Banks battle with credit unions as National Credit Union Day approaches

CNY Business Journal (1996+), Oct 14, 1996 by Apte, Vivek

Credit unions have much to celebrate as they approach National Credit Union Day on October 17. Credit-union assets more than quadrupled during the past 15 years, from $69 billion in 1980 to about $318 billion at the start of 1996. The National Credit Union Share Insurance Fund is running a surplus for the second consecutive year. And credit-union membership now stands at 70-million people -- 30 percent of adults in the U.S.

Unambiguously, the growth in credit unions has come at a cost to the banking industry. Each year for the past 10 years, credit unions have grown by an average of 10.5 percent. The figure for banks is 4.7 percent. Credit unions now offer retail customers the full range of products and services that banks offer. Compared to banks, credit unions have lower service charges, higher interest rates for deposits, and lower interest rates for loans. The banking industry's own surveys show a higher level of customer satisfaction among credit-union members than among bank customers.

Although credit unions attribute their success to the inherent superiority of the credit-union idea, bankers' groups put it more tersely. Credit unions are thriving, bankers argue, because they enjoy unfair financial and regulatory advantages. Credit-union nonprofit status, in the opinion of the bankers' groups, amounts to a tax subsidy. The banks paid about $20 billion in taxes last year. That's $20 billion more than credit unions said.

The banks have banded together to "educate lawmakers and the public on the issue -- they've filed lawsuits and printed ads, primarily. The lawsuits center on two issues to do with the more successful credit unions: forcing them to limit their fields of membership, and removing their tax-exempt status. The ads attempt to address both issues in the same message. One ad asks, "If it looks like a bank, and acts like a bank, but doesn't pay taxes like a bank, is it a bank?" -- followed by the helpful answer, "No. It's a credit union]" The ads seem to imply that the credit unions' not-for-profit status does nothing to prevent them from seeking profits every bit as rapaciously as banks do.

David versus Goliath?

Although credit-union growth has been alarming from the banks' viewpoint, the banks remain massive in comparison. In 1995, the growth in bank assets alone was more than the $318 billion combined deposits of all credit unions. All U.S. credit unions combined would still be smaller than the largest single U.S. bank, Chase Manhattan.

Despite this disparity in size, many localized instances have given the banks reason to worry. Credit unions have emerged as viable competitors for the small-business and high-income market. The Tompkins County Trust Company in Ithaca, for example, with about $512 million in assets, competes heads-on with Cornell Federal Credit Union (about $164 million in assets). According to Tompkins County Trust's president, Jim Byrnes; Cornell FCU aggressively focuses its marketing on employees of large companies and other high-income groups, the same market Tompkins County Trust primarily serves.

Cornell FCU's growth rate, says Byrnes, was about 16-17 percent last year, compare to his bank's nine- to ten-percent growth rate. To add to his worries, Cornell FCU is building a large branch office on the main route that runs through Ithaca. "This is an example of what credit unions can do utilizing capital that they retain as a result of being tax exempt," Byrnes says. According to Byrnes, this scenario is being played out nationwide. Close to home, People's FCU, south of Ithaca, has been successful to the point that there are virtually no local banks left in the Southern Tier region, Byrnes says. Byrnes points to a similar situation in the Poughkeepsie area. The Hudson Valley FCU there controls $818 million in assets. This is larger than 80 percent of commercial banks in New York and 95 percent of commercial banks in the U.S. as a whole.

In Seneca Falls, Summit FCU acquired the former Goulds Pumps credit union and its upscale client base. John Gadziala of Seneca Falls Savings Bank complains that if Goulds Pumps employees wish to make a partial direct deposit into a savings account, regulations permit that deposit to be made only into a Summit FCU account.

Bankers' groups accuse credit unions of "cherry-picking" some of their best customers. "It's not a level playing field," says Michael Smith, president of the New York State Bankers Association (NYSBA). Smith's complaint was repeated by every banker interviewed for this story.

What has changed?

At their inception, credit unions catered primarily to small, narrowly defined groups of individuals with low incomes. The legal requirement that all credit-union members share a common bond, in practice often meant that members knew each other personally. Services were limited to small personal loans and savings account. There were no lines of credit, small-business loans, mortgage credit cards, or even checking accounts. From these humble beginnings a "movement" was born, the primary focus of which was to serve people for the social good, rather than for profit. According to Cherie Umbel, spokesperson for the National Credit Union Administration in Alexandria Va., "Serving the people that banks would not serve is the basis for why credit unions exist.