by David Frankil, NAFCU Services
I like to say that one of a visionary leader’s most important functions is seeing over the horizon and recognizing opportunities and threats before anyone else does, and then shaping the strategy and tactics of the organization accordingly.
So for our year-end community post I asked our Preferred Partners to tell us what they see coming over the horizon, from their perspective, that credit union executives need to be focused on and/or prepared for as we head into 2013. Looking back a year, I see some common themes—revenue issues, economic uncertainty, regulatory uncertainty, and political uncertainty. From that perspective, not much has changed as we look forward to 2013. Here is what a few of them said:
Although we are seeing signs of recovery, many credit unions still have excess liquidity, diminished loan volume, and lean portfolio yields. There is a significant need for managing cash and investment portfolio assets to maximize income potential. Two trends are emerging. First, outsourcing expertise to enhance a credit union’s permissible investment portfolio. Second, giving consideration to reallocating a portion of permissible assets to otherwise impermissible investments, justifiable under NCUA regulatory guideline 701.19.
Most credit unions manage their permissible investment portfolio internally. This may not be a core strength of your current personnel. Partnering with a firm with skills in managing permissible investment allocation may increase performance potential, scrutiny, and due-diligence of the assets and enhance your organization’s use of human capital resources.
Nearly all credit unions currently have some form of employer funded employee benefits. As outlined in NCUA 701.19, federal credit unions can make otherwise impermissible investments as long as the earnings do not exceed employee benefit obligations. This opens the realm of potential investment options to a credit union on a portion of their assets which may enhance a credit union’s portfolio allocation in any number of ways.
The next big online evolution for credit unions will be taking their websites from ‘brochure ware’ sites to ecommerce sites in 2013. We’re seeing CU executives across the country recognize the powerful opportunity that their online banking traffic and trusted advisor status represents for offering online shopping and buying of related solutions. These credit unions are making strategic web investments to optimize the user experience, track sophisticated web analytics, and incorporate advanced digital marketing management tools, including content management systems that support all of the CU’s product offerings. The net effect is to enhance Member satisfaction and drive revenue by making financial services solutions available for shopping, comparing, and buying in a turn-key online experience from a trusted source—their credit union.
A number of credit unions made great advances in small business lending in 2012, but towards the end of the year, overall loan approval slowed. In 2013, credit unions must take more aggressive action if they want to become serious players and small business lenders. Big banks are coming back to the marketplace and alternative lenders have become more mainstream, so if credit unions are to keep up, they must increase their product scope and marketing efforts.
Additionally, credit unions must increase their efficiency, particularly on the small business side. Entrepreneurs don’t have time to come into credit unions and physically set up accounts before they apply for small business loans. That is an inefficient way to do business in the 21st century. Credit unions must modernize their platforms, allow online registration, and meet customer experience expectations if they are to keep up with the competition in the small business lending space.
As we move into 2013, credit unions need to be more focused on the importance of mobile banking and interacting with their members through mobile devices. Start taking advantage of the many uses and benefits of mobile applications, and give your members the ability to deposit checks through mobile capture or make payments through mobile bill pay. Expand the role of mobile applications within your credit union and use them to engage more with your members and promote special offers.
Like practically every other area of banking, new regulations dictate a close look at operations to make sure you are in compliance. On October 24, 2012, the CFPB issued guidance that affects the debt collection activities of credit unions. Credit unions should review the contracts they have in place with their debt collection partners, and perform annual due diligence on them as well. Due diligence should include a review of the vendor’s financials, their insurance coverage, and any compliance certifications such as SOC or ISO. Audits should also be performed focusing on but not limited to adherence to the Fair Debt Collections Practice Act (FPCPA), the Fair Credit Reporting Act (FCRA), and the Gramm-Leach-Bliley Act (GLBA). Instituting these reviews and audits will help mitigate risk to the credit union when contracting with third-party collection vendors.
Reflection, speculation, and shifting conversations have been more frequent in 2012. I am truly impressed with the courageous conversations many leadership teams have been in this year. The conversations have explored diverse questions. “How do we move from a hunker down practice to generative and profitable member service?” “What do our employees need from leadership to be more fully engaged?” “How can the board best support the credit union?” “What needs to shift so we are seen as a high functioning organization by the best industry talent?” These are just a few examples.
