From 2011 to 2023, banks hover around 10% of marketing expenses is the share of net income and credit unions are actually pretty significantly above that. And they've been kind of hovering above 20%, so almost double the proportional spending in terms of marketing is a percent of net income, but actually in 2023, what you ended up seeing is that credit unions spent over 30%. Of marketing as a percent of net income.
From the American Bankers Association, this is the ABA Banking Journal podcast. Welcome back. I'm Evan Sparks. I'm delighted to be joined today by two of my colleagues at ABA. First, we have Robert Flock, who is a VP in our Office of Strategic Engagement, where he focuses on credit union issues, as well as a return podcast guest, Dan Brown from our office, an economist in our Office of the Chief Economist. Dan and Robert, welcome to the show.
Thanks for having us.
Appreciate it, Evan.
So we are here to talk a little bit about a new piece that y'all have a new ABA databank post on the issues on issues related to credit union growth that's up on the ABA banking journal website. So I'd encourage you to go, go there and check it out. And it's about, particularly about credit union marketing. And I've been at ABA for 11 years now. We have talked a lot about various.
Ways that, you know, credit unions have spent on kind of some big athletic sponsorships, things like, you know, the golden one arena in Sacramento, you know, the Jovia financial credit union recently had a super bowl ad. There's a credit credit unions, but naming rights to the ASU sun devils to football stadium.
You know, there's a lot of big sponsorship deals that are going on in the credit union world, but your article looks more broadly at the ways that credit unions are spending their marketing dollars. Can you kind of give us, give us a sense of what you've found in terms of how credit unions are spending their marketing dollars right now?
Happy to Evan. So, you know, as you said, you kind of, you know, are out there in the world going to a baseball game or, you know, watching football on TV and you end up seeing sort of a lot of credit union you know, advertisements and marketing and really kind of, you know, what we ended up doing is as we looked at the call report, we went ahead and compared banks and credit unions over a certain threshold, you know, a billion dollars.
And really, you know, no matter how, what way you slice it, what you end up seeing is, is that. Okay. Credit unions are proportionally spending a lot more on advertising than banks are. And there's some sort of historical reasons as to why that is. But, you know, that's pretty much what we saw. And, you know, there was an article back in 2017 from S& P that went ahead and looked at it. And really, that trend is continuing.
Only continued and even become more apparent as time has gone on and Robert, if you want to go ahead and explain sort of why, you know, this, this evolution has occurred. I think that would be really also helpful for our listeners.
Sure. And real briefly, Evan, you mentioned a handful of specific examples. We have seen instances where credit unions, which are not for profit entities. They're cooperatives, they're owned by their members or democratic organizations. Management in some instances has decided to spend tens of millions of dollars of their members monies on these marketing campaigns and stadium naming rights deals. What we have seen is oftentimes.
These credit unions that are spending these types of monies on these types of campaigns are very focused on growth. Oftentimes, it may be in their states. It may be in a region. In some instances, they're actually focused on national growth.
On its face, that doesn't make a lot of sense to me. The whole concept of a credit union is that it serves a defined field of membership. I know some of these fields of membership have gotten pretty big, you know, what's the credit union that has like the whole Pacific Northwest region in its field of membership? How does this approach to significant marketing spend jive with the statutory limitations on what what a credit union is supposed to be as opposed to a taxpaying bank?
It's actually a really timely question. So last month, June of 2024 was the 90th anniversary of the Federal Credit Union Act, which was signed by President Roosevelt in the midst of the Great Depression, giving credit unions a federal charter so they can, you know, operate in their local communities. With that defined field of membership.
So the way I always look at it is: An employer based credit union, it may be through your church, and again, you know, the other credit union members you're pulling your resources together to provide each other basic consumer financial services, you know the last 25 years Field of membership has changed drastically It really started back in 98 the credit union membership access act And we have seen Incremental changes from the National Credit Union Administration since
that time that have essentially enabled credit unions to expand significantly. You look at where we are today. We've got credit union system that has 2. 3 trillion assets system wide, 140 million members. And like you said, there are credit unions that, you know, not only have a regional presence, whether it's the Pacific Northwest or elsewhere, there are credit unions that advertise the fact. That anyone can join.
