Bancography | Branch Planning, Marketing Research, Brand Strategy, Products & Profitabilty

6 Reality Checks About Credit Union Community Charters

For some credit unions, a community charter may be their only avenue for survival. But for all others pondering an expanded charter, they seem to dwell on starry-eyed possibilities without acknowledging some very big branding issues.

#1 Lost focus
Credit unions with closed charters concentrate on the unique needs of a very specific and narrowly-defined audience. They know exactly who they serve and why they exist. Tragically, many community chartered credit unions let their concept of “audience segmentation” erode into a singular demographic: “all people ages 18-55.” (Translation: “everyone with money and a pulse.”) The bigger your target audience gets, the harder it becomes to find a unique value proposition. The lowest common denominator is rates, price and fees.

#2 Massive marketing muscle
Maximizing community charters requires a whole new level of marketing — billboards, radio, TV, online ads — plus a much larger budget that can be quite a shock for those who aren’t prepared. Closed-charter credit unions are accustomed to a very limited range of marketing tactics. They aren’t familiar with what it takes to generate name awareness and build a mass-market brand. They have little- or no experience with CPM, SEO, click-through rates and paid search.

#3 Estrange your sponsor
To your original sponsor, a community charter can look like a deliberate attempt at distancing yourself from their organization. As you change names and start marketing to the general public, the feeling that your credit union was once an exclusive, club-like employee benefit disappears right along with the special access your credit union once enjoyed. No more welcome packets at new employee orientations. No more kiosks in the employee cafeteria. They may even kick you out of their facilities altogether.

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#4 The old name won’t work
If you have a word like “Employees,” “Teachers” or some other equally-limiting term in your name, you will never convince the community that “everyone can join.” Many credit unions think adding the word “Community” in their names connotes an open charter, but that never works as hoped. You can try switching to an acronym — AECU, BECU, CECU, DECU, EECU, etc. — but these stiff and corporate combinations of letters are already ubiquitously used by other credit unions. Even if you can find a suitable web address, people will still get confused when searching for you on the internet. In all likelihood, a community charter will require a name change.

#5 Cooperation becomes competition
Credit unions are comfortable competing with banks, but they aren’t used to competing with other credit unions. Don’t be surprised when your once-friendly pals at the credit union down the street give you the cold shoulder. Once you have a community charter, you are trying to steal their members.

#6 Bankers hate community charters
Every time credit unions expand, the ABA becomes more agitated. Each new community charter fuels the ABA’s fight for credit union taxation. If every credit union in the U.S. had a community charter, then what argument would there be against taxation?

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This article originally appeared on Callahan & Associate’s website, CreditUnions.com, and is republished here with permission.


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Comments

  1. I would add #7: Going to a community charter is a complete culture shift. Your credit union will have to change: that means your board and your staff. For example, how many credit unions that are now community charters still have a board that is 100% filled with members from its core sponsor group? A true community charter means the board will have members from the community. Your staff must also understand the time committment to being involved in the community (events, chamber invovlement–not just attending chamber chicken lunches, serving on community boards, etc.).

  2. Great point, Mark.

  3. These are all great points. And I would add #8: Location, location, location. So many credit unions established locations convenient to their employee base (manufacturing plants, schools, government offices, etc.). In so many cases those existing locations are NOT convenient to the general public, adding to the already long list of marketing challenges. And unless you expect your new audience to do all their business with you online; remember that the community will not beat a path to your door if they can’t find your building.

  4. Many great points made in the original list, as well as the subsequent comments. I was with you all the way through, until I got to the last seven words of item #6: “…what argument would there be against taxation?” That comment sounds like it came directly from a community banker who does not understand the origin of credit unions’ tax exemption. Credit unions are exempt from paying taxes on their profits because they are not-for-profit financial cooperatives. That holds true for a $1 million asset CU serving a single sponsor or a $10 billion CU serving hundreds of thousands of members across a large geographic area. It’s the structure, not the field of membership. Always has been and if we tell the real story often enough, it always will be.

  5. Mark, your logic is somewhat circular. You are saying a credit union deserves its tax-exempt status because they are tax exempt. Having a member-owned structure (e.g. REI) is not why credit unions enjoy a tax exemption. The original idea of credit unions hinged on “serving the underserved” and people of “modest means.” This is why Congress decided they deserved a tax break, and you can’t get a tax exemption without being not-for-profit.

    You may think item #6 sounds unfair or unfounded, but the point addresses spin and politics. The ABA would have a very simple case that our very dim Congress could grasp: “If every credit union has a community charter serving everyone with the same products as every other bank, they should be taxed.” The other side of the argument (in defense of credit union tax exemptions) would be a lot more complicated.

    It’s hard to argue that a credit union serving 250,000 people in two states is “serving the underserved.” It’s an argument credit unions are already struggling with, and it will only get harder as more community chartered credit unions join the ranks.

    Please keep in mind that item #6 does not advocate either for- or against credit union’s tax exemption. If you think it sounds like a line straight out of the ABA play book, well… that was the point, and it’s something credit unions need to seriously consider.

    The ABA’s Keith Leggett and I have debated credit union taxation a few times. He asserts that credit unions should be taxed because they “waste” their money on things like concerts and bowl game sponsorships. That simply isn’t fair. You cannot say an organization doesn’t deserve its tax-exempt status because you don’t like the way they market themselves. The argument works the other way too though. You can’t say, “Credit unions should be tax exempt because we are not-for-profit and member-owned.” Tax exemptions are generally given to organizations performing a public service that the government would rather not provide itself.

