Deposit Disruption, 2019 Edition

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The following blog post was written by c. myers and originally published by CUES on January 2, 2019.

How will you respond?

Imagine a world where member deposits are harder and harder to come by—a world in which slow leaks in the potential deposit pool have become a steady drain. As you imagine that world, the time to think strategically about how you could respond is now, before it actually happens.

People have been moving away from cash and checks as payment methods for years and it’s no surprise that the trend is more pronounced with younger age groups. At the same time, the available alternatives for payments have been exploding. Consider the ways in which the following could stealthily shift significant funds away from credit unions in the long term:

  • Retailers’ reloadable account programs hold customers in place with discounts, rewards and convenience. Starbucks, Target, and Amazon all offer perks to folks who are willing to load funds and store them, at least temporarily, for later purchases. Back in 2016, The Wall Street Journal reported that Starbucks held more than $1 billion in its app and on gift cards. That’s over $1 billion—probably more today—that is not going into a credit union.
  • Fintech payment providers hold customer balances. Apple Pay Cash and Venmo are two of the well-known players. The cash that passes through these accounts is often thought of as transitory, but some customers store funds in them. According to Logica Research, when asked if they were given an extra $500, 18 percent of Americans and 27 percent of millennials would put it in their PayPal account. At the end of 2017, Venmo and its owner, PayPal, held more than $18 billion in “funds receivable and customer accounts.”

Credit unions have been wrestling with ways to keep members from straying too far. Person-to-person payments are an example of the conundrum this represents. P2P platforms cost money but are thought to build relationships and keep members engaged. They may even prevent members from shifting some of their deposits away from the credit union. But are the trade-offs worth it?

The following strategic thinking exercise is a thought-provoking way to explore possibilities and test drive the future so that decisions can be made swiftly and with confidence when the future suddenly arrives. For this to be effective, ask your team to really put themselves into the future, think deeply and be as specific as possible when answering the questions.

Imagine it is 2025 and 20 percent of deposit funds have drained away:

  • Will we rely more heavily on such non-deposit funding sources as borrowings or sale of loans? If so, which funding sources will we use?
  • What is our true value proposition for a member with respect to deposits? Consider rates, engaging digital channels, unique products, etc.
  • How will we adjust our business model to offset increased funding costs? Be specific.
  • Which members will still keep their money with us? Why?
  • Are we okay to simply house the member transaction accounts that connect to other payment services like Venmo, Apple Pay and Amazon? If so, how can we make those relationships profitable?
  • How will our answers change if the funding drain is 50 percent?
  • What other questions should we be asking?

C. myers’ CUES Webinar Excerpt – Profitability by Category in Changing Rate Environments

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This excerpt from our recent CUES webinar demonstrates how to look at Profitability by Loan Category from a bottom-line perspective.  In less than 5 minutes, we walk through some clear examples of what could happen to loan profitability as market interest rates change.

To view the entire 1-hour CUES webinar, titled Advance Management of Your Lending Economic Engine, click here.

All I Want for Christmas is AI

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Written by David Loftus.

A few weeks back, I asked my seven year old daughter what she wanted for Christmas.  Her reply, an Alexa.  My first thought was that she seems a little young so I thought I would ask a few questions.  “Why do you want an Alexa?” I asked.  “Because she does what I want, right now,” she replied.  What she really meant was that she could boss Alexa around.

A week later, while driving to school, I was getting my five year old son ready for the day by asking him a few math problems.  He struggled coming up with the right answer to one of the questions.  He quickly asked for my phone.  I assumed he wanted to use my calculator.  No, he told me that he was going to ask Siri.

For those with young kids, these remarks may not seem out of the ordinary.  Obviously, children say crazy things and are also consuming technology at an exponential rate.  But what really stood out this time, probably because I’ll ultimately be the one to pay for Alexa, is what banking will look like by the time they are adults.  A few examples that came to mind:

  • After bossing Alexa around for the next 15 years, what will that now 22 year old woman expect when buying a car?  Or, should the question be whether she will want a car? 
  • How sensitive will her deposits be with Alexa constantly shopping for the best rate? 
  • With Alexa, Siri, and advancements in Artificial Intelligence (AI) playing a bigger role, will my son ever have to worry about over drafting his checking account or paying other fees? 

At this time, nobody really knows the answers to these questions.  Earlier in the year, we posted a blog that surveyed readers on how long it will be before AI will impact credit union business models and strategies.

The responses were heavily weighted toward the shorter end of around two years.  Change is happening and along with it come opportunities.  While I may have concerns around technology and AI impacting my children’s lives, I can’t help but also think of the opportunities.

If credit unions have artificial intelligence on their radar screen, they may be able to take advantage of the opportunities such as the ability to gather business intelligence, deepen member relationships, and improve efficiencies to name just a few.

