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What Is Credit Unioning?

What Is Credit Unioning?
Posted: Sep 21, 2017
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As “banking at the fringes” chips away at traditional banking services, credit unions need to shore up their offerings.

[Editor's Note: This article was previously published on CU Today and has been modified.]

The Office of the Superintendent of Financial Institutions (the OSFI is the Canadian equivalent of the US Office of the Comptroller of Currency) has issued a restriction – that any non-banks must remove the terms “bank”, “banker” and “banking” from any references provided by that financial institution. Any financial institutions that continue to use these terms can face criminal charges. “The restriction applies to all non-bank financial service providers, including both federal regulated trust and loan companies and provincially regulated institutions (i.e. credit unions). So processing checks, granting loans, and managing individuals’ wealth is not considered banking in Canada.

In the U.S., holding deposits and issuing debit cards is also not considered “banking”. PayPal’s assets, which is the aggregate of all balances held in PayPal’s users’ accounts, $33 billion as of January 2016, would make it the third largest credit union in the U.S., if it were regulated as a credit union, which of course it’s not. PayPal operates only under state-by-state money transmitter licenses. To be fair, PayPal is subject to Regulation E consumer protections. But none of the other quarterly reporting, compliance and restrictions that apply to banks and to credit unions apply to PayPal, so holding people’s money must not be banking.

Venmo, which also holds people’s money, and is coincidentally owned by PayPal, is testing the ability to offer a debit card tied to the Venmo users' balance. This would allow the Venmo user to use the wildly popular P2P service as a payment option in brick and mortar stores. More notably, it would allow Venmo to earn interchange on the debit transactions, much like a bank does.  Hmmmm ...

PayPal is also offering additional bank-like services at the fringe of banking. PayPal recently inked an agreement with Visa to issue debit cards in Europe (could the U.S. be next?), and purchased TIO networks in Canada, one of the largest online bill pay vendors. This acquisition enables PayPal users to use their balances to pay for utility and cell phone bills and make loan payments. Apparently online banking is not considered banking, despite the name.

So far these are examples of enabling individuals and small businesses to store money, access their money, and spend their money, none of which are regulated as banking. But what about loans?

Amazon has loaned more than $1 billion to small businesses in the past year. Amazon is perfectly positioned to grant these loans. It has been in business for 22 years, and can track sales of the small businesses that sell through Amazon marketplace, determining which one’s are “loan-worthy”. Amazon must have deemed 20,000 business worthy, since it has loaned more than $3 billion to those businesses, sometimes granting second loans to the same third party seller. According to CNBC, loans range from $1,000 to $750,000; Sellers have said interest rates are between 6 percent and 14 percent. Extending credit must therefore not be considered “banking” either.

Should credit unions fear this wave of tech companies providing banking services on the fringe of the financial industry? 

Yes and No. Credit unions still have the powerful combination of links to the community, spirit of cooperation derived from member ownership, and a bundle of products that as of today, can’t be offered by non-regulated entities, like mortgages, car loans, credit cards, share certificate accounts, etc. But credit unions should have a healthy fear that the bar is being raised. They can no longer rely solely on member loyalty and roots in the community. Instead, credit unions need to think outside of the traditional box and stay current with the purchasing behaviors of not only their current members, but the next generation growing up in a digital world.

Consumers, which include credit union members, have become accustomed to the Amazon experience (“if you like this you may also like that”), to the ease of online access to their money like PayPal is providing, to the social and fun aspect of P2P that Venmo has created to pay friends and family. According to pyments.com, a full 42% of all credit unions do not offer a mobile banking app. Lowering this would certainly be a start to stemming the threat of “banking on the fringes”.

Do you agree or disagree? Would love to hear from you.

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Michele Featherstone

Michele FeatherstoneMichele Featherstone

Trellance Senior Portfolio Consultant Michele Featherstone brings more than 20 years of industry experience working as a strategic marketing consultant with credit unions of all sizes. Prior to joining Trellance, she held a senior leadership position at a Trellance partner credit union, where she w

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