    It all boils down to this: Why do credit unions deserve their tax exemption? If there is an answer sufficient to fight back the ABA’s highly-coordinated, heavily funded attacks, then heck… Go for it! Give a community charter to any credit union that wants one.

  6. The tax exemption has nothing to do with who is served, it has to do with how the organization is structured. Individual credit unions have no mandate to serve underserved individuals or communities, unless that’s their approved field of membership. As long as they maintain a structure of cooperative ownership with a volunteer board, then they qualify for a tax exemption. Mr. Leggett and the ABA certainly want to confuse the issue and say that it is only through service to the poor that credit unions are due a tax break, but that just isn’t the case. Cooperative ownership, one member – one vote and volunteer boards are the basis for special treatment. Banks can and do provide service to underserved communities and individuals, but they will never qualify for a tax exemption as long as they have a for-profit structure with a preferred group of stockholders. The arguments made by the ABA for taxation of credit unions are a smokescreen. It has nothing to do with products and services, how big or small we are, how many members we serve or how big our field of membership may be. In fact, if there were no field of membership restrictions (a fine idea that I would endorse) then credit unions would still qualify for a tax exemption because they are cooperatively owned with every member having a vote and the right to serve on the board of directors.

  7. Cooperative ownership and a volunteer board are two requirements that must be met in order to qualify for tax exempt status. But there is a difference between a qualifying requirement and the reason behind the exemption itself. Otherwise, anyone could start any kind of business — a car dealership, an airline, a restaurant — using this structure simply to get a tax exemption. Congress has determined that only special kinds of organizations — those performing a public service — deserve tax breaks, and they are all required to conform to the same structural guidelines.

    * 501(c)(1) — Corporations Organized Under Act of Congress (including Federal Credit Unions)
    * 501(c)(2) — Title Holding Corporation for Exempt Organization
    * 501(c)(3) — Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations
    * 501(c)(4) — Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
    * 501(c)(5) — Labor, Agricultural, and Horticultural Organizations
    * 501(c)(6) — Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
    * 501(c)(7) — Social and Recreational Clubs
    * 501(c)(8) — Fraternal Beneficiary Societies and Associations
    * 501(c)(9) — Voluntary Employees Beneficiary Associations
    * 501(c)(10) — Domestic Fraternal Societies and Associations
    * 501(c)(11) — Teachers’ Retirement Fund Associations
    * 501(c)(12) — Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, etc.
    * 501(c)(13) — Cemetery Companies
    * 501(c)(14) — State-Chartered Credit Unions, Mutual Reserve Funds
    * 501(c)(15) — Mutual Insurance Companies or Associations
    * 501(c)(16) — Cooperative Organizations to Finance Crop Operations
    * 501(c)(17) — Supplemental Unemployment Benefit Trusts
    * 501(c)(18) — Employee Funded Pension Trust (created before June 25, 1959)
    * 501(c)(19) — Post or Organization of Past or Present Members of the Armed Forces
    * 501(c)(21) — Black lung Benefit Trusts
    * 501(c)(22) — Withdrawal Liability Payment Fund
    * 501(c)(23) — Veterans Organization (created before 1880)
    * 501(c)(25) — Title Holding Corporations or Trusts with Multiple Parents
    * 501(c)(26) — State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
    * 501(c)(27) — State-Sponsored Workers’ Compensation Reinsurance Organization
    * 501(c)(28) — National Railroad Retirement Investment Trust

  8. I suppose it depends on whether one believes credit unions are tax-exempt because they are not-for-profit, or whether they are not-for-profit because that’s the requirement for a tax-exemption.

  9. Jim Miller Jr. says:

    Wow, I thought very few people had “drank the kool-aid” on the taxation issue. Non-profits that are tax exempt are declared so because they are non-profit. End of argument, legal statement, and history lesson. Do not confuse the income tax ememption allowed for non-profits with income tax deductions which the IRS may allow to taxpayers for donations made to those non-profits that provide some kind of educational, charitable, social, scientific, or literary community service.

    A 501(c)1 is a very different thing from 501(c)3 ,and so is a 501(c)6 like the ABA (yes, I pointed out that the American Bankers Association is a tax-exempt non-profit under a very similar section of the IRS code!). Read Section 501 and you will see that to be tax-exempt an organization does not need to be co-operative in structure and directors may be paid in most of the available sub-section definitions. These are not defining characteristics. A common defining characteristic is that none of these organizations may issue capital stock (although they may have shares).

    Finally, the underlying purpose of the tax-exemption as it applies to credit unions is most closely (athough referring specifically to a mutual recreation club) defined by a Federal Court in McGlotten v. Connally, 338 F. Supp. 448 – Dist. Court, Dist. of Columbia 1972:

    “Unlike the deduction for charitable contributions, the deduction for “exempt function income” does not operate to provide a grant of federal funds through the tax system. Rather, it is part and parcel of defining appropriate subjects of taxation. Congress has determined that in a situation where individuals have banded together to provide recreational facilities on a mutual basis, it would be conceptually erroneous to impose a tax on the organization as a separate entity. The funds exempted are received only from the members and any “profit” which results from overcharging for the use of the facilities still belongs to the same members. No income of the sort usually taxed has been generated; the money has simply been shifted from one pocket to another, both within the same pair of pants.”

    In a CU, the income comes from the members, and belongs to them exclusively. As such, the functions of the CU are inherently defined as exempt as a matter of function. Income tax is still paid by the members on the dividends they receive. The ABA wishes to impose double-taxation on those funds to the detriment of CU members.

  10. Thanks for the thorough reply and insights Jim.

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