The Internet Archive's Attempt to Start a New Kind of Credit Union Is Dead
A noble effort, quashed by bureaucracy.
It seems reasonable enough: If you want to change the finance industry, start a bank.
It helps to have the resources to start a bank, of course, and in 2008 Internet Archive founder Brewster Kahle had all kinds of resources. Kahle is one of the internet's pioneers, co-developing WAIS, the internet's first publishing and distributed search system, in the late 1980s, and later co-founding Alexa Internet, the web statistics giant. The two startups would net him $15 million (cash) and $250 million (shares), respectively, when they were eventually sold to AOL and Amazon.
In 2008, Kahle began to think beyond the web. The banking industry had managed to plunge the globe into the Great Recession, for one thing, but, at the same time, he'd begun to take note of the difficulty his employees were having in securing loans. In 2011, he formally moved to open a credit union, and the Internet Archive Federal Credit Union opened for business in 2012.
Now, three years later, the dream is dead. As the New York Times reports, Kahle is giving up the credit union. It turns out that, even with a pile of internet money to burn, running a credit union is a full-time adventure in navigating bureaucracy. According to Kahle, this is mostly courtesy of the National Credit Union Administration, the agency responsible for regulating the US government-backed federal credit union system. Turns out the NCUA isn't big on shaking things up.
When the credit union opened, it was forbidden from offering basic consumer banking services like debit cards and online banking. It was, moreover, forbidden from offering loans of more than $5,000, leaving the Internet Archive's operation basically capable of only offering predatory payday loans, as Jordan Modell, the credit union's chief executive told the Times. It was also subject to routine audits and exams—by this past August, Modell and Kahle estimated that they'd spent 187 hours dealing with regulators and 61 hours with customers.
Much of this occurred after the Internet Archive FCU took on three Bitcoin outfits as customers, with the NCUA's blessing. Soon enough, however, the agency rescinded its permission and forced the credit union to drop the Bitcoin customers. In a post at archive.org, Kahle notes that this resulted in one of the firms going into bankruptcy.
The IAFCU currently has only 100 members.
We wanted to help the under-served, but the restrictions made this too difficult. We tried to offer student loans, but we were limited to lending only $5,000. This was a particular problem when, for example, an under-documented local Rutgers student with a 700+ credit score and a part-time job needed $8,000 to stay in school but others would not help him. We sought an exception from the NCUA, but they said no. In another case, we worked with a migrant farm workers association to offer their members access to the credit union. We set up a system that allowed them to send money back home with much lower fees than organizations such as Western Union. We had set up services to help undocumented workers so they could pay their fair share of taxes and put them on a path to citizenship. But after ruling that we could accept members of this migrant farm workers as members then a lower level examiners reversed this decision and we had to move all of those members to non-members effectively killing our relationship with the migrant farm workers association. Also, our members wanted to send outgoing wire transfers but the NCUA would not allow it resulting in many members leaving. You probably get the idea, we certainly did.
To be clear, the NCUA has a pretty good reason to be an asshole about this stuff. Credit unions are sort of idealized banks: small, non-profit, cooperatively run, customer-owned. In terms of consumer banking stuff (like fees and car loans) the difference between a credit union and a bank can feel like night and day. It's a system worth protecting.
"Part of the reason the regulators may act this way is how technically insecure the money system is," Kahle offers. "As an engineer, when I looked at how the transaction systems work, I was shocked to see few technological safeguards. I imagine there is major fraud activity. Ironically, the bankers and regulators need exactly the technologists that they are pushing away."
Over the past decade, the number of credit unions has dropped by over 40 percent. Given the banking fiasco in the interim, that number should be going up, one would imagine. While the credit union system is worth protecting, it doesn't matter a whole lot if there aren't any credit unions left to protect.