Why Your Credit Union Won’t Go the Way of SVB

Have you spent the last month assuring jittery members that their hard-earned assets are safe? It’s been an undeniably nerve-wracking time.

But all crises come with opportunities. As news around bank runs and general economic uncertainty continues to dominate headlines, you can take advantage of teachable moments around the credit union difference.

While credit unions certainly aren’t immune to economic downturns, your credit union isn’t likely to have its name in a headline that includes the words “collapse” or “failure.” But do your members fully understand why? Now is a great time to make sure they do.

Here are three core messages to keep reinforcing during this time of heightened financial anxiety:

 

1. Credit unions serve a diverse mix of consumers and businesses

The subtitle of this article says it all: “Focusing on wealthy people and their startup investments is not a sign of good risk management at a bank.” Asset diversification seems like it should fall under “Financial Institution Smart Choices 101,” but as the recent near collapse of Silicon Valley Bank (SVB) and so many other banks shows, too many institutions don’t follow this basic tenet.

SVB didn’t just invest in a start-up here or there, it invested almost exclusively in start-ups and start-up adjacent funds and their investors. And just to make things even more interesting, many of the start-ups had some tie to cryptocurrency.

The point here isn’t to bash start-ups or cryptocurrency—although both are inherently risky, both also have potential to be forces for good when that risk is managed appropriately. The point is that it’s never smart for a financial institution to focus on a single persona or a single industry.

Because this post is focused on marketing, not asset management, we’ll assume your credit union is following the smart practice of serving a diverse mix of consumers and businesses. Now, it’s your job to get the word out to your members. Share stories about the variety of people you serve, and, if you offer business services, industries you support. Be sure to explain why that diversification helps to cushion your credit union, your members, and the community overall against financial instability.

 

2. Member-owned cooperatives are inherently resilient

Speaking of risk, what about the risk inherent in the credit union movement’s focus on the financially underserved? By serving lower income populations, aren’t credit unions making themselves vulnerable to loan defaults and other dangers?

Actually, the research proves otherwise. This report, conducted for the U.S. Treasury Department, analyzed whether Community Development Financial Institutions (CDFIs), with their focus on economically vulnerable consumers, were more risky than those with a “mainstream” clientele. Their conclusion? Not only do CDFIs show no greater risk of institutional failure than conventional financial institutions, but considering the challenges the typical customers of the average CDFI face, the CDFI risk profile is actually better than that of the average financial institution.

Similarly, community development credit unions (CDCUs), which are credit unions with a mission to serve low- and moderate-income people and communities, are able to support high-risk consumers without putting their organization at additional risk—especially in the area of loan loss rates. This article from Brookings outlines some key reasons, which include:

• They are based in and closely tied to the community they serve.
• They prioritize building long-term relationships.
• They have a physical presence in their community.
• They grow in response to community/member needs instead of those dictated by earnings and stock prices.
• Their boards tend to be made up of community volunteers.

By virtue of being local, member-owned, not-for-profit institutions, most credit unions fit the above criteria, whether or not they qualify as CDFIs or CDCUs.

And here’s another reason your members can sleep more soundly at night: cooperative organizations of all stripes are, by their very design, better able to weather economic turmoil and general uncertainty than other types of organizations.

During Covid, for instance, member-owned cooperatives, with their focus on owner value instead of profit, were more agile and better positioned to pivot and innovate. And this research (about cooperatives in the Italian wine sector! Salute!) highlights the myriad strengths of a cooperative structure, including its ability to realize scale, create new markets, increase market efficiency, reduce transaction costs, manage risk via pooling, and promote innovation.

Looking back to our last financial crisis, a Canadian government report that examined the performance of “conventional” and cooperative businesses during The Great Recession stated: “The higher survival rate of co-operatives relative to conventional private businesses attests to the inherent resilience and stability of the co-operative sector.”

 

3. Credit unions actively contribute to local economic development and stability

Credit unions have a well-deserved reputation for helping to ensure the well-being not just of their members but of their local economy overall. That commitment also helps increase the well-being of the credit union—a great example of the power of interdependence at work.

For instance, credit unions are known for maintaining branches in underserved rural communities—and sometimes even opening new branches in areas that banks have fled. Our September 2022 CUInsight article, “Digital is important, but branches matter now more than ever,” explored the value of physical branches and provided examples of credit unions that had stepped in to fill a need. In a listening session hosted by the Federal Reserve, a number of participants also cited examples of credit unions moving into/or expanding their operations after the closure of a local bank.

American Banker highlighted the unique ways credit unions supported their communities during the early days of Covid, including putting together a housing resource guide, pledging millions of donations in relief efforts, creating a public/private partnership to provide low-cost loans to local small businesses, and donating critical medical supplies.

While local economies are still vulnerable to national economic trends, resilience starts at the neighborhood level. According to Brookings, “Now is the moment to create a resilient platform for local growth, one that reduces uncertainty, expands economic opportunity, and ultimately adapts to an extreme climate through improvements to transportation, water, energy, and telecommunications systems.”

In this era of financial uncertainty, it’s critically important to let both members and the general public know that your credit union is different—not just in a one-time email or announcement, but as a core message that’s continually reinforced across all platforms. Your credit union is diversified, stable, and inherently resilient in ways that most big banks are not. If your community hasn’t already opened its eyes to a credit union, now is the time.

 

This article was originally published on CUInsight.