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Raging Payment Battle Requires Purposeful Strategic Thinking
Consumer Behavior and Technology, Economy, Strategic Planning Blog PostsToday, July 12, is Amazon’s Prime Day. As part of the event, they are encouraging their members to apply for their Amazon Prime Store Card, which, among other features, offers 5% back on eligible Amazon purchases.
The raging battle for payments continues to escalate. Amazon is just one more threat to interchange income. If you want interchange income to continue to be a primary source of revenue, then you must fight this constant battle with constant strategic thinking. The right business questions need to be asked – and answered – in order to turn strategic thinking into strategic action. Specific to Amazon, business questions that can be asked could include:
Regarding the questions above, considerations include:
You can read more about Amazon Prime and their credit card here.
In an upcoming blog, we’ll discuss the broader payments battlefield, and how purposeful strategic thinking can keep you in the battle.
NCUA – Rethinking NEV
ALM, Interest Rate Risk Blog PostsIt’s no secret that the NCUA is planning to implement new guidance for net economic value (NEV) testing this year.
From NCUA’s recent open meeting, some key elements of the new guidance include:
The new test is being designed to support the NCUA’s responsibility with respect to understanding risks to the insurance fund, and is intended to create greater comparability between credit unions. Credit unions will still be expected to run their own A/LM analyses, to understand risks to earnings and net worth, and support their internal risk management and decision-making.
Having modeled thousands of NEV simulations, NMD values are arguably the most significant wildcard. For most of our clients, we already model at least two views of NEV: one using their base case assumptions for NMDs and another showing shares at par. Historically, NEV with shares at par was used by examiners to get the same comparability concept, and to limit the variety of deposit assumptions.
Shares at par ascribes no market value to the shares, thereby removing any benefit of low cost deposits from the analysis. The new guidance then, at least with respect to shares at par, would be some improvement. Keep in mind, though, that any standardization of deposit values would hide any material differences in deposit pricing between credit unions.
However, no matter how much rethinking of NEV occurs…
…NEV, even with standardized assumptions, is still not going to address fundamental business issues. For example:
To sum it up, NCUA has a new test. Passing NCUA’s test does not replace the need to understand short- and long-term profitability, risks to profitability, and risks to net worth. Understanding and managing these risks are directly related to creating a relevant and sustainable business model.
Brexit’s Effect On Your Business Model
Consumer Behavior and Technology, Economy, Strategic Planning Blog PostsExcept for those that have been on vacation in a very remote location, all of us have heard or read countless reports about how voters in The United Kingdom (UK) decided to leave the European Union (Brexit), and predictions about the impact to the global economy (Source). This decision will have long-term implications, as UK is the fifth largest economy in the world (Source), and the second largest in the European Union. Thinking strategically about how Brexit and other events that create uncertainty can impact the business model of their credit union is key. Below are brutal facts and a strategic scenario to consider.
Brutal Facts
Margins are squeezed and Brexit can cause more squeezing. On June 1, 2016, the US 10-year Treasury yield was about 1.85%, already very low by historical standards. On the day following the Brexit vote, due to a spike in uncertainty that Brexit created, the yield was down to 1.57%, a decline of 28 basis points (bps) from earlier in the month and nearly 17 bps from the day before. The 10-year Treasury influences the interest rate charged for longer-term loans, such as mortgages.
Germany is the fourth largest economy in the world, followed by UK as the fifth, as noted earlier. As 2014 got underway, Germany’s 10-year government bonds were trading at 1.94% and UK’s were trading at 3.03%. Both rates have been trending downward in order to “jolt lending, spur inflation, and reinvigorate the economy after other options have been exhausted” (Bloomberg, Negative Interest Rates, June 6, 2016). Of particular note, the day following the Brexit vote, Germany’s 10-year bond was trading at a negative interest rate of (0.05%) and UK’s at 1.09%. At that time, Japan, the world’s third largest economy, had a negative yield on its 10-year government bonds.
Strategic Thinking: Rehearse Tomorrow Today
Consider a process which you have regularly scheduled meetings with a team of key players, such as monthly or quarterly, during which the only thing on the agenda is rehearsing tomorrow today, discussed in a previous blog about strategic planning (http://www.cmyers.com/preparing-for-strategic-planning/).
Identify a trend that is happening, such as negative interest rates in other large economies. Create a future scenario in which those trends continue or expand. Ask your team to discuss what that future could look like and list out all areas of the credit union that could be impacted, and be sure to estimate and simulate the financial implications of the scenario, as well as actions the team would consider. Remember, nothing happens in isolation, so combine events.
An example of a scenario about negative interest rates follows. Imagine it is 2018 and the US has slipped into a modest recession, which was triggered, in part, by the uncertainty created in Europe from the passage of Brexit. Loan demand declines and delinquencies increase. The value of the dollar continued to rise as the value of the Euro and British Pound dropped, making US products even more expensive to the rest of the world. Also, increasing uncertainty caused a flight to safety worldwide. The safest investment is US Treasury debt. As a result, the US 10-year Treasury yield is 0.75%, half of what it was at in June 2016, and shorter-term rates, such as the 3-month and 1-year Treasury bills, are paying negative yields. Current 30-year mortgage rates are 2.50% and competitive rates for auto loans to quality borrowers hover around 0.40%. You are being charged 0.10% to hold cash in an overnight account.
Resilient organizations are that way for a number of reasons. One is because they rehearse tomorrow today. Leaders of these organizations are deliberate about preparing their organizations for thriving during disruptions. Negative interest rates may not be the next big disruption, but your preparation for it may help you to thrive during other disruptions.
Don’t Hit Cruise Control on Auto Loans
Consumer Behavior and Technology, Strategic Planning Blog PostsAuto sales, which have been at record levels and hit a peak of 17.8 million units last year according to CU Times, may be reaching a plateau. If your earnings are heavily reliant on sustained and significant production in auto loans, think strategically about the following:
Many credit unions have enjoyed significant growth in autos.
As you strategically evaluate your competitive position with respect to auto lending, don’t lose sight of these three basics:
Heartfelt Thoughts for Orlando
Uncategorized Blog PostsWe would like to take this time to pause from the constant noise around the financial services industry. We feel it is important to remember those who died or were injured as a result of the heinous crime in Orlando. Our heartfelt thoughts go out to the individuals, families, and friends, who were impacted by this unnecessary act of violence.
We recognize that heartfelt thoughts are minimal in light of the amount of healing needed. In time like this we offer this thought.
There is only one thing that remains to us, that cannot be taken away: to act with courage and dignity and to stick to the ideals that have given meaning to life.
– Jawaharlal Nehru, First Prime Minister of India