Financial cooperatives torn between two worlds
Financial cooperatives further strengthened their position during the financial crisis. Their new challenge is: How do they hold onto the cooperative customer relationship and the roots in the local community? Professor Hans Groeneveld examines these issues. ‘A veritable cooperative is an economic democracy in action.’
While they can differ in terms of form, financial cooperatives are found around the world. The cooperative banks and insurance companies together have hundreds of millions of customers and play a key role in the economy and society. Their roots usually stem back to the late nineteenth or early twentieth century.
The cooperatives are just as much banks and insurance companies as their private competitors. So what distinguishes financial cooperatives from private companies? Cooperatives are owned by their members and have been founded in order to serve customers. Profit is not an aim in itself. ‘It is important for cooperatives to make profits in order to ensure the continuity and further growth of the services’, says Hans Groeneveld, who held his inaugural lecture as Endowed Professor of Financial Cooperatives at the TIAS School for Business and Society of Tilburg University in February 2015. This special chair is dedicated to studying financial cooperatives around the world. In addition to his professorship, Hans Groeneveld holds an advisory and policy position in cooperative development at Rabobank.
An important player
Cooperatives in the financial services sector hold a strong market position. This position has been strengthened in recent years. Cooperative banks, such as Rabobank, have a joint market share of more than 25% on the European continent. Credit unions (local cooperative credit unions in which individuals and businesses loan money to each other) are primarily prominent in Anglo-Saxon countries where they hold an 8 to 10% market share. Mutual insurance companies are strong in Japan, the United States and Europe and have a 27% market share worldwide. Groeneveld: ‘Insurance is something you ideally do together; it is all about solidarity.’
Sounder than private banks
Cooperative financial institutions further strengthened their position during the last financial crisis. Groeneveld: ‘Cooperatives were naturally hit by the crisis as well. But while cooperative banks have a quarter of the market in Europe, they had only 8% of the total of impairments and write-offs in the period 2008-2010. And they were able to absorb them independently. So cooperative banks proved to be sounder than private banks. They did not require state aid and were able to continue to provide credit for longer. And the same applies to the credit unions.’
Trends difficult to reconcile
Regardless of how strong they emerged from the crisis, the financial cooperatives will now face new challenges. ‘Cooperatives are being torn between two worlds,’ says Professor Groeneveld referring to the trends in the financial sector that are sometimes difficult to reconcile with the customer focus and roots in the local community that are part and parcel of cooperatives.
Achieving economies of scale
Take the high level of virtualisation of products and services for example. There is a global trend of customers banking increasingly online and visiting bank branches less and less. This corresponds with the efficiency improvements that banks and insurers are implementing. Cooperatives cannot lag behind in this development and are consequently also virtualising and achieving economies of scale.
‘Having strong roots in the local society is vital. But we now see operations and areas growing in size and increasing virtualisation of the services. So how does a cooperative keep people engaged? You can only nourish the cooperative identity if you have a relationship with the customer. Virtual customer contacts are customer contacts, but they do not serve as the basis for building a relationship’, says Groeneveld outlining one of the challenges faced by cooperatives that his chair is focusing on.
‘You can only nourish the cooperative identity if you have a relationship with the customer.’
Voice for the members
And how can the voice of the members continue to be heard on financial cooperative’s boards of directors and supervisory boards? Groeneveld notes: ‘Governments and authorities are placing increasingly more stringent demands on supervisory board members of cooperative institutions. They must now be more or less half bankers, while cooperative organisations are supposed to focus on letting customers’ voices be heard, also in supervisory boards and central governance bodies. Member influence in selecting the members of the boards of directors and supervisory boards and in the topics that they discuss is essential. If a cooperative is not as well rooted in the local community, this will occur less automatically. Cooperatives will consequently have to put more energy into gaining ideas and opinions from members. A veritable cooperative is an economic democracy in action.’
Cooperative bank balance sheets
When you compare the balance sheet composition of cooperative banks to that of private banks, the figures clearly reveal that they focus on different items.
Loans to families and businesses (the core of the real economy) account for half of the debit side of the balance sheet at cooperatives, compared to 37% at private banks. ‘This means cooperatives operate closer to the real economy’, says Cooperative Professor Groeneveld, noting that private banks are more focused on the financial sector and governmental agencies. ‘The financing of cooperative banks’ activities is also more stable. On their balance sheets cooperative banks have relatively a larger amount of savings and other amounts due to customers than private banks do. This is all due to the fact that they arose in local communities. Private banks attract more funds from institutional investors.’