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Regulator Risk: NCUA Consolidation?

Recently the U.S. Government Accountability Office (GAO) submitted a recommendation to Congress for all depository institutions to be combined under one regulatory entity.

Congress could consider consolidating the number of federal agencies involved in overseeing the safety and soundness of depository institutions…”

—GAO, March 2016

We want your feedback! If federal agencies (including NCUA) were consolidated, how severely would that impact the credit union industry? Please click here to take our one-question survey, and share your thoughts.

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Testing a Negative Rate Scenario? Consider These Questions First

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There has been a lot of buzz recently about the potential for negative interest rates to hit U.S. financial markets at some point.  Short-term rates have been negative in Europe since June 2014, and the Bank of Japan made the move in January of this year.

European Central Bank rates fall below zero in 2014

Before you test this scenario from an asset/liability management perspective, there are several strategic questions that should be evaluated.  Consider the following:

  • How would loan rates change? Would your credit union’s floor rates on certain loan categories stay the same – meaning even if market rates drop, the loan rates will not decrease further, as the credit union would want to be compensated for liquidity, credit risk, or other concerns?
  • How might loan demand be impacted? This question could be difficult to answer because loan demand is often multifaceted, driven by factors other than just the current level of rates, such as the overall strength of the economy or the direction in which housing values are moving.
  • Could deposit rates drop further, or is there a scenario where the credit union would charge members a fee to hold deposits? If so, how might your members respond? If a “negative rate” comes in the form of fees, and if members have deposits at 3 or 4 different institutions, would they pay fees at multiple institutions or consolidate their balances to minimize the fee impact?  How could this impact liquidity and liquidity planning?
  • If members are charged for their deposit balances, would they be more likely to use those funds to pay down loan balances, resulting in a drop in loan-to-assets?
  • Would important sources of non-interest income be impacted, such as NSF, ODP, or interchange income?
  • What are some changes your biggest competitors might make? How would this impact your credit union’s response to negative rates?

There are many additional questions that could be considered.  The value in discussing these types of scenarios is not that every single question is asked and answered, but that key stakeholders are thinking strategically about events that could materially impact the future of their credit union.  Even if this specific scenario never plays out, thinking through how the credit union might respond and practicing the process can be worthwhile, and can then better inform any asset/liability management modeling you consider.

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How Better Processes Can Help Solve Your Talent Crisis

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As the nation’s unemployment rate continues its downward trend, many credit unions are celebrating higher loan demand and lower loan losses.  But as most employers know, low unemployment levels have a darker side.

Great talent is precious and sometimes elusive.  To survive and thrive in the highly competitive and rapidly evolving financial services industry, high-quality employees are needed for everything from strategic guidance to client-facing interactions and back office functions.

Even when unemployment rates were high, credit unions reported receiving lots of job applications but few of the right applicants.  With today’s better job market comes the added pressure of turnover due to good workers seeking better positions.

There is plenty of advice written on recruiting and retention.  Much of it focuses on benefits, perks, recognition, and employee development.  But one aspect that is often overlooked is the daily work experience.  What is it really like to work at your credit union?  Do your employees feel that they’re part of a high performing team, receiving positive feedback from delighted members and internal customers?  Or are their days filled with performing tasks without a valid purpose and asking members to jump through manufactured hoops?

Talent management and process improvement are inextricably linked.  That may sound strange at first, but high-quality employees want to work in a high-performing organization, and one of the keys to a high-performing organization is good processes.  Good processes deliver better member and employee experiences and can increase member growth and lending, in addition to creating happier members.  All of which leads to an upward spiral toward an engaged workforce that is excited to be a part of the organization.

The most desirable employees want to be associated with the best “bank” in town.  Better processes are one of the keys to making that goal a reality.

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Grow or Die – A Strategic View of Growth

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Grow or die. We hear this quite often. But what does it really mean? The game has changed. Credit unions are no longer just competing against other financial institutions. Non-traditional competitors are taking away non-interest income, especially sources such as interchange income. At the same time, non-traditional competitors, such as Lending Club and Sofi, are attacking margins by changing consumers’ definition of banking from a “one-stop-shop” of financial services to de-bundled boutique product offerings.

