the magnetic stripe cards, and—besides--with just the mag strip card, we were at much higher risk of skimming. In the groceries, we gave up and used cash. (Although we later discovered that we couldn't use an ATM without a chip card, either. Fortunately we didn't run out of cash before we headed for Germany.)

From working on past articles about EMV ("Europay, MasterCard and Visa") cards (read them here and here), I knew something about chip cards being prevalent in Europe and nascent in the United States. Please note that all of this is no ding to our current credit union's card, which we happily carried because of its friendly-to-travelers fee schedule and the institution's always awesome customer service.

But what an interesting example of why U.S. credit unions might want to start offering EMV cards to members—especially those members who travel. $3.6 billion United Nations Federal Credit Union, Long Island City, N.Y., has already done so; $48 billion Navy Federal Credit Union (on Navy FCU's site, see the link about "Using check cards worldwide") was piloting its program when our writer talked to them for the aforementioned story in the July magazine; and credit union service organization PSCU has just announced a prepaid chip card offering for client credit unions.

Offering chip cards is definitely something to look at if your members travel, even before 2013, when MasterCard will require acquirers (merchants’ financial institutions) to have systems that can handle EMV transactions. Today already, members can enounter circumstances of no chip, no service. Oh yeah, and then there's that part about the better protection from skimming, too.

Lisa Hochgraf is a CUES editor.

Learn more about the CUES School of Consumer Lending, to be held in September near Chicago.

Learn more about EMV at CUES' CEO/Executive Team Network, slated for Nov. 4-7 at the Ritz Carlton Palm Beach. John Ainsworth, group head, U.S. markets, MasterCard Worldwide, will present "EMV–The Catalyst for a New U.S. Payments Ecosystem."

Hybrid Cards: Convenient or Confusing?

By Aris Jerahian 

Financial institutions continuously are looking at ways to capture and grow their market share with new payment products. Hybrid cards, which combine debit and credit into one plastic, are one of many new products emerging in the industry.

This type of a card certainly has the potential to broaden existing relationships between a credit union and its member. As well, hybrid cards, like the one recently debuted by Fifth Third, allow a card-issuing credit union to migrate signature debit transactions down a credit path, earning them increased interchange and the potential for interest income.

The key drivers for the success of the hybrid card model will be convenience and education. While there will always be a portion of the cardholder base that wants to keep their credit cards separate from their debit cards, another group will appreciate the promise of fewer cards in their wallets. So from that standpoint, the card may be attractive. But, as always, consumers will be looking at the entire package. They’ll be closely examining whether the convenience is worth the fees, rates and minimum balances that come with the card.

Many consumers are already confused about when to use debit and when to use credit. Hybrid cards alone will not ease that perplexity, so cardholder education will be very important. Financial institutions that roll out products like this will need to have a strategy in place for properly training cardholders. No credit union wants a cardholder to be surprised with finance charges for purchases he thought were being debited from his checking account. Spiraling cardholder satisfaction often causes a ripple effect, impacting a credit union’s entire member relationship.

As with all new payment technologies, we will have to wait and see if consumers accept this change. More importantly, we’ll have to see if the product encourages the kind of purchase behavior that is beneficial for both the cardholder and the issuer.  

Aris Jerahian is VP/client relations for The Members Group, a CUES Supplier member based in Des Moines, Iowa.