Dan, it might make sense for you to talk a little bit about this potential membership idea in terms of You know, credit unions have a field of membership where, you know, it's the eligible number of folks are able to join for some credit unions on their car report. They actually put the entire population of the United States.
That is exactly correct on an aggregate level for the industry in 2011, the average credit union over a billion dollars in assets saw potential members being slightly below on average 3Million. Americans, but that number has more than doubled. And so in 2023, the average credit union with over a billion dollars in assets sees there's potentially almost 7 million potential members out there. And basically, what that means is, is that you know, as these changes in the regulatory.
You know, regulatory legislative changes have occurred over time credit unions have seen more and more potential members out there. And so now it's to the point where you can basically donate 5 dollars and be a potential member. You can actually just be a resident of a particular state and be eligible to be a member and that we've really seen a water down significantly over time of membership eligibility.
And so that sort of unleashes this sort of marketing bonanza that we've ended up seeing here over the last. A couple decades you know, to go ahead and reach these potential members.
I'm curious first of all, where do you get the the where do you pull the marketing data on credit unions?
Absolutely. So it's basically similar to how banks have to disclose a bunch of metrics. Credit unions also have to go ahead and disclose you know, various numbers in regards to their financial performance for the credit union call report. And so that's exactly where all this information came from, and that they have a potential member number that they go ahead and have to disclose. And we ended up seeing a huge upswing in that as time goes on. And same thing when it came to the.
Marketing numbers is that there's a sort of an educational promotional component within the credit union call report and the majority of that. And I think almost all of it actually is dedicated to sort of marketing and advertising dollars. And so we just went ahead and looked at those numbers, looked at it on a proportional basis. And that's sort of how we're able to arrive at the numbers that we have in the staff analysis.
Can you talk a little bit about what, how banks and credit unions are different in terms of how much they're spending on their on marketing their institutions?
Absolutely. What you see from 2011 to 2023 is that banks hover around 10% of marketing expenses is the share of net income and credit unions are actually pretty significantly above that. And they've been kind of hovering above 20%, so almost double the proportional spending in terms of marketing is a percent of net income, but actually in 2023, what you ended up seeing is that credit unions spent over 30%. Of marketing as a percent of net income.
So that number actually seems to be increasing over time a little bit while the bank number has been staying quite stable.
And I mean, when we were talking about net income here, that is, that is the, that is money that presumably should be being rebated to your members in the form of lower rates lower fees for service Why 30 percent of it's going to marketing?
That is correct. And actually we went ahead and quickly cited a piece in, in our staff analysis that went ahead and compared when it comes to various lending products and as well as rates on deposits. And what you end up actually seeing is, is that the savings that you get from a credit union really isn't all that much. It's a couple of basis points here and there.
And it basically runs counter to the basically tax incidence theory and that all the tax savings is not being being passed down to the consumer and is instead going to, like you said you know, either marketing initiatives or sometimes even increased bonuses or executive compensation for some of the larger growth oriented credit unions.
Seeing these numbers showing credit union spending nearly 3X what banks are spending as a share of their net income on marketing. That raises a lot of questions where this tax subsidy is going and what credit union members are getting out of their credit union relationships.
Looking at some of the regulatory changes we touched on in terms of how potential membership has expanded over the last 20, 25 years, we've seen that uptick. You also see an uptick in the market expenditures. These 2 trends are very much in line with 1 another, and it's very clear that. You know, credit unions as for the ones, at least, that are focused on growth again, whether that's in their market regionally or nationally they have made necessary changes to expand their potential membership.
They have then increased their market expenditures to reach those potential members and hopefully sign them up for their purposes.
