From Credit Unions to Fintech: The Past, Present and Future of Nonbank Competition

By Daniel J. Forte

Can you offer a guess as to what business sage said “When you’re finished changing, you’re finished”?
Perhaps a tech entrepreneur running a Silicon Valley unicorn? A business professor at one of our elite universities? Warren Buffett or Bill Gates?

Well, guess again. It was Ben Franklin.

I hesitate to confess how long I’ve been working in our banking industry (no, Franklin was not a colleague), but it’s been a while. Apparently, Ben knew long before any of us the common aphorism: nothing is permanent but change. It may be a cliché by now but the frightening thought is, if we don’t change with the times, there might be no tomorrow.

As the year begins, I am privileged to take on the new assignment as chairman of the ABA’s State Association Alliance as we face the challenges and opportunities of a newly elected president and Congress. As I do, I am reminded of the many leaders that have served before me, as well as how much the industry has accomplished together despite (or perhaps as a result of) an escalating pace of change.

Nonbank competition is but one of a growing list of “blue sky” issues that include evolving technology, shifting consumer demographics and ongoing changes to the payment system. In Massachusetts, we have turned the page on what now seems like an age-old battle to rein in the unwarranted growth of large, bank-like credit unions.

ABA has done an excellent job demonstrating to all who will listen—and even some who won’t—the aggressive expansion plans that CUs are initiating, most at the expense of local communities and traditional banks. Whether through state and federal legislation or regulatory action, the threat of unchecked growth is real.

We recently asked for an independent study to determine Bay State credit union tactics and their impact. Perhaps the most significant finding was that our local credit unions are expanding exponentially by deploying a strategy to be designated “low income,” thereby removing both the membership restrictions and the traditional 12.25 percent cap on commercial lending without any requirements to monitor or actually serve low- to moderate-income families.

This designation is easily achieved by including students, who by definition have little income. In Massachusetts, “low-income” credit unions grew in number from 11 to 57 between 2012 and 2016, while the large “low-income” credit unions made more loans to wealthy individuals and fewer loans to lower-income individuals than did local banks and traditional credit unions.

We intend to continue research in this area to let our local lawmakers know the real costs of the largest credit unions, including lost tax revenue, potential safety and soundness and harm to local communities and banks.

Speaking of harm, is the growth of nonbank fintech startups keeping you awake at night? The technology being deployed may be new, but our industry has seen its share of disruptors in the past, before they were even called disruptors. Once thought of as a real threat to banks, many of today’s fintech firms exist as partners. Lesson learned: if we don’t keep up and innovate, there will surely be more threats that could have a great impact. As for the fintech firms, if you can’t beat ’em, have them join you. Yes, something else to keep you awake at night.

Franklin wrote an entire book on that subject too: Early Rising: A Natural, Social, and Religious Duty. If only he knew about interest rate risk and increasing regulatory burden! His four hours of sleep per night might have turned into two.

Daniel J. Forte is chairman of the ABA State Bankers Association Alliance and president and CEO of the Massachusetts Bankers Association.

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