As mentioned earlier, spend some time imagining how various applications of AI might change your credit union and continue to broaden your thinking on what it could mean for your membership going forward.

Three Financial Tests Credit Unions Are Running Today

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The following blog post was written by c. myers and originally published by CUES on December 3, 2018.

One of the advantages of running thousands of what-ifs for hundreds of credit unions each year is that it provides a window into what is on the minds of credit union executives.  The what-if scenarios that are being requested by our ALM, budgeting, and forecasting clients are widely varied, but the top three tests we’re being asked to run are:

  • Increasing deposit rates to retain or acquire new deposits
  • Adding borrowings or selling investments and loan participations to provide additional sources of funding
  • Increasing operating expense

Increasing Deposits, Adding Funding Sources

Even though the federal funds rate has been increasing since 2015, credit unions only recently began testing higher deposit rates in earnest.  While the federal funds rate has risen 2% since late 2015, credit union cost of funds barely moved until 2017.

The reason it took so long is that liquidity was generally plentiful.  But now some credit unions are seeing deposits leave while others are no longer growing fast enough to fund loan growth.  This is one of the reasons we’re asked to test adding borrowings, selling investments (often at a loss) and selling participation loans.  Commonly, a combination of options is requested so the impact of increasing rates and running CD promotions can be compared to other methods of bringing in funds. (What-ifs on adding borrowings and selling investments may also relate to interest rate risk mitigation.)

According to Callahan & Associates, Q2 2018 industry loan growth was 10.1% and Q2 2018 industry deposit growth was 5.8%.  As credit unions think through this issue, they are turning their attention toward studying detailed deposit trends and fine-tuning deposit rate structures to better respond to member sensitivity.  They are concluding that strategic deposit acquisition relies not only on fast and easy delivery channels, but must also focus on engaging members in ways that go beyond rate.  Examples include stickier interactions like goal setting, progress tracking, rewards, and intriguing, bite-sized educational components.

What-Ifs for Technology & Talent

Operating expense is also a hot topic, with areas of concern emerging in technology and talent.

The need to constantly invest in remaining relevant into the future continues to bring increased technology costs.  There is still plenty of focus on making delivery channels fast and easy.  Some credit unions are switching core systems to pave the way for more capabilities.  Many are building data analysis infrastructures as they turn to the promise of data analytics to better understand and serve members and have actionable business intelligence at their fingertips.

At the same time, competition for talent affects every organizational level.  The combination of low unemployment, upward pressure on compensation and the all-important need for great talent is often cited in what-ifs for increased costs.  According to a Deloitte 2018 survey, 43% of millennials envision leaving their jobs within two years.  Some credit unions are responding by more fully developing their talent through training and leadership development programs.

These types of what-ifs reflect changes in the thinking of credit union executives as the world continues to evolve.  Negotiating the shifting deposit landscape and remaining relevant to members with the talent to make it all happen are keys to success that many credit union executives are factoring into their view of the future.

Is Your Strategic Plan Missing a Vital Piece?

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A strategic plan is created to articulate a vision and unite an organization in realizing its exciting future.  Strategic plans are designed to better the business, so there is typically an underlying belief that the plan will result in financial viability, but while strategic plans commonly look 5 years into the future, 5-year financial plans are far less common.

Why a 1-year financial plan and a 5-year strategic plan?

It is critical to have a view of the long-term financial implications of the strategic plan – a strategic financial plan.  By its very definition, a strategic plan will have effects farther into the future than the next 1-2 years.  Some shy away from putting numbers to something so long term because it’s difficult to accurately budget for 1 year, let alone 5.  But that’s just the point; it’s not intended to be a budget.

Not a budget – keep it simple

A strategic financial plan should provide a big picture view of existing trends with and without the effects of the strategy layered on.  This does not have to be difficult or incredibly detailed.  Stick to the big trends and impacts and keep it simple.  The purpose is to highlight the financial changes that are brought about by the strategy rather than to predict financial results.  In other words, focus on the resulting differences.

Include all of the strategic initiatives to see the combined effect.  If the plan doesn’t meet expectations, it’s better to know that now.  And if success is highly reliant on specific assumptions, such as increasing loan growth, you can work to get the organization united behind loan growth early on.

Deeper discussions beyond the finance team

The conversations that surround quantifying the financial impacts and timing are productive extensions of the discussions that led to the strategy in the first place.  Rather than asking the finance team to get input from individual stakeholders and put it into the plan, have the conversations as a strategic team.  The exercise of thinking through the impacts together will uncover hidden expectations and help everyone land on the same page.

Linking strategy with measures of success

Great strategy needs to be linked to financial outcomes, which is intuitive for most.  At the same time, the idea of quantifying financial impacts over the long term represents a mindset shift for many.  The strategic financial plan can be created at a high level while generating a much needed long-term view, which makes it an especially beneficial piece of a comprehensive strategic picture.