The New Credit Union Mantra: Stop Breathing !

A Bad Memory
Ever had one of those childhood memories you haven’t thought about in years come flashing into your mind and you wonder “where did that come from?”  No...well that makes this intro a slight bit awkward then doesn't it?  For me the memory was from 1st grade and I was sitting next to the meanest kid in the class. As we were working on some worksheet he whispered to me, “Stop It.” I looked at him like he had burst into Opera. “Stop what?” I asked. Glaring at me he replied, “Breathing…Stop Breathing.” So there I was sitting next to a future serial killer and thinking to myself, “how do I stop breathing.” The answer was I couldn't and so I did what any six year old from the Gulf Coast of Texas would do, I punched him as hard as I could and made a break for my friends across the classroom.


In Your Own Words

Today in credit union land we have a similar scene happening between credit unions where some credit unions seem intent on sending the same message of “stop breathing” to other credit unions within their markets.  When the article, “Credit Union Culture: Cooperative or Cut Throat” was posted I honestly expected to have people bash the article and come rushing to the defense of the credit union movement. I was sure people would talk about attending local chapter meetings and expound on the 7 Cooperative Principles. Sadly, it seems our industry is changing and many of us are unsure of the behaviors we see around us.

In reviewing the various discussion boards we posted the article, “Credit Union Culture: Cooperative or Cut Throat” on the level of responses was incredible. The following responses are a sample of the types of responses the article generated from you, the experts, on the state of credit union culture:

• “Unfortunately credit unions have changed a lot over the years in their philosophy when it comes to helping other credit union. With many CUs having expanded their FOM to community the competition and unwillingness to share has majorly increased. At least that has been my experience. There are still some that remember that we, as credit unions, are all in this together.”

• “Over the last few years I have spoken with many credit union CEO's who agreed that a majority of volunteers and CEOs alike have lost sight of their cooperative roots. The Seven Cooperative principles supposedly define our business model and the value proposition forming the heart of every credit union's brand.”

• “It's my belief that any trends displaying cut-throat, suspicious and unwilling to cooperate with one another behavior are all symptoms of losing sight of our common heritage--our cooperative roots.  Any initiatives to reverse this trend will one day be viewed in my opinion as saving the movement.”

• “…CUthroat. It's an everyday occurrence to see larger credit unions in my area push their way into our founding company - a university. You wouldn't see me walking on the site of their founding companies & current plants to sell my credit union.”

• “ As a CUDE, I am a believer that credit union philosophy is good business as anyone. That said, the world has changed; the economy tanked; the examiners have gone nuts; and successful credit unions rightly believe they need mass to survive. Healthy CU's are leveraging their capital by making merger overtures where it makes sense. Unhealthy, and small, credit unions may perceive that as cutthroat. It's survival.”

• “Community charters killed credit union cooperation. It seems that the 7 Principles guiding the industry today are growth, growth, growth, growth, growth, growth and more growth.”

• “CUs that feel that they are being taken advantage of should react. How? Grow profitably! Scale to a point where the competition - be it another CU or a Bank - can no longer abuse based on scale.”

• “Nonprofit status does not mean that the competitive forces in your industry have ceased. CUs must recognize that US does not need 15,000 Financial Institutions. Not all will survive. Many will be acquired; many will fail. The question that each CU executive and Board member should ask themselves is, 'Which category do I want to be in'?”

Reading the comments above you have to wonder if credit unions have crossed a tipping point in which we slowly do to ourselves what the banks could never do to us…make us disappear. Much like the school grade bully who threatened every time someone around him took a breath many large credit unions have sought to grow no matter the cost to themselves or to the movement as a whole. They have pulled back resources from smaller credit unions and have circled the wagons around themselves.

In the past I would have shaken my head and pointed my finger at all the talented bankers who have sought refuge and employment in the credit unions.  As much as I would like to blame the newly recruited the truth is we can’t blame converted bankers. We have to own our industry culture ourselves. Those of us who really care about the culture of credit unions have to own our own willingness to stand up for the principles that attracted us to cooperatives to begin with.

Given our current course once the dust settles we end up with a few hundred mega credit unions as small credit unions are swallowed by larger counterparts. While some might view this as inevitable the end result of thinning the credit union herd is less credit unions to compete with banks. It means fewer voices trying to make a difference.

In a world of fewer credit unions the question becomes, “Quis custodiet ipsos custodes”or “Who will guard the guards?." We all know it is the presence of community based financial institutions that keeps rates and fees in check for consumers within our communities.

The Solution Is Us

The irony of this trend is that the cooperative nature of credit unions is exactly what is needed to save credit unions. As we emerge after the economic recession we face a landscape in which the largest banks have come out with more capital and expanded market share. Credit union leaders now find themselves trying to survive with diminishing profit margins, increasing regulatory expenses, and stronger lending competition from captives.  In the face of these new realities credit unions need to turn back to their foundations and relearn to trust each other and collaborate to survive.