Thoughtful questions are foundational to learning organizations. Cultures that expect and encourage thoughtful questions are supporting growth and development of employees, board members, and members. There is a correlation to high performing organizations and the types of questions asked. Carol Dweck, author of Mindset, distinguishes between a fixed and growth mindset. Fixed mindsets tend to ask transactional questions and reward behavior of individuals who stay between the lines! The downside is the assumption that what worked before, will still work no matter the presenting issue or opportunity. Organizations with growth mindsets view mistakes as learning opportunities, look for new opportunities, and explore outside the lines for growth and development.
What questions are you asking? What is the most important question being asked in your organization? What quality conversations are happening? I noticed in 2012, more strategic planning sessions focused on quality learning and generative questions; this is a springboard for learning and, I believe, to credit unions increasing their offer in the financial institution industry.
I’d call 2013 the year of new Member engagement for credit unions. Membership continues to grow as more and more consumers join credit unions, and the challenge is to turn them into full-fledged, engaged users of your solutions. Specifically, credit unions need to get great (not good, but great!) at the process of engaging Members on all fronts.
A key success factor: moving past the information-gathering phase (the application process) and into account activation, funding, and other profitable Member behaviors. If you analyze your data and are typical of most credit unions, you’ll see very high attrition rates in the first 90 days after an account has been opened, or lots of open accounts but little in the way of real activity. The cause is relatively easy to understand—existing accounts are often tied to a myriad of automatic bill-paying relationships, and changing all that requires time, effort, and information. All too often it is left up to the new Member to figure out their own account transition strategy.
There are plenty of tools out there to help in this process, including some from Deluxe. The win-win here is that new Members will start to see the benefits of the credit union model, and you will also grow your business.
Without question, new regulatory requirements for mortgage servicing and impending rules from the Consumer Financial Protection Bureau will be a major factor continuing into 2013. National mortgage servicing standards, higher penalties for non-compliance, new requirements from Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and the PMI companies will all impact credit union servicing operations. Credit unions are beginning to understand the bottom-line implications of these regulatory burdens—more staff hours spent on documentation, fewer on member service. These new requirements will continue to make compliance even more difficult and expose credit unions to more regulatory violations, penalties, fines, and possibly litigation.
Pay particular attention to Europe’s economy in 2013. Will there be a recession in the Euro Zone? Or, will Europe accept a bailout? In the absence of a bailout plan, is Europe setting the stage for a global recession? If so, watch for a weaker U.S. economy along with a stock market correction. Do some financial modeling to see how these adverse conditions affect your members with significant equity portfolios or retirement accounts weighted towards equities, and also what this means for any income streams derived from those members. Will future borrowing be at risk? Continue to exercise caution prior to committing to certain capital expenditures, or at the least, stress-test for another dip in the economy before full recovery. Additionally, the Consumer Financial Protection Bureau’s May 2013 change to remittance transfers will certainly have an impact on your international wires. Are you prepared for this new ruling?
Genworth expects the housing market to continue its recovery in 2013. That means more opportunity for credit unions to increase their mortgage origination business and capture a share of the profits available through mortgage origination. Members value being able to get a mortgage from a lender they trust, and credit unions are well-positioned to meet that demand. Credit unions should continue to educate their members about their product offerings and provide education that helps them understand how to choose the best mortgage for their needs.
Removing the cloud of regulatory uncertainty also would help the recovery in the housing market. Credit unions should stay engaged with their trade association and Congressional representatives to ensure that national housing policies strike an appropriate balance between private sector and government participation, so that first time, low down payment borrowers are encouraged to purchase homes through safe, sound loans they can repay.
Your members’ branch experience is about to change. One of the most frequent (and most passionate) issues we discuss with credit unions is the current state, health, and future of their branch formats and locations. Clearly, members want and expect a physical presence, offering personal service in close proximity to where they work or live, but competitor intrusion into traditional credit union markets along with changing member dynamics and moving to online and mobile banking are reducing traffic in the branch. Making the branch network fit for purpose and “future proofed” is a challenge and one that can and will change beginning in 2013. NCR Corporation is bringing new technology and innovation to life that automates branch transactions in order to help financial institutions operate more efficiently and serve their members better. In fact, we saw in 2012 the NCUA rule that technology that delivers a virtual teller experience (such as our APTRA Interactive Teller) will qualify as a service location. We expect an increase in policies to enable more of this type of technology to transform branch operating models for the benefit of members and staff alike, with a large increase in adoption by credit unions and by large and small banks. In the process, branches will be reshaped and optimized to deliver a modern and efficient experience that combines the very best of assisted and self service experiences.
