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A CU Industry Backstory

Ed Filene and Anne discussing data at the America's Credit Union Museum

In honor of International credit union day, It is only appropriate we take a moment to share a brief history of the industry.

An explainer of Credit Union Backstory

The word credit union does not provide a clear definition of what a credit union is. Is a credit union a place that offers credit to unions? Or is it a union of credit? Here is a helpful explainer of the history of credit unions and what they do.

A credit union in the United States is a financial cooperative that provides traditional banking services and is regulated by the National Credit Union Administration. A credit union offers standard financial products and services, including but not limited to checking accounts, term deposits, IRAs, credit cards, auto loans, and home loans.

Credit unions originated with farmers in the Rhineland region of Germany in the 1850s. Friedrich Raiffeisen was the mayor of Neuwied, a town in the Rhineland region. Due to the cyclical nature of their farming business, he observed farmers who needed to take loans out at the beginning of the planting season to purchase seeds and repay the loans when the crop was harvested and sold. Raiffeisen saw the farmers struggling with loan sharks as their only way to manage their farms financially, and thus the farmer was in a constant debt cycle. To provide a better financial option, he created the first rural financial cooperative founded on his "S" formula: self-help, self-governance, and self-responsibility.

Alphonse Desjardins imported this idea from Europe to Canada in the 1900s. He created the organization known today as the Desjardins Group, the forerunner to North America's current structure of credit unions.

Credit unions then gained a formal footing in the United States with the help of Filene's Department Store president Edward Filene. In 1909, Filene and Desjardins created the Massachusetts Credit Union Act, the first comprehensive credit union law in the United States, which eventually served as the model for the Federal Credit Union Act of 1934 that authorized federally charted credit unions in all states.

What exactly is a Credit Union?

A credit union is a financial cooperative, a business structure wherein all the users of the credit union's financial products and services have an ownership share in the cooperative, making them members. This cooperative structure makes credit unions fundamentally different from other corporations and financial institutions. Cooperatives also focus on generating benefits (which may or may not be profitable) for members, while corporations, such as banks, focus on creating returns for investors.

Credit unions also adhere to a set of seven cooperative principles:

1. Voluntary and open membership

2. Democratic member control

3. Member economic participation

4. Autonomy and independence

5. Education, training, and information

6. Cooperation among cooperatives

7. Concern for the community

8. Diversity, equity & inclusion

Cooperatives were created in the United States by five fundamental interrelated driving forces:

1. Market failure (monopoly power, excess supply, missing markets)

2. Economic crises (depressions and recessions)

3. New technology

4. Organizations and cooperative advocates

5. Favorable public policy (presidential interest, legislative initiatives at both the state and federal levels, and judicial interpretation)

These forces supported the inception of the credit union industry. Credit unions were created in response to the stock market crash of 1929 and the Great Depression when the country was looking for a financial alternative to banks. In 1934, credit union legislation was enacted.

Factors That Create Successful Credit Unions

To prosper, cooperatives must be well-organized, well-financed, well-managed, and governed by a committed membership. They must be progressive, adapting to changes in business climates and members' needs. Successful cooperatives also have strong operational management. A successful cooperative has leaders willing to innovate, make necessary changes, invest, and grow.

Cooperatives need dedicated organizers. Successful cooperatives draw on the leadership skills of dedicated volunteers. Management is also supported by the individual cooperative member, the community the credit union serves, and the credit union industry.

Conditions That Lead Credit Unions to Potential Failure

The following are identified "pitfalls" for cooperative efforts:

  • High turnover of leadership and management

  • Too many "collateral" goals

  • Lack of rigorous financial analysis

  • Poor location

  • Failure to change direction quickly

  • Loss of the "cooperative advantage."

Cooperative Business Life Cycle

According to Zeuli and Cropp's Literature on Cooperatives, Principles, and Practices, cooperatives have a standard business life cycle:

  • Phase 1: Innovation and experimentation phase

  • Phase 2: Take-off phase (a rapid expansion in co-op numbers)

  • Phase 3: Stabilization phase (co-op number stays constant or low growth)

  • Phase 4: Consolidation phase

Current State

Based on research done by the Financial Brand, the total number of credit unions is on the decline. In 2012, there were 7,165 credit unions. Today there are less than 5,000. However, the number of members is growing. In 2012, credit unions had 93.7 million members, and today 126.6 million people are credit union members. This trend of increasing members in an environment of fewer credit unions is an indicator of consolidation, the final phase of the cooperative business life cycle.


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