One way for this to happen is another recent trend of a few progressive credit unions to seek out strategic collaborations for core processing and other large budgetary expenses with other like minded credit unions.  These collaborations are founded on a common desire to gain operational efficiencies that creates economies of scale that return value to the membership of each of the credit union partners.

This model allows an alternative to the “hunt and skin” model of credit union mergers that have happened over the last three years.  As credit unions begin to research this alternative they need to start with core system alignment. The largest players in core data processing are aware of this movement and have begun to build the tools to enable this.  Jack Henry with its “PowerOn” forums or Open Solutions with its newly released “DNAppStore” have both invested in the tools to allow credit unions to collaborate directly with one another.

An example of this type of collaboration can be seen with *Open Technology Solutions (OTS) based out of Denver Colorado.  Together the individual credit unions form a combined collaboration that has over 7.6 billion in assets. This size allows for it to negotiate deeper price concessions from key vendors and then pass those cost savings back to their respective bottom lines.

As Big Banks emerge stronger and largely unrepentant from the recession it is foolish for credit unions to fight over islands of sand as banks are focused on driving profits. As banks push members into our arms with new fees we need to form the alliances that will allow us to grow in a way that complements one another.

Collaboration takes true vision and heroic leadership as management teams learn to trust one another and take hold of core corporative principles. For those leaders who have the courage and skill to navigate these new waters they will find that building large scale operations is where the real opportunity is for their members as they are able to roll out more expansive services with less cost.

To learn more about an example of an operating credit union collaboration check out Open Technology Solutions

Mobile Banking: A Roadmap To Your Future Member

Mobile Return on Investment
This week I attended the 5^th Annual Mobile Banking & Emerging Applications Summit in New Orleans and learned that almost everyone in the room both Big Bank, small banks and credit union were all running towards this new “golden” channel and were not really sure of what it is supposed to look like when they get there.  The prevailing question for many of the attendees was what do I have to roll out and what is the ROI. Most expert players in the mobile arena could not provide a hard and fast ROI on the channel.  Then magically a slide appeared in one presentation in which Forrester research stated there was a 15 percent ROI for the mobile channel.  Twitter lit up as everyone suddenly tweeted that the magic formula had been found! However, before you go and change that PowerPoint presentation you were going to give to your senior executive team on why you need mobile you first need to understand the math behind the hype.

The 15 percent return on investment is based on the assumption that you are going to be able to change consumer behavior from channel to channel.  So that member who goes into the branch or calls your call center is suddenly going to just use this new channel. Does that sound like your member? Not mine either. 

The 15 percent assumes that low value transactions of moving money or checking a balance will now take place over the phone and not involve the call center.  When many of the panel experts were asked about their own experiences at their financial institutions after they launched mobile the opposite seemed to be the trend. Your members simply used you more. They took that large check to their local branch and then called the next day to the call center to see when the hold would be lifted after checking their balance on their Smartphone. 

Another challenge in calculating the ROI is getting to the behavior and seeing if there was a change. It seems to hold true across the board that it is more exciting to buy the technology than it is to track member usage patterns. To compound the issue further even if you do show some subtle shifts it becomes very difficult to isolate the different factors that could have influenced that shift in your member’s behavior. So imagine a market that has sizable cost to deliver that does not have a measurable ROI…yep…that’s mobile.

So where does that leave mobile? Consider that 18 of the top 40 financial institutions have already implemented mobile banking. You can see that for many of our competitors the prevailing concept is that mobile is now table stakes in keeping consumers satisfied.  This is with good reason as according to recent research over 58 percent of all Americans use a mobile device for non voice data communication on a typical day.

The challenge for credit unions looking to enter this channel is that Big Banks are moving into this channel aggressively just look at the buzz over a Big Bank launching a tablet app to see the hype it generates. This hype influences our members as having a mobile device is now normal. So you not offering a solution is seen as more of a problem as mobile usage becomes more of a part of how people interact with their financial institution.

Where to Start
You need to think about what product you are going to launch that gets you the most bang for your buck.  When you consider the cost of building an Iphone app and the 250 different versions of Android (don’t even think about the BlackBerry which is dead in this market space) the easiest entry product is a mobile web browser designed by a reputable vender.  A mobile web browser should be a top priority on your mobile roadmap. The browser solution provides the most comprehensive and cost effective modality of all the solutions.  The majority of your smart phone users will be able to be served with this solution. Don’t get caught up in the app craze. Have the discipline to launch in phases and learn from each phase. It is your staff that will have to support it.

When asked what is the most popular method to conduct mobile banking the most popular method for smart phone owners was mobile internet browser at (77 %), then SMS test messaging (28 %),  and then (26 %) for a downloadable mobile application.

