A hard truth

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April is Financial Literacy Month, and this is a big deal for credit unions, because one of their

April is Financial
Literacy Month

commitments is the financial education of members.

Throughout the month of April, the Credit Union will be posting on Facebook and Twitter definitions of financial and economic terms that are good for every person to understand, and I’ll be publishing blog articles with other, more expansive topics. Such as the one today.

You see, OAS FCU is about to increase some of its fees. This is something that will make some of us groan. It’s never nice to start paying more for certain things. It somehow seems unfair. The truth is that this increase of some fees has a good explanation.

Credit unions work like this:

• Members deposit money, and they earn dividends on those deposits;
• Members borrow money, and they pay interest on those loans;
• Members use products, have special circumstances, and make use of special services, and they pay fees for them;
• The income that the credit union makes, to continue working and surviving comes from two sources: the interest received on loans, minus the dividends paid on deposits, and added to that, whatever fees it generates. Remember, the aim of credit unions is never profit, but to make enough to keep working productively for members, and to save the members as much as possible, be it via deposit dividend rates and lowest as possible fees.

There are other legal requirements that credit unions have to deal with, such as deposit reserves and the creation of allowances and other capital accounts for various long- and short-term purposes.

Now, in a normally working economy all this works fine. But for the past few years the US

and global economies haven’t been working very well. Because of the 2008 banking crisis, consumers are weary of investing in riskier endeavors like the stock market or even bonds. The rates on deposits worldwide are so low that in some countries the Prime Rate is actually negative; yes, depositors have to pay banks to deposit their money there. And you’d think that they would take out those deposits and invest in something else; but in the past few years the options for investment have been so bleak and risky that no, depositors would oftentimes pay for leaving their deposits safe in a bank, rather than take them elsewhere (this, by the way, is another cog that keeps recession going on: if we don’t invest, the economic gears can’t start moving, and it stagnates).

Added to this unwillingness to take risks, governments, companies and organizations have been downsizing. The word of this past decade has been “austerity”. Austerity means lower wages and often more taxes. The result of this is that people buy fewer items. Fewer items bought means less productions, which leads to layoffs.

So, the general situation stands as this: people not wanting to borrow to buy, and people getting laid off, retiring early, and getting severance packages. In OAS FCU terms it means, average to low new loans, and increased deposits. This means, average to low interest income, and having to pay extra dividends on all the deposits of the members who, like everyone else on the planet, do not want to invest in riskier endeavors just yet. Additionally, loan interest that grows adequately but not enough to pay all the dividends of the share deposits coming in, plus the costs of operations, and the reserves that the law requires credit unions to have.

This increase in deposits has left OAS FCU with relatively lower reserves than what’s ideal

Credit unions are
shared enterprises

(according to regulations), which means that the Credit Union is undercapitalized. But there are some things that can be done to improve these reserves, and the most straight-forward one is to generate income from fees (even if nobody likes it) and other sources. I have to mention here that our Credit Union has, comparatively speaking, much lower fees than other credit unions and financial institutions.

Under normal circumstances I would not write about this, but because some of our fees are about to go up slightly, I think that knowing the hard truth of why it is that they’re going up might make us all a little more understanding, and accepting. I hope everyone understands that, if fees have to go up, it’s for the good of us all, because OAS FCU is, after all, our credit union.