Misunderstand 'Not For Charity,' End Up A Charity Case

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It is perhaps the most misunderstood phrase in all of Credit Uniondom.

If you missed The Credit Union Journal's SEG and Business Development Conference in San Diego (and we know who you are), you missed two days of intense discussion and presentations related to ensuring a credit union grows. What was perhaps most remarkable about the meeting were the challenges made to long-held principles of the Credit Union Faith.

That faith is founded on the motto, "Not for profit, not for charity, but for service." The "not for profit" part is at the center of the state-level storm over taxation, and is the frequently misunderstood reason for the tax exemption. The "service" part has been the subject of countless sessions, slogans, surveys, and self-congratulations. What is rarely discussed is those three words in the middle- "not for charity."

Few realize how important (and historical) the phrase is to credit unions. It took Fredrick Raiffeisen the better part of two decades in the 19th century to realize the "charity" model could not be self-sustaining, and that for a cooperative to exist and prosper it must adhere to basic business principles even in a democratic model. What Raiffeisen came to realize, as did those who later brought the German mayor's cooperative idea to Canada and the United States, was that "charity" in this case has two flaws: first, it is entirely dependent upon wealthy benefactors providing funding on an ongoing basis and, second, those who do not contribute to the financial co-op are dependent upon (and that's the kind way of saying it) the charity of those who do. In other words, in the old 80-20 role, the 80 aren't so much charity cases as they are sponging off the 20.

The "charity" aspect has long been misunderstood, misinterpreted and intentionally misconstrued. The banking industry has always deliberately looked away from the "not for profit" and "but for service" legs of the stool in favor of misconstruing "not for charity." The banks paint a picture for the media and legislatures that credit unions were "intended" to be charity wards, offering five or a hundred bucks here and there to financial orphans. Any evidence credit unions are anything but financial soup kitchens is played up by the banks as evidence credit unions have forgotten their "mission" (indeed, I think banks refer to credit union mission so often to imply credit unions are supposed to be missions) and that the tax exemption should be revoked.

But there's another group whose misunderstanding of "not for charity" is more egregious-credit unions themselves. Too often boards have rejected the notion that all members should pull their weight, mistakenly believing they aren't being true to the credit union mission by asking (indeed requiring) members to do so.

But that's changing, albeit slowly. What was clear at The Credit Union Journal's SEG & Business Development Conference was that progressive credit unions now know a lot more than the 80-20 rule. They know who the 80 and the 20 are (see related stories, beginning on page 10). Some may remain aghast at the very thought, but in other words they know who's profitable to the credit union and who ain't. This knowledge doesn't make them banks-it makes them better credit unions, with the emphasis on union. Most credit union members are the kind of one-way relationships you read about in Dear Abby. In fact, the 80-20 rule is being generous, according to Bob Lawhead, president of Raddon Financial Group. Lawhead told the conference his firm's research shows that in the Southwestern U.S., for example, 9% of credit union members generate a whopping 228% of their credit unions' earnings. That's the 9-91 rule.

The progressive credit unions are stressing two-way relationships. It's still one member, one vote, but it doesn't mean all members are equal to the credit union. Better members get better deals. For those reading this believing it's simply undemocratic and downright unfair that the 20 are rewarded for being better members, ask yourself this: Where are the 80 without them? They're in a foundering, CAMEL 4 or 5 credit union that has stagnated and is in need of a merger partner, that's where. And with what kind of partner will they likely be merged? A credit union that rewards its 20, and works everyday to move more members into that group.

Bought And Paid For?

It was noted in this space several weeks ago that credit unions do a poor job of telling their story. Look no further than Iowa for the latest, greatest example in the form of language contained in Iowa House Bill 203. Most of the ink and outcry related to that bill has had to do with its provisions related to taxing credit unions. But the bill also prohibits credit unions from acquiring banks, as University of Iowa Credit Union attempted to do in January with a small bank that is struggling. Legislators have bought the bankers' argument that this is somehow wrong, even though the bankers themselves would likely be better off if the deal went through. Iowa isn't exactly home to giant money center banks-when a community bank is snapped up, it's usually by one of the regional super-giants. That means the legislature essentially bought (or more appropriately, was sold), the argument that rather than having Iowa's citizens own their local financial institutions, it would be better if a Bank of America did.

Frank J. Diekmann is Editor of The Credit Union Journal and can be reached at fdiekmann cujournal.com.

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