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Sponsored by: Nutmeg State Federal Credit Union
October 31, 2022

Banking Local Matters More Than Ever

Obviously, the COVID-19 pandemic drastically impacted many small businesses, and in turn affected the people who own, operate and frequent them. Meanwhile, national and global businesses in many industries have focused on customer experience and low prices to attract customers and win market share. Unfortunately for local economies, this often extracts valuable capital from our communities and redistributes it elsewhere.

“Buy Local” has become an increasingly prevalent rallying cry as consumers have tried to support the small businesses of their families, friends and neighbors and keep precious capital circulating within their local economies. Often overlooked, the banking choices that members of a community make can have a significant impact on the community’s retention of capital and the future viability of its economy.

For context, consider the basics of a financial institution’s business model: simply put, financial institutions connect stores of capital (people who have money) with uses of capital (people who need money). IRAs and deposit accounts (certificates, savings and checking accounts) serve as methods for safely storing capital, while lending products (loans, lines of credit, and credit cards) provide short- and long-term borrowing vehicles for putting that capital to use. Financial institutions largely make money on the difference between the cost of deposits (APY and dividends) and the price at which they can lend (interest rates).

There are two major characteristics of this business model which can directly impact local economies. For one, as circulators of capital, financial institutions can direct capital from one location to another. Not-for-profit community financial institutions like credit unions typically focus on local circulation; that is, moving capital from one entity to another within the same local economy. On the other hand, national, for-profit commercial banks typically direct capital in order to maximize profit, which often spans multiple local (and sometimes national) economies. This impact can be multiplied as capital is lent to large corporations at terms not available to smaller organizations, creating significant competitive advantages for national companies as they compete for market share with smaller, local businesses.

The second key characteristic of the financial institution business model which can significantly impact local economies is the treatment of profits. Commercial banks, as registered corporations, have an obligation to pay their shareholders. The bigger the bank, the more widely spread its set of shareholders, and the less likely that all of those shareholders live within the same local community. As the bank pays some percentage of its profits out to its share-holders in the form of dividends, it is by definition extracting capital from the local economies of their customers. In contrast, credit unions are owned by their members, and are required to deliver a share of the proceeds of the operation to their membership, and do so in various forms. In many cases, after expenses and retained earnings, credit unions return value to their members through community investment, local partnerships, and support of non-prof-it programs. Instead of leveraging their local communities for profit, these not-for-profit organizations exist embedded within their local communities, serving as catalysts and facilitators for local economies.

Local economies are essential for the thriving and surviving of local communities, which form the backbone of this country’s identity. Merely buying local is no longer enough to save our local economies; depositing locally and borrowing locally are equally critical in the strengthening of our nation’s communities.

Nutmeg State Financial Credit Union is a member-owned, not-for-profit financial cooperative headquartered in Rocky Hill, Connecticut which serves people who live, work, worship, attend school or volunteer in Hartford, Middlesex, Tolland and New Haven counties, as well as select towns in Fairfield County.

Embracing our roots as a steward of the financial cooperative movement, we are a values-driven collective committed to intentional actions and investments to be the change in our community. We believe prosperity for all people is possible through meaningful social and economic relationships, ensuring inclusive and equitable access to resources. It is our mission to strengthen our community through relationship building and make prosperity for all a reality.

As a member of our community, we invite you to join us.