Up until the 1980's or so, it was fairly common for credit unions to issue interest refunds to borrowers at year-end. That was the U.S. credit union version of the patronage refunds issued by other types of cooperatives. Such refunds are uniques tools used by credit unions and other cooperatives to manage capital levels, return value to member- shareholders, and tie members more closely to the company. But the practice of interest refunds in U.S. credit unions has been mostly non-existent for a long time now.
In a new Filene Research Institute study, "Credit Union and Cooperative Patronage Refunds" re-instituting patronage refunds is explored as a unique tool for credit unions to single themselves out in the highly competitive financial services arena. The report examines the details of common refund practices outside the credit union system and weighs the pros and cons of increasing the practice among credit unions.
Credit unions, of course, pay member dividends every month in the form of ordinary interest. Very few, however, offer a consistent extraordinary dividend. Standard reasons for not paying one include earnings already being tight, creating an on-going expectation among members, and potential excess already being reflected in the credit union’s attractive savings and loan rates.
These reasons are valid, but are the same reasons any publicly traded firm with excess capital might use. Nevertheless, the boards of those publicly traded companies constantly remind themselves that their shareholders expect real value and can easily take their money elsewhere. Nothing—not good feelings, not good intentions—says “please stay” like cash.
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