Credit Unions Outperform Banks On Customer Loyalty, And Banks Lobby To End Credit Unions' Tax-Exempt Status
The Bankrate Banking blog reported the results from a recent survey about customer loyalty:
"According to the 2013-2014 National Member and Nonmember Survey from the Credit Union National Association, 57 percent of credit union members indicate they are extremely likely to recommend their credit union to friends. In contrast, just 40 percent of members who also use banks say they're equally as likely to recommend that institution to friends."
A 2012 survey found that 11% of customers were ready to leave their bank. To improve their performance, you'd think that banks would focus on better customer service, and cut costs to improve profitability. The big banks have focused on lobbying legislators in Washington to end the tax-exempt status of credit unions, which are non-profits:
"... Frank Keating, president of the American Bankers Association (ABA) wrote, "Many tax-exempt credit unions have morphed from serving 'people of small means' to become full-service, financially sophisticated institutions. The time has come to abolish this exemption." "
Another claim the banking industry likes to make is that repealing the credit unions' tax-exemption would create a level playing field. Earlier this year, the American Banking Association trade group released a flyer (Adobe PDF) which claimed:
"Today credit unions are a $1 trillion industry that pays no income tax. That’s nearly $2 BILLION every year that could help shrink the federal deficit. Now, credit unions want even more perks. It’s time to end credit unions’ indefensible and outdated special treatment. Enough is enough."
I agree. Enough is enough. And, enough with the spin and misleading statements. Let's start with some facts from the U.S. Statistical Abstract:
- The average bank is about 14 times larger than the average credit union. In 2010, the average bank had $1,739.7 billion (or $1.7 trillion) in assets while the average credit union had $124.6 billion in assets.
- Banks still control a whopping 94% of the market, based on assets. In 2010, FDIC-insured banks (commercial and savings) had over $13.3 trillion in assets, compared to $914 billion in assets at credit unions (federal- and state-insured).
- Banks are far bigger with more branch offices and ATM retail booths. Also in 2010, the 7,657 FDIC-insured banks (commercial banks and savings institutions) had 95,527 offices (main office and branches). That is about 12 offices per institution. In the same year, there were 7,339 credit unions; most with a couple offices (that rely on others' ATM networks to service their members).
- In 1990, the average bank was about 20 times larger than the average credit union. In 1990, the average bank had $306.6 billion in assets while the average credit union had $15 billion in assets.
- From 1990 to 2010, the number of banks decreased (e.g., consolidations, failures) by about 50%, the number of offices increased by 45%, and assets increased 186%. So, the big banks got a lot bigger.
- During the same period, the number of credit unions decreased (e.g., consolidations, failures) by about 43%, and assets increased by 361%. So, small organizations did get bigger.
- In 1990, banks controlled about 96% of the market; based on assets. So, credit unions have captured 2% of the market in 20 years. That is miniscule annual growth in market share.
Some additional facts worth noting:
- Banks provide retail banking operations (e.g., checking accounts, savings accounts, money market accounts, debit/credit cards), commercial banking (e.g., lending to businesses), and investment services. 70% of credit unions do not provide commercial banking operations. So, the claim about full service isn't accurate.
- A 2012 study found that while the total number of branch offices at banks increased during the past six years, the number of branches increased in higher-income areas and decreased in low-income areas. It seems hypocritical at best (and dishonest at worst) for banks to accuse credit unions of focusing away from the poor while banks do it.
- The claim by banks that credit unions receive special treatment is particularly laughable. Banks should never, ever complain about special treatment. During the 2007-2008 recession, banks received about $700 billion in TARP bailout money.
- If banks want to enjoy the benefits of tax-exempt status, they have the freedom and choice to re-organize as a credit union.
- When talking about banks, let's remember who we are dealing with. A 2012 survey found that more than a quarter of executives polled said that they considered unethical behavior necessary to succeed in business. The industry has an ethics problem it has failed to fix, yet it wants to tell another industry how they should operate.
The trade group representing credit unions has completed its own analysis which totally debunks the level playing field claim by banks. Read this 2011 report: Commercial Banks and Credit Unions: Facts, Fallacies, and Recent Trends:
- The claims by bankers imply that credit unions have captured a larger share of the market. This is false. In 1992, credit unions had 6% of the market -- the same share as in 2010.
- In 2011, half of credit unions had less than $19 million in assets while less than 2% of commercial banks were this small. During the same period, two-thirds of banks had $100 million or more in assets, while only 20% of credit unions were this big.
- The claims by bankers that credit unions don't paying their fair share of taxes is misleading and dishonest. Many banks use the SubS tax status to pay less taxes. According to CUNA, the number of banks using the SubS tax status has grown from 6% in 1997 to 31% in 2011. Both small and big banks use this tax dodge. Again in 2011, 61 banks with $1 billion or more in assets used the SubS lower-tax status, which was originally created for small businesses. It would seem that the banks are gaming the system tax wise.
What's really going on here? I began to wonder why an industry that controls 94% of the market would complain about its competition.
