Saturday, November 5, 2011

Give Me Some Credit

Ok, so today was the big switch—Bank Transfer Day. A woman started a group on facebook that implored people to make the switch from their big bank to a credit union or local bank. The day the switch was supposed to happen was today, November 5. 70,000 people became friends of the page and made the pledge to make the change. Many more are expected to as well.

So, the question becomes, why switch to a credit union? And for that matter, what is a credit union?

Well, a credit union is owned by its account holders with each member getting one share to help decide the direction the credit union will go. One person one vote; account holders are typically called shareholders and accounts are called shares to reflect this system. Credit unions are not publicly traded entities, their assets are managed by an elected volunteer board that steers policy according to the will of its account holders. Credit unions tend to be local; operating in a small region and having few branches or ATMs. To offset this though, many credit unions belong to larger groups of credit unions that share benefits like access to each other's ATMs to increase their footprint.

Credit unions typically use their assets to reinvest directly into local communities, providing a very large percentage of small business loans SBAs each year. All banks in the nation last year averaged .187 percent of deposits going toward small business loans. In contrast, the more regional institutions—credit unions and even local banks—invest substantially more. They inject money into the local economy which provides jobs and helps the middle and working classes.

The big banks counter that they make substantial contributions to SBAs in the form of loans and services. But their categorization of an SBA is a business that makes less than $20 million in profits per year. If you look closely at where those 'magnanimous' loans go, it's mostly in the $10 million to $20 million profit range. Big banks don't have the same kind of lending policies. Period.

Credit unions also focus on lending and helping improve financial stability of their shareholders. Boeing Employees Credit Union (BECU) extends a line of credit based off the largest expense a shareholder has on a monthly basis—example: if a shareholder's biggest monthly bill is $500 for rent, BECU gives the shareholder $500 of credit attached to the shareholder's accounts. This provides a safety net in case of emergency (car breaks down, unforeseen medical bill etc.) and prevents overdraft fees, while simultaneously building credit scores for those who don't use it.

Banks should do these kinds of things but they don't. Most banks have eliminated free checking, charging fees to customers without notifying them. In the wake of the big bailouts; banks have failed to lend out money to SBAs or small clients; instead focusing their energy on acquisitions. Lending is tight in the recession despite record bonuses for their executives. They often have national ATMs but that's a moot point because places like BECU offer over 28,000 ATMs nationwide through their partnerships. Big banks are usually publicly traded companies which makes them vulnerable to significant manipulation via markets as well as enthralled by the coercive power of large investors rather than their members.

Banks have held this nation hostage with their 'too big to fail' nature. The American taxpayer has been effectively on the hook; stuck with these guys because they have hoarded cash, made terrible financial decisions, lobbied Congress to turn a blind eye to their unregulated pyramid schemes (Madoff was famously boosted in credibility by the banks who refused to inquire about his methodology), and refused to do anything to change these detrimental policies.

This was supposed to be an objective look at banks versus credit unions, but I fail to see a reason why I should continue to patronize a place that can't turn a profit (Bank of America has been the DJIA poorest performer for the last two quarters), wreaks havoc on my country's financial system (the banks approved toxic loans and bundled them in volumes that caused the recession), is unresponsive to customers (they have famously tried to foreclose on homes for $1.00 and $0.00 in unpaid loans; both later attributed to bugs in their system), and has continued to make big payouts to its CEO without tying his pay to any sort of objective performance.

Oh, and they don't care either, so don't worry about hurting their feelings. If I were to tell the CEO that I was pulling all of my assets out and sticking them in a credit union, he would laugh at me; he doesn't care about what I make because he makes that in less than five minutes of work. But that would never happen, because he will never meet me. I have a high likelihood of meeting and knowing a board member of BECU though; they live and work in my community. They make sure that the money goes where it belongs, back to the community. And they have a democratic way of organizing themselves. I love democracy and I love economic development. I don't love monopolies that hold capitalism hostage and spend millions of dollars lobbying my congressmen to make legislation that continues to benefit only the big banks. I'm sick of it.