Credit Union Market Share
Historical Perspective:
Credit cooperatives were first established in Germany to fill a need for small business and agricultural credit not met by commercial banks. At the time, the continental economy was playing catch-up in an industrial revolution. The industrial powerhouses were Great Britain and the United States. Aristocratic institutions and economic institutions were reorganized. Peasants long tied to their lords were suddenly on their own. Small artisans and craftsmen were being abandoned in hopes that the industrial revolution would provide a cheaper alternative – which it couldn’t for every good or service.
To fund these competitors in this new economy, commercial banks had to focus on large industrial infrastructure. No commercial bank had time or resources to produce the information necessary to underwrite loans for small artisans upgrading their own capacities, or small farmers who needed to mechanize or modernize in any way. From this need for small loans to smaller customers was born the cooperative credit movement.
The movement spread first to Italy, then to Canada, and finally to the United States. In Italy, the banks grew, and became more professional. In Canada they began to offer loans and financial services to consumers as well. In the United States, the traditional markets (small businesses and agriculture) were well served by other market participants. However, in the area of consumer finance, non-traditional lenders held the largest market shares. In all instances where cooperative credit had taken hold, a market had been found where extremely exorbitant interest had been charged, and that was the market where the cooperative took hold. In the United States in the early 20th century that market was consumer finance.
In 1943, Lincoln Clark wrote about the early success of credit unions[i]. He estimated that small loan companies, industrial loan companies and other lenders held a combined 87.5% of the consumer credit market in 1929 (incidentally the year of the stock market crash). By today’s standard, these lenders all seem non-traditional. That same year, credit unions, a very new innovation in the United States, held only 4.9% of that market. By 1942, credit union market share had grown to 11.5% of all consumer loans in the nation. During that same time period, commercial banks also discovered consumer lending, with their market share expanding from 6.6% to 30.1%. The (now) non-traditional lenders mentioned above were the big market share losers. At the end of 1942, their share of the consumer credit market had shrunk to only 58.2%.
Fast-Forward to Today:
These lending trends from the 1940s have continued. The key lending institutions in the 21st century are commercial banks, thrifts, and credit unions. Over the past couple of decades, however, the market share held by credit unions has grown at the expense of commercial banks. Researcher at the Federal Reserve Bank of St. Louis, David C. Wheelock and Paul W. Wilson, report that credit unions hold 10% of all deposits, more than 13% of consumer loans, and that their market share has nearly doubled since 1985. They also report that the average credit union grew 600 percent (inflation adjusted) over that same time period. The graph below shows the share of insured deposits at federally insured depository institutions. Don’t try to draw too many conclusions from the last year in the series, since that was the first year the maximum insured grew from $100,000 to $250,000. Much of the decline in market share is the sudden inclusion of money in corporate accounts with commercial banks beyond the former insured limits.
Another way of examining the size of the credit union market is by looking at the proportion of depository institution employees employed at credit unions. The employment share held by credit unions has been growing as can be seen in the graph below. Over the past couple of decades a steady increase in employment can be seen. The line at the top of the graph shows the share of depository institution employees that work at credit unions. This share was about 8% in 1990, but has grown to over 14% in mid 2010. But even when graphed as a percent of all finance and insurance, the share of employees that work at credit unions have been increasing.
The reason for such a dramatic rise in market share for credit unions when compared to other depository institutions is twofold. First, credit unions have been steadily growing their number of employees. Over the past twenty years, credit unions have added more employees (actual employees) than all other depository institutions combined. Which leads to the other reason for increasing share of employees – other depository institutions have actually realized a net loss in jobs over the past twenty years. In the graph below, the annual change in employment (in number of positions in thousands) is demonstrated. Credit unions have steadily added employees. Whereas change in employment at other depository institutions has been far more volatile (which I believe is a demonstration of the difference in risk preferences between the two types of depository institutions – but that is a topic for another blog entry).
Part of the reason for the growth in market share could be attributed to a change in the nature of credit unions. John R. Walter has done a good job of outlining the recent regulatory changes that have led to an expansion in both credit union size and scope. Although credit unions used to focus on the poorest members of society (and some still focus on that segment), researchers have also found that the wealthiest individuals in the country are also members of credit unions (as well as customers of commercial banks)[ii]. As credit unions have been allowed to offer more bank like products, many of the balance sheet levels have begun to mimic a bank (see the graph below). Note how vehicle loans began to take up a smaller share of the loan portfolio, real estate loans began to take up more, and loans are a larger proportion of assets.
But credit unions are not taking over all of the United States at an equal rate. Returning to the employment share held by credit unions, the map below shows where credit unions employ the largest (and smallest) shares of depository institutions’ employees. It is interesting to note that the states where the founding fathers of American credit unions predicted that credit unions would flourish are generally not the region where they hold the largest share of employees. The western United States were not the focus of early success in credit unions, but that is where the largest concentration of market share (at least in employment) can be found.
By the same token, the segment where credit unions were most ardently pushed when they first came to the United States was in agriculture. That market was never truly developed, as can be seen by the low market share across America’s heartland. Over the next twenty years, who knows how this map will change?
[i] Clark, Lincoln (1943). “Credit Unions in the United States.” The Journal of Business of the University of Chicago, Vol. 16, No. 4 (Oct., 1943), pp. 235-246.
[ii] As cited in Nembhard, Jessica Gordon (2002). “Cooperatives and Wealth Accumulation: Preliminary Analysis.” The American Economic Review, Vol. 92, No. 2, Papers and Proceedings of the One Hundred Fourteenth Annual Meeting of the American Economic Association, Atlanta, GA, January 4-6, 2002 (May, 2002), 325-329.
Comments
Post a Comment