Let Credit Unions Grow

The Case for Expanding Field of Membership

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When Americans deposit their paychecks, get loans, and make certain types of investments, they can visit either banks or credit unions. Banks are typically owned by stockholders. Credit unions always belong to their members. Although terminology differs somewhat—credit unions have “shares” rather than “deposits”—the two institutions offer a similar product lineup.  

Credit unions, like banks, mediate financial transactions between savers and borrowers, although credit unions have maintained a relatively small market share. As Table 1 illustrates, credit unions’ share of the consumer credit market peaked during the 1980s at about 12 percent, and since then has shrunk to just under 10 percent. 

The two types of institutions compete (although Credit unions have a very modest market share) and, for years, they have competed in the political realm. The American Bankers Association, the nation’s largest banking industry trade association, portrays credit unions as unfair competitors that act like profit-making companies, while they face far less regulation than banks., As the ABA argues on its website:

The once-familiar model of a group of people—typically brought together by their jobs—pooling their resources to promote savings and to make small consumer loans is threatened…[Credt] unions are full service, diversified, financial institutions serving hundreds of unrelated groups, as well as entire states. Even though many credit unions have strayed beyond their original mission, they are still afforded special treatment: federal tax exemption and exclusion from many of the regulatory responsibilities that apply to banks, such as the Community Reinvestment Act.

None of this is false on its face: Credit unions do enjoy these exemptions, and many operate in a very businesslike fashion. But, in fact, credit unions are different and, in important ways, more regulated than banks. They all operate on a non-profit basis—although nearly all retain earnings—and, at least in theory, return excess revenues to members—that is, their depositors—rather than distribute them to stockholders. While stockholder-owned banks respond only to their shareholders—which they are legally obliged to do—credit unions theoretically exist only for the benefit of their members. Credit unions, furthermore, face limitations on the interest rates they can charge, how they may spend their revenues, and, most importantly for this paper, whom they can serve.

Banks can serve anybody who walks in the door. Credit unions, on the other hand, can only serve members of particular groups. State laws define these in each state and two major types of groups exist under the Federal Credit Union Act:

  1. Single common bond, based on occupation or association, such as, for example, all the employees working for General Motors;
  2. Multiple common bond: These serve multiple groups (each with its own common bond) and confined within a reasonably small geographic area. For example, it a credit union could serve all employees of Microsoft in Washington, D.C. and all students at Washington, D.C.’s Georgetown University also located in Washington, D.C.
  3. Community, based on a well-defined, geographic area. Although a few credit unions operate statewide, most limit themselves to a city or county. Generally, someone must live, go to school, work, or worship in the community a credit union serves in order to join that credit union.  

Today, field of membership is an historical anachronism—in the hands of regulators and bank lobbyists, it has become an effective way to shut out competition.