Community Building in Credit Unions

In the American credit union movement's early years, narrow legislatively imposed field of membership (FoM) requirements functioned to limit the possible scale of cooperative financial institutions. As a result of this state of affairs, one of the major trends in the development of credit unions in the United States has been the push for the gradual loosening of their FoMs. That process culminated in the mid-1990s, when the regulatory framework was shifted to allow for "community" charters under which a credit union's FoM could consist of a region populated by millions of potential members. The results of this change have been mixed; while the number of credit unions members has grown robustly, that growth has been accompanied by a crisis in credit union identity.

This crisis, manifestations of which include declining annual meeting attendance, aging boards of directors, demutualization, and the fact that many new credit union members aren't even aware that their institution is structurally different than a joint-stock bank, was not entirely unexpected. Indeed, it had been anticipated by the debates between "traditionalist" and "progressive" credit unionists over the strategic direction of the movement in the 1970s and '80s. While the progressives advocated for the consolidation and growth of credit unions into large, technologically savvy full-service institutions with loose FoMs, traditionalists countered that the core purpose and essence of credit unionism would be weakened or even lost entirely in the course of such a transformation.

Given the path of consolidation and expansion that the credit union movement has trod in the last two decades, it is clear that the progressive vision came to dominate the movement's agenda, with impressive results. Since the Credit Union Membership Access Act of 1998 was passed, millions of Americans have benefited from gaining access to the benefits of cooperative banking, and the size of the deposits held by credit unions has more than doubled. As late as the 1970s, credit unions had been so marginal to the financial system that they often held their cash reserves in bank accounts; by the dawn of the 21st century, joint-stock banks were concerned enough by the competition they were encountering from progressive-model credit unions that the American Bankers Association launched a public campaign to attempt to convince Congress to restrict FoM. These signs of success were accompanied, however, by worrying trends which suggested that the traditionalists' concerns had not been entirely unfounded.

In order to understand the full implications of those worries, it is necessary to examine the nature of the traditional credit union model. In contrast to the progressive-model credit unions which claim tens of thousands of members and hundreds of millions of dollars in assets and dominate the movement today, traditional-model credit unions were small. Their FoMs generally consisted of a community such as a work-place or church in which the members' inter-relationships preceded their common membership in the credit union. Loans were decided upon by a credit committee made up of volunteers, and those volunteers' detailed social knowledge of prospective loan recipients factored heavily in their decision-making. Furthermore, the fact that it was clear that a debtor owed money to his or her co-workers or fellow parishioners rather than to an institutional "other" meant that there were social as well as fiscal incentives for avoiding default.

For a traditionalist, the essence of credit unionism lies in the institution's ability to use its members' social knowledge to allocate credit far more efficiently than would be possible for a bank, since the bank has to act upon far less reliable information. A cooperative corporate structure is vital to a credit union's success, since it ensures that the organization could not become a vehicle for the exploitation of one segment of the community by another, but the scale is equally important for the traditionalist vision. If the members don't know each other or, even if they do, don't feel the need volunteer their social knowledge to the credit union, then its ability to allocate credit becomes no different than a bank's.

Implicit to the progressive vision is the idea that the loss of such advantages is a regrettable, but unavoidable, sacrifice that is more than compensated for by the economies of scale that can be obtained through growth. Indeed, it is argued that those economies of scale are essential just to stay afloat in the rapidly evolving world of financial services; without them, there would possibly be no credit unions at all. As a result, progressives perceive the core of credit unionism to be the cooperative structure; that, in and of itself, is enough to justify its conceptual differentiation from a bank.

Thus, credit unionists are presented with two seemingly mutually exclusive choices. Either a credit union can provide the services that modern consumers have come to expect from financial institutions but grant loans based upon the same criteria as a bank would use, or it can leverage social capital to aid in credit allocation while foregoing such amenities as e-banking and debit cards. However, a more detailed examination of the developmental path of credit unions casts doubt on the binary nature of the traditional and progressive visions and leaves open the possibility of their integration.

All new enterprises require start-up capital, and, for many credit unions, that capital took forms that would seem unusual from the perspective of a for-profit entrepreneur. The space in which the credit union's business was transacted was often initially provided, rent free, by the sponsoring community (workplace, church, etc.), and the labor of the board of directors, credit committee, and education committee was volunteered. The first person to be paid was the treasurer, but even they were known to refuse salaries in their organizations' first years. Essentially, these were subsidies by which interested parties could invest in the creation of the credit union without actually parting with monetary capital. As credit unions developed and matured, those subsidies were no longer needed, and the organizations moved into their own spaces and hired professional staff.

In a similar way, the social connections that allowed traditional credit unions to grant credit more confidently than a bank could can also be thought of as a form of subsidy. The host workplace or church had already invested enormous amounts of time, money, and energy in constructing its community, and it then essentially allowed the credit union to free-ride on the value of those social connections in the same way it might have allowed the credit union to use a room for a few hours per week. As such, the social connectedness of the credit union's founding community can be understood as another form of non-monetary start-up capital, similar to volunteered labor and space.

If this is the case, then it follows that, in the same way that maturing credit unions internalized the cost of space and labor, so they might also internalize the cost of generating social capital. For a credit union that's FoM remains narrow, this might mean little more than sponsoring events that contribute to the continued coherence of it's sponsoring community. However, larger credit unions are not based in a single community; rather, their members come from all walks of life, and hold in common only two things: rough geographic proximity, and common membership in the credit union.

This does not mean that community-chartered credit unions are precluded from leveraging their members' social capital. What it does mean, however, is that, in order to do so, such a credit union must build a community with itself as the base. By engaging in activities which serve to connect its members with each other, and constructing feedback mechanisms by which those relationships can inform credit decisions, a community credit union might have its cake and eat it too, taking advantage of both economies of scale and "economies of community" which together serve to advance the interests of its members.

Democratic Community Giving

One tactic by which a credit union might foster shared identity amongst its members could be through democratizing the organization's community giving. Support for community is a core cooperative principle, and most credit unions honor it through sponsoring events, donating to charities, granting scholarships, etc. For members who identify strongly with their credit union, such activities can be a source of pride, but their impact is limited by the fact that members outside the board of directors have no direct say in how charitable giving is directed. Most members perceive credit union charitable giving as a positive thing, but it is ultimately "they" rather than "we" who is making the gift.

That perception could be changed, and member identification with the credit union dramatically increased, by democratizing the giving process. Instead of having the board of directors or marketing director decide where the money could be best spent, the board could simply determine the amount money the credit union should set aside for the year's giving. In the time leading up to the annual meeting, each member could nominate one non-profit organization or project that operates within the field of membership that they would like supported. Then, before the annual meeting, the credit union might sponsor a "non-profit" fair at which all of the nominated organizations could set up informational booths to educate the membership about the work they do. Each member could then vote for up to five organizations, and the money would subsequently be disbursed to the organizations pro-rated by how many votes each received.

By doing this, every credit union member could feel directly responsible for having supported projects in her community that she cares about, and would recognize that the support was delivered through the vehicle of the credit union. Furthermore, members would be incentivized to reach out to their fellows in order to "campaign" for their chosen cause. Not only would the membership become, as a whole, more well informed as to what's going on in their community as a result of this process, but such interactions could initiate the deeper relationships which might serve to form the threads in the tapestry of a community centered in, and created by, a credit union.