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2015-11-05 07:57:25
A venerable form of banking comes back into fashion
Oct 31st 2015
THERE is a proselytising feel to the credit-union movement. Believers talk of a
social mission : to serve communities, not the false gods of the stockmarket.
Today, this creed is winning more converts than ever before. Globally, the
number of people in credit unions has doubled since 2000, from 108m to 217m.
Savings are up by 130% in real terms (see chart).
Credit unions first appeared in 19th century Germany. Like banks, they took
deposits and made loans. But, crucially, they were owned by their members, who
shared a common bond , such as a profession or place of residence. Earnings
were returned to members in the form of better interest rates.
In Europe, most of these early institutions evolved into co-operative networks,
such as DZ Bank in Germany and Rabobank of the Netherlands, which are still
owned by members but no longer serve a particular group. Elsewhere, the
requirement for a common bond endures: Partners Federal Credit Union, for
example, is open only to employees of Walt Disney and their families. Fully 39%
of American adults belong to a credit union, up from 36% a decade ago an
increase of 14m. In Australia, another stronghold, 24% do.
Three forces are driving the growth of credit unions. The first is simple: they
offer higher rates than banks to savers and lower rates to borrowers. American
credit unions charge an average rate of 2.66% on a three-year used-car loan,
against 5.13% for banks, according to SNL Financial, a research company. Credit
unions also outscore banks in customer satisfaction surveys in America, Canada
and elsewhere.
A second factor is the financial crisis. Some credit unions failed; corporate
ones, which pool and reinvest the funds of individual credit unions, were
especially badly hit. But, in general, credit unions were more resilient than
banks, says a report published in 2013 by the International Labour
Organisation. Without the same pressure to chase short-term profit, they took
fewer risks. As the big banks were hit by failure and scandal, credit unions
presented themselves as a more wholesome alternative. That boosted membership,
especially among the young.
The third cause of growth is more lasting, argues Bill Hampel of the Credit
Union National Association, an American industry group. In America, legal
changes have allowed for multiple common bonds , helping credit unions to
merge. Big credit unions are now professional operations with nationwide ATM
networks and a wide range of products: the Navy Federal Credit Union, which
serves American sailors and soldiers, has nearly 6m members. All this makes
credit unions easier to join, and more convenient to use.
This brings them into closer competition with banks. In America, bankers
complain loudly about credit unions exemption from federal income tax. But
even in Australia, where they don t enjoy the same tax breaks, credit unions
still offer competitive rates, according to data from Canstar, a research
company. Happily for banks, though, the very thing that makes credit unions
different also hampers their growth: they cannot raise equity.