Hate Thy Neighbor

Unless you work in the financial industry you might not be aware that there is a debate raging: Should credit unions pay taxes?

Credit Unions are tax-exempt thanks to the 1934 Federal Credit Unions Act, largely due to the fact that they are not for profit. Or at least that’s the short answer. The more accurate answer is tied to why Credit Unions existed in the first place. They provided small loans to the community and didn’t advertise. They filled a distinct and separate niche from banks. You can read the entire history here.

However, Credit Unions have changed a lot since 1934 and now they look and act a lot like a Community Bank… and Community Banks have to pay taxes.

I get it.

It’s not fair to see your hometown rival given the advantage of not having to pay taxes. They can use those funds to buy the billboard for the hometown high school baseball stadium or to open a new branch, or any other tactic that directly hurts your business.

The rules should apply to everyone. That’s worth fighting for, right?

Wrong. And not for the reasons you think. Yes, there is countless minutia that explains how that argument is fundamentally flawed, but the real reason you should shrug off this battle is that there is only one group who is benefiting from it…

Who’s Really Eating the Pie?

This argument would only matter if you could prove that the tax-exempt status was allowing Credit Unions to gobble up market share away from Community Banks. Is that the case?

From this chart, you can see it’s certainly true that Community Banks have experienced a dramatic decline since 1984.

As recently as 1995, medium and small banks controlled 42% of market share.

Their market share has indeed declined since then, now closer to 23%. But are Credit Unions to blame? If they were, surely you’d expect to see growth in the number of Credit Unions. Not the case.

But Credit Union market share, like that of Community Banks, has decreased. Who is taking it?

It’s the megabanks.

The data is clear – tax-exemption has not enabled Credit Unions to steal business from Community Banks.

Who is Really Playing Unfairly?

Recent media has shown us that there are plenty of sketchy ways that the mega-banks are unfairly hurting Community Banks. Here are a few examples:

  1. Their risky behavior was largely responsible for the 2008 economic crisis. They were bailed out, then bought up community banks who didn’t receive the same treatment. Bank of America and Citigroup received $45 Billion each.
  2. Mega-banks have a history of betting on risky “derivatives,” like when JP Morgan used consumer deposits to bet that American Airlines would go bankrupt and made $450 million in profit. It doesn’t always work out well, the “London Whale” for example, where JPMorgan lost $6 billion on bets.
  3. JPMorgan, Citigroup, and Bank of America all reached settlements with the U.S. government in response to the Department of Justice levying charges of misconduct. The penalties were in multi-billions, but no one went to jail.
  4. 2012 HSBC Inc. admitted to violating money-laundering laws covering $200 trillion worth of transactions. The penalty was $1.256 billion (one month’s profit) and no one went to jail.
  5. Wells Fargo illegally opened millions of fraudulent credit card and deposit accounts in its customers’ names without their knowledge or consent.

While these institutions have had to pay fines, it is usually a fraction of the profit they made from committing the crime.

Think about that.

The government responds by drafting regulation. This regulation typically becomes a burden that further strains the community financial institutions. Then, the megabanks complain about that legislation…

“These banks have long complained that the regulations are excessive and saddle them with extra compliance costs they don’t deserve.” – Washington Post

They absolutely deserve it.

The Game is Unfair

Community bankers are right to be outraged. The game they are playing is absolutely an unfair one, but it isn’t the credit unions that are cheating.

Community financial institutions too frequently look at the differences in business models or allow hometown rivalries to dominate their strategic thinking. Meanwhile, the megabanks are breaking all the rules and taking over the market.

Of course, this doesn’t even begin to describe the threats posed to community financial institutions from tech companies like Apple, Amazon, Facebook, Google…

Stop worrying about the bank across the street.

They aren’t going to be who puts you out of business.








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