So step one on the roadmap is the mobile browser. In looking down the road on your roadmap you have to at some point consider a triple play solution (App, Web Browser, SMS texting) as this allows your members the chance to choose the delivery mode that best suits their needs or preference.  This also allows you to reach all of your member segments with a mobile solution as you cover regular feature phones and smart phones. 

Now many are quick to dismiss the text banking solution but I think that is a mistake. Instead you need to think about how to broaden this product beyond just weekly push alerts. Look and see how you can utilize real time balance alerts. Add fraud alerts to the mix. When your card processer notices a transaction that is outside the member’s normal spending patterns send them a text telling them to confirm the transaction.  You really want to create ROI? Add cross sell tags on the end of low balance alerts for lines of credit and overdraft.  Think about quick hit messages that create calls to action.

Last Thoughts on the Mobile Channel to Consider

Retention- How are you going to be your members PFI helping them to pay, manage, and save – anyway, anytime, and anywhere? This is exactly what Big Banks are trying to solve.

Cost Savings- Can you shift low value interactions from your branches and call center to the mobile channel. This frees up staff to engage in longer and deeper conversations with your members without altering your staffing model.  Can you reduce fraud by using real time alerts to engage your members faster? Please don’t tell me you are calling your member at the number on the system when you see a spending pattern shift. Just between us but that doesn’t work as often your member isn’t home. The good news is they do have their mobile phone on them.

Driving Member Acquisition – members will see this the same way as ATM networks. The Big Banks have an ATM everywhere. Even if I never use an ATM I want my financial institution to have them.  Today 1/3 of 11 year olds in the United States have mobile phones.  For them mobile is part of the world they have grown up in.  You need to understand that mobile is now here and is not going away. 

Big Banks are growing mobile users 25-30 percent annually lowering their cost per transaction. We all know this is a margins game. If Big Banks continue to gain efficiencies and credit unions continue to stand still then the end result is we are priced out of business in the rates we offer our members.

Share your thoughts where are you on the mobile roadmap ?

Real Teaching Moments With Our Members

The old gentleman’s eyes looked away as he sat at my dinner table and told me this story from his youth back in the 1930’s. It was going to be a perfect day. His class was going down to the lake for a class outing and picnic. Each student was to bring a sack lunch for the day. 

The boy was the son of a farmer and times were very lean in 1930’s for rural farmers. The boy gave his mother a week’s notice that he would need to take his lunch. On the day of the outing his mother handed him a sack lunch with a tomato biscuit, a country ham biscuit, and a biscuit with homemade butter and jam on it.  The boy excited about the day, kissed his mother and left for school.

The ride to the lake was enlightening for the boy as he heard everyone ask one another what they had brought for lunch. As the students headed toward the lake the boy held back and found an old stump with a hole in it. He quickly shoved his sack lunch down the stump hole and ran after his classmates.  When it was time for lunch he pretended not to hear the voice of his young teacher. She was new to the small country school and had come from the city.

The teacher called to him again and this time there was no ignoring the urgency or tone of her voice.  “Where is your lunch?” she asked when he joined the group with no lunch sack.  “I forgot it at home” he replied.  “Well then you can have my tomato sandwich” and with that statement she handed him her sandwich and then reached into her purse and pulled out a slightly crumpled sack. 

“I am going to have a biscuit” and with that she pulled out the country ham biscuit the boy’s mother had packed and started to eat it and commented to the children that she had never had a country ham biscuit before.  The boy stared at her with dismay.

The old man paused as he told the story and his voice caught for a moment. He explained then that he had been ashamed of the lunch his mother had packed as it was a poor farmer’s lunch.  That morning on the ride over to the lake he had heard that the other children were all having white bread sandwiches; which back in the 1930’s was a luxury.

The man’s eyes focused on me as he finished his story. He said, “After all these years I still remember her and how much pride I felt as she ate my mother’s biscuit." He then added, "She was a good teacher.” 

Now think of our members today. The average consumer is saddled with $6,493 in credit card debt and juggling an average of six open credit cards, according to credit health website Credit Karma’s latest data. That’s just our member’s debt on plastic. We have members who see others getting ahead but like the boy in the story stand back ashamed to speak up and ask for help. They see themselves struggling when everyone else is getting ahead. They see their homes, with a typical mortgage of around $171,665, sliding underwater in equity. They wonder how they ended up with the typical auto loan of $15,152, plus another $29,572 in student loans on an education that has not delivered all that had been promised. That’s a  grand total average of $222,800 for the average consumer.

For many credit union members the recession played fast and furious on their household finances, and left many families struggling paycheck to paycheck.  Paying a car, home, or college education in cash has become impossible for most. For many, putting the grocery bills on a credit card is the “new normal “that happens each month in order to pay the mortgage or the rent.