And what's interesting in the data, too, is that you end up seeing spikes either in potential members or marketing dollar changes in line with changes in the regulatory landscape. So, like, in 2015, you see an increase in potential membership and that sort of in line with the 2015 charter chartering and field of membership rule. And then similarly, in 2021, we saw a similar uptick and that was in conjunction with the rule that.
Helped relax geography proximity requirements for credit unions in regards to their membership. So, you know, we, we sort of view that as not a coincidence in these situations is that when there have been relaxations in regulations, you see the corresponding uptick both in you know, potential memberships in the eyes of the credit unions and then the corresponding increase in marketing during those time periods.
We have talked about how credit unions have been able to put the taxpayer subsidy to work in acquiring banks and in being able to you know, offer a higher multiple for as an acquirer of a bank charter. And now they're able to put that, that taxpayer subsidy to work in. You know, fueling a higher growth rate than than the banking sector and in spending more on marketing dollars.
What Robert, what are the, what are the implications for both for, you know, U. S. tax policy if we see more and more migration of financial intermediation to the tax exempt sector?
Sure. Well, at a base level, what we'll see is the tax exemption grow as more assets migrate to the credit union system, whether it's from banks or elsewhere, the cost to taxpayers on an annual basis will increase. Right now, it's about 3 billion per year, and that is simply if credit unions were paying federal corporate tax at 21% but presumably that number will continue to grow into the future.
And I believe you know, various government entities have projected that will likely occur going into the next 10 year period. In terms of the growth oriented credit unions, you mentioned bank acquisitions. There are credit unions that have acquired banks. That are also issuing subordinated debt. That on top of that are spending significant amounts of money on marketing.
This idea of growth does not necessarily align with the credit union mission of service to their membership, particularly in LMI communities, and it does not align with congressional intent. Again, creating some very specific purpose. These types of activities to fuel growth are out of whack with that mission and their not for profit structure and demonstrates the real need for Congress to conduct oversight. It's been 20 years since Congress has had a hearing on the credit union industry.
As this analysis shows, the industry has changed drastically in that time. Congress has looked at other elements of the nonprofit sector, whether that's nonprofit hospitals, universities, what have you credit unions really ought to be next in line for that. That conversation.
Absolutely. Well let's before we wrap up here. This is not related to this credit union paper that's out on the on the, on the banking journal website, but we did recently cover in Newsbytes, the semi annual regulatory agenda and the national credit union, union administration has signaled that it's going to do a rulemaking on requiring disclosure to members of executive compensation, which is something that all, almost all not for profits do on their form nine 90.
But credit, but federal credit unions don't Robert, what can we expect to see out of NCUA with this executive comp potential proposal and how can we expect this to affect credit union oversight?
Thanks for the question, Evan. This is a really significant development for credit union accountability and transparency. As it exists now, federal credit unions, in addition to religious entities, are the only non profit organizations that do not file IRS Form 990. Even state charter credit unions file IRS Form 90. This provides really critical information on the finances of non profit entities to the public writ large.
Thanks, Evan. And it's a huge gap for many years of federal credit unions have not had to provide this information anywhere.
It essentially creates a gap for not only the public, but also credit union members who do not have any insight whatsoever into how Their cooperative is being managed from a financial perspective and that includes executive compensation What we have seen from ncua is that they might be considering a proposed rule on executive compensation Transparency sometime this fall likely october.
We're not sure what exactly that will look like in terms of Reporting to credit union members or reporting to the ncua perhaps both But this will provide greater accountability and transparency for federal credit unions. And we welcome this great development.
Great. Well, Robert and Dan, thanks so much for being on the show today. Talking about your new paper, your new post, as well as some of these other issues going on in the credit union universe.
Thanks, Evan.
Thank you for having us.
For our listeners. You can find this in previous episodes at aba. com slash banking journal podcast. And you can also find us on any of your favorite podcast platforms. Well, this wraps up our current season of the podcast. We are like Congress going to take a summer recess and in August, and we will be back with all new episodes after labor day. Thanks so much for listening. And we'll talk to you in the fall.