With serious threats to relevancy, the “grow or die” statement needs to be deeply considered. It is critically important for decision-makers to have clarity on what they mean by growth. What gets measured gets attention – meaning strategic focus and financial resources.

Growth comes in many forms:  Growth in assets, deposits, loans, membership, revenue, etc.

Growth in assets, deposits or membership does not necessarily translate into growth in revenue, income, or growth in members that contribute, or are highly likely to contribute, to the cooperative.

Consider just a few of the many options available to measure success for membership growth. Should the measure of success be:

  • Membership growth?
  • Growth in contributing members?
  • Growth in products and services per member?

In this limited example, a credit union’s strategy, initiatives, and allocation of brain power and financial resources would be different depending on what is determined to be important.

If the measure of success is membership growth, then the type of membership growth should be a topic of strategic discussions. A credit union can quickly grow its membership through youth campaigns, targeting 20-somethings, offering incentives, and of course indirect autos or CD shoppers.

Digging deeper, let’s use the 20-somethings to address just a few of the many questions that come to mind:

  • How long will it take for the youth and 20-somethings (often called pipeline members) to become contributing members to the cooperative?
  • It is not uncommon to see 30%-50% of the new membership growth come from those less than 30 years old. In light of this:
    • Does the credit union have enough contributing members to offset the net cost of the youth and 20-somethings until they become contributing members?
    • How should asset growth goals be adjusted since this group does not yet have a ton of money to save?
  • Does the credit union’s appetite for risk align with the needs of the 20-somethings? If not, what brand damage might be created by inviting them in and saying “no” to their needs?

The above provides just a sliver of the critical and strategic thinking that should be done with respect to measuring growth.

The next time someone says, we need to grow or die, consider asking, what exactly do you mean?

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Don’t Let Poor Project Management Set Your Go-Live Dates

Three. The typical number of bottlenecks when it comes to credit union project management:

  • IT,
  • Marketing,
  • Compliance.

These three departments are tasked with to-do lists for many projects within the credit union – on top of their own projects and priorities.

A huge concern is if go-live dates are set on a case-by-case basis, instead of from an enterprise perspective.

Think of it this way. Imagine your credit union is planning to enhance its existing ATM network. This project is being managed by the IT department with the assistance of a third party. The IT department takes care of installing the hardware and software required. The IT department takes care of testing. The third party suggests an implementation date, and the IT department agrees with the date and time, which happens to be a Friday, the first day of the month, at 9 am.

Sounds harmless, except…

  • The launch requires full network downtime of 45 minutes and the 45 minutes must happen at 8 am
  • The 8 am downtime is actually right when the credit union opens
  • The 8 am downtime was chosen for launch because that’s when the vendor said worked best for them but the IT department never pushed back and asked if other days or times were available
  • It’s a Friday, and the first of the month. This means there are typically more members wanting to get cash because they just got paid
  • Compliance was not aware of the project until a few days after the implementation which increases the risk of a significant compliance exposure for the credit union
  • The IT department did not know that, on the same day, marketing was launching a new promotion that pays members a materially higher interest rate on their savings. If the marketing promotion gets the planned traction and the ATM enhancements don’t go as planned, member service will suffer. Not to mention the avoidable stress on employees had there been better coordination and management of the project
  • This is not the only key deadline IT has to meet on this day

Poor Project Management Hurts More Than Just The Project

If individual departments manage their own go-live calendars, without discussion or feedback from their fellow departments, and without consideration of the membership, the impact it could have on the membership – and employee morale – is no joke. According to recent research, a consumer’s most significant factor for annoyance with the banking experience comes from annoyance with the branch experience, and the biggest reason for banking loyalty includes delight in the mobile and online experiences. Additionally, other research reports that 36% of Millennials said they will probably switch financial institutions in the next 12 months.

Now might not be the time to make members angry.

If your credit union isn’t discussing high-level project timelines, with the right people, in one room, and with a visibility of how department resources and calendars are going to be affected, then you are playing a game of roulette.

The discipline to appropriately manage a portfolio of projects is no longer optional in this fiercely competitive environment. Smaller credit unions without the ability to designate someone to manage the portfolio of big projects can still find ways to work the conversation into staff meetings and daily huddles. But this still requires that everyone be on the same page and paying attention to the overall picture.