NCUA Dividend: A Case for Critical Thinking

Core to behavioral economics (BE) theory is the “radical” notion that people don’t make economic decisions based solely on logic. BE relies on psychological insights into human behavior to help explain economic decision-making. For example, year in and year out credit unions provide better loan and deposit rates to consumers. Classical economic theory predicts that consumers would choose credit unions over banks for all types of consumer finance products, but we know from market share data there is something besides pricing driving consumer decision-making.

BE is a powerful tool to help credit unions make decisions that benefit their members, communities and, by proxy, their cooperative. The NCUA’s decision to approve a distribution in the form of a dividend of $735.7 million provides a unique opportunity for credit union leaders to advantageously apply BE principles with this windfall.

Mental Accounting: Assigning money to mental categories, which determines how we feel about the money. We’ve heard from some credit unions that the NCUA distribution is not that big of a deal because they were anticipating it. Others consider the distribution “found” money. In each case, credit unions are treating their dividend in a specific mental category. It is important to treat this distribution for what it is: Thousands (or in some cases millions) of dollars.

Opportunity Cost: What we give up by choosing one thing over another. Credit union advocacy organizations have done an exceptional job communicating that the distribution is not “just” the cash dividend but also the Share Insurance Fund premium credit unions would have paid in 2018 without advocacy efforts that resulted in the closure of the stabilization fund. This “opportunity cost” results in an extra $1.3 billion swing in credit unions’ favor. It is important to factor this amount in the windfall.

Status Quo Bias: Irrational preference for the current state of affairs. Any change from the baseline (or status quo) is perceived as a loss. Operating in a regulated industry rewards status quo thinking. Regulators and boards will often tell you to stick to your knitting and focus on incremental improvements. It’s important to treat unique situations like this outside status quo thinking and instead think “what if.”

Anchoring: The tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. Credit unions are a collegial bunch. They get together at conferences, share ideas, collaborate on approaches and have similar strategies. Regarding the dividend, we’ve heard credit unions anchor on the idea of putting this amount into the budget stew. It’s important to think broadly about the opportunity and not default to the first (and most obvious) approach.

A New View

Hopefully, credit union decision makers can use some of the BE framework to position this opportunity in a different light.

Credit unions should treat this extraordinary distribution as a $2 billion-plus opportunity: the $700M-plus distribution plus the $1.3 billion opportunity gain of not paying into the SIF in 2018. CUNA has a calculator for determining the customized distribution for each institution.

They should also follow the guidance they give members. Of the four general categories of advice credit unions give members who obtain a financial windfall, some of the advice categories don’t quite translate:

• Save: In the credit union context, this means adding to their capital position. However, credit union capital is hundreds of basis points above the regulatory minimum so it is questionable how saving more will help fulfill their missions.
• Pay down debt: Credit unions don’t hold debt in the traditional sense, but many have debt in the form of short- and long-term borrowing and those positions are growing, so it may be good for some. More generally, many are loaned out or close to it, so paying down debt may not be an option that resonates.
• Go on vacation: Credit unions love attending meetings and conferences. In 2017, they spent $70-plus million on education and training. While some investment here is worthwhile, it is unlikely the full amount would affect even the most curious institutions.

But one piece of advice does hit the mark: Invest.

• Investing is about buying something today in hope that the asset will increase in value, pay dividends, or both. Credit unions’ investment portfolio is $360 billion, so adding less than 1% more in traditional investments would have a minimal impact. Seize the opportunity to invest in a different asset class. This diversification approach may kick start a new line of business, build a new competency or enable entry into new markets.

In 1935, Edward Filene gave a $25,000 personal loan (roughly $450,000 in today’s dollars) to start CUNA Mutual Financial Group – which now has 3,500 employees and $3.5 billion in annual revenue, and serves about 95% of the credit union market. Not a bad investment, eh?

Credit unions could theoretically make 4,444 such bets with this mini-bonanza. Surely it won’t happen on that scale – but this example illustrates the potential of the opportunity. Some practical applications include intensive strategic planning, investments in better serving community or turbo charging CUNA’s “Open Your Eyes” awareness campaign. If you can’t find a way to invest these dollars, consider supporting a multi-year Guns N’ Roses tour. They are only charging $3 million per show, which could keep them on the road for almost 700 dates. If Guns N’ Roses is not your cup of tea, Beyoncé reportedly only charges $1.5 million per show. If that’s too rich, invite Filene out to your upcoming planning session … we charge considerably less.

George Hofheimer is Chief Knowledge Officer for Filene Research Institute. He can be reached at 608-852-4632 or georgeh@filene.org.