Since the Federal Credit Union Act of The following summarizes the historical background to the U.S. Credit Union Movement and how that history is a preview to new and powerful savings and earning opportunities afforded by blockchain technology. History is an important teacher: To understand where we are going, it is important to understand where we came from.
Credit Unions are of The People, by The People, and for The People – but Powered by Technology.
Part 1: A Historical Perspective
Since the Federal Credit Union Act of 1934 (as amended) became law, U.S. Credit Unions have been early adopters of trends and technologies in banking. The following summarizes the historical background to the U.S. Credit Union Movement and how that history is a preview to new and powerful savings and earning opportunities afforded by blockchain technology. History is an important teacher: To understand where we are going, it is important to understand where we came from.
The Backdrop: Bank Runs and The Great Depression.
The Federal Government was bailed out by the Industrialists of the late 19th and early 20th Century. Bank runs and failures plagued the 1890s and were common into the first decade of the 20th Century – pushing the U.S. Treasury to the brink of bankruptcy. Private equity bailed out the Federal Government and acquired banks for pennies on the dollar. The Central Banking and the Federal Reserve system that resulted was put into law in the Federal Reserve Act of 1913, as amended, as a means of protecting the interests of the Private Equity holders and handing them a controlling interest in the US Banking System.
The Roaring 20s led to everyone from the Richest of the Rich to everyday laborers speculating in the Stock Markets. By August of 1929 inflation was on the rise, industrial production was lagging, and the markets were overleveraged (sound familiar?). There were no limitations to retail and commercial banks investing in the markets, allowing banks to leverage customer accounts and reserves well beyond reason to take advantage of the bull run. The stock market crash that ensued marked the beginning of a ten-year period of economic depression that only turned around with the start of WWII. Once again, banks failed, and private equity was tapped for the bailout. This time, private concerns (Rich People) demanded an insurance pool to back their investment. The Banking Act of 1933 created both the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits and the Securities and Exchange Commission (SEC) to regulate the stock markets[1] and how banks may participate in them. This was meant to insure investors’ bailout funding as well as to rebuild consumer confidence in the banking industry. There is no point in bailing out the banking system if no one wants to use it.
Part of the motivation for the Credit Union Act of 1934 was to counter the power grab by the Industrialists and to give banking cooperatives, savings and loans, and mutuals a way to exist without excessive regulation and control – particularly regulation and control dictated by central banks. Credit Unions (CU) formed under the CU Act are exempt from regulation by the SEC and the Commodities Exchange Commission (CEC, renamed as the Commodities Futures Trading Commission, the CFTC). This legislation established the basis for the National Credit Union Administration (NCUA) as a regulatory body that would oversee the unique needs of cooperative banking apart from the emerging retail and commercial banking model. One notable distinction between the FDIC and the NCUA is that the FDIC protects the bank shareholders first and then the account holders; whereas, the NCUA protects the account holders first who are the shareholders.
1 https://www.history.com/topics/great-depression/great-depression-history
NCUA Regulation: Evolution of the CU Movement
The NCUA emerged as an incubator for advancements in banking products, services, and technologies within a stabilizing regulatory environment. Sometimes it is hard to believe the foresight of the CU Act and the vision of the NCUA Boards in facilitating the needs of The People in such a rapidly changing financial and technical world. While it’s one thing to adopt electronic and computerized banking systems for ledgering and bank-to-bank transfers, the Credit Unions led the charge to integrate ATMs, remote (FAX) check deposits, touch-tone phone banking and transfers, and then Internet Banking. These innovations were implemented for the convenience of and at the demand of CU Members – The People.
One concept key to the operational and regulatory success of Internet Banking – Digital Banking – is the idea of the digital receipt. In a CU, shares represent the dollar value of a CU Member’s account, where one share is equal to one dollar. Digital Banking requires that digital receipts for shares are created and transacted between Members, Vendors, CUs, etc. One party initiates a transaction and shares are taken from their account and converted to a digital receipt. Once transacted, the digital receipt is converted back to shares and deposited in the receiving party’s account. The NCUA regulatory framework is what allowed the CU Movement to embrace internet banking in the 1990s and into the 21st century.