As I see it, this lobbying by banks is another slick attempt to focus attention away from themeselves and to limit consumer freedoms and banking choices. By limiting or eliminating choices (e.g., credit unions), banks reduce competition that keeps banking prices down. Without credit unions, it would be easier for banks to raise prices (e.g., fees, loan interest rates, decrease savings interest rates). Consumers would not have an option to move their money to from banks. I can think of no other reason why an industry would complain about competition that has only 6% of the market.
Remember, raising prices was what the banks wanted to do in 2011, but couldn't when consumers rejected higher monthly checking and debit fees proposed by the Bank of America and other big banks. Raising banking prices has several benefits for banks:
- Increases banks' revenues and profits
- Encourages some current account-holders to move to underbanked status: a checking or a savings account, but not both
- Encourages some current account-holders to move to unbanked status: neither a checking nor a savings account
- Allows banks to service both underbanked and unbanked customers with highly-profitable prepaid cards, instead of with traditional checking and savings accounts. Prepaid cards aren't as tightly regulated as debit cards, credit cards, checking accounts, and savings accounts. Prepaid cards have fewer or no disclosure requirements and few to no limits on the number or amount of fees the banks can charge. Prepaid card users have greater liability should the bank that issued their prepaid card fail.
In 2011, about 8% of U.S. households were unbanked and 20% were underbanked. The average prepaid card charges about $300 per year in basic fees. That's a huge revenue source for banks. Do you want to pay $300 per year, or more, in banking fees? I doubt it. I don't.
This blog discussed the long list of fees charged on many prepaid payroll cards. The goal should be to decrease unbanked and underbanked households. The St. Louis Federal Reserve said it well in 2010:
"Encouraging the unbanked to handle payments through the financial mainstream is important for a number of reasons. Having a checking and savings account is an important first step in establishing that the consumer has the financial acumen to apply for credit for a car or home... the key advantage to consumers having bank accounts is avoiding costly alternative financial services and enabling families to build and protect their wealth. Unbanked consumers spend approximately 2.5 to 3 percent of a government benefits check and between 4 percent and 5 percent of payroll check just to cash them. Additional dollars are spent to purchase money orders to pay routine monthly expenses. When you consider the cost for cashing a bi-weekly payroll check and buying about six money orders each month, a household with a net income of $20,000 may pay as much as $1,200 annually for alternative service fees—substantially more than the expense of a monthly checking account fee."
So, traditional checking and savings accounts are ways for consumers (e.g., the poor and lower middle-income people) to move up the economic ladder in society to achieve the American dream. If one wants the poor and middle-income classes to succeed, one should encourage them to open traditional checking and savings accounts with the lowest-cost financial products possible, usually available at credit unions.
Without credit unions (or with severly hampered credit unions), a rise in banking prices by banks would likely result and cost consumers dearly. The Los Angeles Times reported:
"The tax exemption is crucial to credit unions, which by law can't raise capital through public stock offerings the way that banks can, said Fred R. Becker Jr., president of the National Assn. of Federal Credit Unions, a trade group with about 3,800 federally chartered members... A 2012 economic study commissioned by the trade group found that removing the tax exemption would cost consumers about $10 billion a year through higher fees and interest rates on loans, as well as lower interest rates on savings."
The Los Angeles Times article also provided some good background information:
"Under a 1934 law, Congress exempted credit unions from federal income taxes as long as they were nonprofit businesses, organized without capital stock and operated for the benefit of their members. For decades, most credit unions were small operations, usually serving employees of individual businesses and government agencies. The industry has grown significantly since the 2008 financial crisis, boosted by outrage over Bank of America's 2011 plan to impose a $5 monthly fee for debit card use."
So, the big banks have only themselves to blame for the rise in credit unions. I think that it is important to remember the history of banks and credit unions described in this Federal Credit Union handbook (Adobe PDF):
"In the early twentieth century, credit needs of the urban working classes in the United States were largely neglected by established financial institutions. For the most part, the average worker had nowhere to turn except to the usurious money lenders of the day. This growing dependency complicated the economic life of the average consumer and gave rise to the development and formation of a cooperative credit system in the United States, an idea originating in Europe and imported to North America in 1900. In 1908, the first legally chartered cooperative credit society was established in Manchester, New Hampshire by a special act of the state’s legislature. The following year, the first complete credit union act, the Massachusetts Credit Union Act, became law in Massachusetts. By 1933, enactment of state laws permitting formation of credit unions had been largely accomplished. In 1934, the Federal Credit Union Act was signed into law..."
A reminder: usurious = very high or unlimited interest rates. So, a world without credit unions would eliminate the need for the Credit Union Act. It would also eliminate several freedoms citizens have, including the right to gather as a group and form a credit union. It would also set conditions for a return to the high interest-rate times of the 1800's. Do you want to return to banking practices of the 1800s? I doubt it. I don't.
What to do next. First, contact your elected officials and tell them what you think of the banks' lobbying against the tax-exempt status of credit unions. Second, move your money to a local, community bank or to a credit union. Third, join the Don't Tax My Credit Union movement.