Naïve people think that banks are big impersonal organizations and that credit unions are the cute and cuddly koala bears of the financial services industry. Very often, the common perception can be wrong.
Many credit unions, thanks to more liberal membership rules, have become multi-billion dollar behemoths that dwarf the local community banks in their area. The reasons for the tax-free status of credit unions has been long documented, and banks will continue to attack the perceived inequities that favor credit unions over banks. If a credit union competes and grows to the disadvantage of the local banks, perhaps the value proposition of the credit union is better received by consumers, no matter the current rules.
Recently, however, a more insidious development has grown out of the tax benefits of member-owned credit unions. Today, entrepreneurs are using credit unions as a vehicle for creating personal wealth.
How? They first get a state or federal credit union charter under the auspices of serving an "under-served" community of financial service customers. Are there really any under-served financial service communities left in the US today? I would be hard-pressed to name one. But no matter. Nether the feds or the states have the power to challenge the application, or even turn it down unless there is an egregious problem. The credit union raises some start-up capital, the applicant appoints a compliant board, and away they go.
The credit union opens up. It has higher costs than the local banks because it is new and smaller, but don’t worry, it will still be more profitable. It outsources all of its operations to a super credit-union called a CUSO, or credit union servicing organization, itself a very profitable business. There is a guaranteed margin, and of course, the credit union pays no taxes! Where do all those excess returns go? Why, into the pocket of the credit union president whose compliant board grants him or her most of the excess profitability in compensation. And, it's members be damned. In more and more cases today, the local credit union president is making more, much more, than the president of larger shareholder-owned banks. And who is subsidizing that wealth transfer? Why, you and I, because again, the credit union pays no taxes!
Congress is aware of this "sham" and the bank lobbyists work hard against it, but they will never prevail. Whether the head of the credit union regulatory organization (who is often paid near seven-figure salaries) is a former senator from New Hampshire or a former congressman from Florida, the credit unions always win. After all, it must be un-American (or at least un-Australian) to question whether letting the koala go extinct might be a good thing.