As you might anticipate, the digital receipt is really no different than a token or transaction written to a blockchain. Once again, the authors of the Credit Union Act of 1934 and the NCUA Boards that followed were prophetic to a new idea that will revolutionize saving and wealth generation for CU Members today and in the future.
But this is a topic for Part 2. We still have a little more history to discuss.
The Road Gets Rocky: Fear and Loathing in the 21st Century [2]
Ok, so, I live in Las Vegas and a nod to Hunter Thompson is always a click-grabber. This will also be the section where topics of recent historical interest briefly will be laid out with no more than a cursory assessment as to the wisdom of the decisions made along the way.
The Savings and Loan scandals and the recession of the 1980s is a turning point for the CU movement. The number of credit unions peaked in 1985 at more than 15,000 and has declined steadily to about 5000 today [3]. This period marks the beginning of a major change in focus of Credit Union Management from service to the membership to compliance and meeting short term performance goals. This is the beginning of the Big Bank Influencer Influx (B2I2) into the Credit Union Movement.
The financial industry excesses of the 1980s and early 1990s led to increased regulation and the Asian/Russian Financial Crisis in 1997 and 1998 that had a global impact on banking. It became clear that the banking and financial industry had become globalized at that point. This widened the opening for the B2I2 in the Credit Union space.
As the nation eased into the 21st Century, we had the likes of the Enron scandal, the Dot Com bubble bursting, and major bank/investment companies merging that paved the way for additional B2I2 influence – particularly among the largest credit unions. Two major events of the early 2000s: 1) the 9/11 terrorist attacks and 2) the 2008 Mortgage and Financial Crisis became the primary drivers for a regulatory explosion in the banking industry. The merger and acquisitions movement in retail banking began to build momentum among credit unions as well. Community Banks – most of which were Credit Unions – were the first to fall victim to this trend.
These new federal compliance requirements simply have made it too expensive to run Community Banks. CEOs need accounting specialists to ensure compliance with Dodd/Frank. They need investigative/legal experts to deal with Anti-Money Laundering and Privacy compliance. IT and Security experts also are needed to deal with System and Organization Controls (SOC) compliance. Since these regulations are applied as one-size-fits-all conditions, they have driven up operating costs disproportionately for Small Banks, Thrifts, and Small Credit Unions. According to a recent CUNA study, small credit unions pay 60% more of their total operating costs for regulatory compliance compared to large credit unions.
This is a major reason why the credit union industry has seen more than 1800 mergers and failures (30%) in just the last ten years. The average asset size for credit unions undergoing mergers has increased from $22M in 2011 to over $53M in 2021. There are still about 3200 small credit unions (~$100M or less in managed assets) that are struggling to maintain their identity, provide service to their membership, and to maintain their ability to remain compliant and solvent at the same time.
2 The information used for this section comes from NCUA data posted on their website. Additional information is from the Credit Union National Association (CUNA), CUInsight.com, and ChipFilson.com.
3 William Hunt Blog, CreditUnions.com, based on Federal Deposit Insurance Corporation and National Credit Union Administration data from mid-year, 2021.
The Future: Look to the Past for Answers
Is it time to lay the U.S. Credit Union Movement to rest? Obviously, we at the Proposed Maven Federal Credit Union don’t think so or we wouldn’t be trying to start a new credit union.
The answer is twofold: 1) Credit unions need to start looking for new technology to solve these regulatory compliance problems, and 2) Credit Unions need to work with the NCUA to develop a graded approach to compliance.
Recall that the whole reason for the CU Act of 1934 was to ensure that community banks – credit unions – could operate in an environment free from the excessive regulation and control brought on by the central banks. This allowed CUs to not only prosper, but to advance new banking products, services, and technologies within a stabilizing regulatory environment. Isn’t this the direction that the American Credit Union Movement should be taking today? A two-pronged approach embracing new technology and the NCUA is the nod to the past that will help secure the future of the credit union movement.
In Part 2 of this series, we will look at some of the technology that the Proposed Maven Federal Credit Union is developing and see how this will help reduce costs and increase member engagement.
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