We all know that a major focus of 2013 is going to be on reducing the deficit, and one of the proposals is to restrict contributions to 401(k) plans and/or to impose additional taxes on 401(k) contributions.
At risk is the retirement security of over 60 million Americans who participate in retirement plans, over three-quarters of them middle-class workers, credit union members and credit union employees earning less than $75,000 per year.
We know this program works at lower income levels too—the Employee Benefit Research Institute (EBRI) indicates that over 70% of workers earning from $30,000 to $50,000 participated in their employer’s 401(k) plan compared to only 5% who save for retirement without a plan at work.
This is one of those predictions where we have a chance to shape the future by asking our elected officials to protect America’s retirement plan system by voting against curtailing tax incentives for retirement savings. 60 million Americans count on retirement plans for their future, and are counting on Congress to protect them.
Here’s an easy way for you to help make the case to Congress—go to http://www.capwiz.com/savemy401k/issues/alert/?alertid=52579516.
Early 2013 will be indistinguishable from late 2012. Homeowners will continue their refinancing spree, taking advantage of today’s stupid low rates. The long-term implications of which is the average family will stay in their home longer, resulting in fewer overall mortgage transactions, though an increased demand for home equity loans is on the horizon.
Three areas of focus in 2013: First, the Home Affordable Refinance Program (HARP). HARP was a bountiful 2012 success. One million homeowners collectively lowered their mortgage payments by $3.6 billion per year this year. The Program runs 12 more months and up to 7 million more homeowners still qualify. What’s your plan to close their loan? Second, get ready to switch to purchase-money lending. We’re headed for an extended purchase market, with a few scattered refinancings. Helping members finance their home is the best way to create broad, deep, lasting relationships. Third, compliance. Not exhilarating, just necessary. Systems and technologies help you consistently follow the rules, making lending less worrisome.
BE SURE TO USE YOUR BEST MARKETING PRACTICES: In light of the current regulatory environment, it is important that you remain vigilant in 2013 regarding compliance, your marketing practices, and providing quality products for your members.
We suggest you review the optional credit protection products you offer to be sure you are providing your members with meaningful benefits at a reasonable cost. A “promise to pay” and peace of mind are strong influencers in a person’s decision to purchase credit protection. Additionally, it builds trust in your relationship with your members.
Concentrate on your best marketing practices to be sure you are reaching the right members. Be sure to enroll them correctly. For life and disability benefits confirm their health and eligibility. For involuntary unemployment products verify their working status. It’s important to ask these questions when you offer the product.
If you are still struggling with MFOEL, remember that the NCUA has confirmed that you can use a multi-featured blended lending plan. It is simple and easy. And a “best marketing practice” is to make sure you are using the proper disclosures for both open and closed end advances.
The important thing is to be ready when lending picks up in 2013 and as regulations increase. Having your lending plan squared away, choosing the best optional credit protection products for your members, and using the best marketing practices will allow you keep up with the coming mortgage and other regulatory changes. Provide your members with the peace of mind they deserve.
2013 will bring continued concern about the daunting challenges posed by regulatory change for U.S. financial institutions. Of the nearly 400 rules required by the Dodd-Frank Act, only about one-third have been finalized, and another third have yet to be proposed. The new requirements are likely to trickle out for years to come. These developments will surely test the mettle of even the strongest companies and keep continued pressure on the bottom line.
On the consumer protection front, the intensified scrutiny faced by the industry is not likely to lighten up any time soon. Recently settlements reached by government agencies and regulators with financial institutions for violations of consumer protection and other laws have exceeded $1 billion. Indications are this trend will continue into 2013.
We will continue to see supervisory interest in a wide variety of areas in 2013. The cold reality is that regulators, as well as consumers, with access to more data than ever before, are making it a point to use available information to drive their agendas. This should incent institutions to get ahead of the curve by knowing what their data says about them, and to tell their story before someone else does it for them.