Each month of the “new normal” blinds the member to the dangers ahead of them. So what are the red flags we need to educate our members about to help them see the spiral of relying too heavily on credit?

As the financial experts we need to be aware of these three road signs and do our part to educate our members.  I would hope that every credit union leader reading this blog offers some type of free CBR review for their membership. If nothing else each of you should post these warning signs to your brand new Facebook page. Remember that new social media blog you have started but were not sure how to make it actionable? Well, my suggestion would be to post this on that blog and then add a line about calling the credit union to get a free consultation to look over your credit bureau.  So without further fanfare here are the teaching points we should all be educating our membership on. These points have been written so you can publish them straight to your membership

Credit Warning Signs To Post To Your Members

You’re Only Paying the Minimum. 

If you’re paying the minimum on your debts, two things could be happening: you’re using more cash toward expendable monthly purchases, or you can only afford to pay the minimum. In both cases, you aren’t prioritizing paying off your debts. Paying only the minimum might mean you’re making affordable payments month-to-month, but you could end up paying hundreds or even thousands of dollars in interest over time—you’re essentially paying the bank to maintain your debts. Reset your budget to pay more towards the minimum payments.

You’re Turning to Plastic to Pay What You Can’t Afford.

How often have you realized you’re low on cash or emptied your checking, and needed to use your credit card instead? True, one of the uses of a credit card is that it allows you to buy things you couldn’t otherwise afford. But on the flip side, should you be financing something you can’t pay for right now? Your debts accrue interest and make it even more unaffordable over time. Putting a $600 purchase on an 18% APR credit card and paying just the minimum results in $300 in interest charges over the life of the debt—that’s a 50% increase from the original debt! Your credit card is best used to pay things you can afford to pay in full every month; that’s the credit-building action that boosts your credit score and steers clear of debt.

Your Credit Score is Falling.

Relying heavily on credit isn’t just costing you money; it compromises your financial future. When lenders take a look at how much debt you are carrying and how much credit you use, it’s a sign of risk that you may mismanage or default on the credit they extend you. Plus, with debt and credit use factoring into about 30% of your credit score, a decreasing credit score is the first sign that you are in over your head. If you don’t know where you stand with your credit health, start with checking your credit score regularly for free at Credit Karma and monitor for any drops in your score. Contact your credit union and ask them to go over your credit with you.

Practical Application

Looking to add loans to your bottom line? Start a promotion educating members on the nature of credit. Offer tools like Credit Karma for online members. You should also offer a free credit review to every new membership you open. Go over the CBR with them and talk about the impact of slow pay or other items you find in the trade lines. Look for outside debt and look to refinance that debt saving the member even more money.

Some of our members are confused and ashamed of what they simply do not understand. Rather than bury those questions and ignore the problems we need to help our members by creating real teaching moments and showing them how they can move forward.   

Visit CreditKarma to learn more about online credit monitoring solutions you can offer your membership

Credit Union Culture: Cooperative or Cut Throat ?

Who is the Enemy At the Gate
In my capacity assisting credit unions with their Business Continuity planning, I have noticed a great deal of distrust among the credit union family. Many credit unions feel that their sister credit unions are their enemy.  While friendly competition should be the norm, the attitudes I detect seem to be of a much more cut throat in nature that contradicts the cooperative spirit of the movement.

While conducting training for the management team of one credit union, my suggestion of credit unions supporting each other in times of crisis was viewed as an anathema.  Sending the little old lady trying to cash her Social Security check to the main branch five miles downtown was preferable to setting up a mutual agreement with another credit union with a nearby branch to offer one teller space in the event of a crisis.

The Not So Cooperative Nature of Credit Union's 

Shouldn't “People Helping People” extend to “Credit Unions Helping Credit Unions”?  I certainly think so.  ALL credit unions should still be part of the cooperative network. Yet, too often many credit unions seem locked into “If Acme CU is bigger than me, they must be stealing membership from me!”  Though not a new development, it certainly seems to have gained momentum in recent years.  Perhaps it is an outgrowth of the community charter movement.  Perhaps it is as a result of the regulatory pressures brought on the management.  Perhaps it is fallout from the economic times.  Perhaps it is a combination of all three.

Credit Union membership shouldn’t be a zero-sum game!  Credit Unions don’t steal other credit unions members.  After all, unlike the NCUA thinking as they initially proposed their new corporate rule, real people can be a member of multiple credit unions without impunity.  People will become members depending on service, services, locations, and rates.

Credit unions should actively recruit new members from the population who don’t know the benefits of credit union membership.

We Need A "We Are the World" Moment

Credit unions should help each other out. We should embrace our common mission and unique charter and join together to help offset the enormous expenses we incur as smaller community based institutions. Mutual assistance should be le mantra de jour, not the exception.  How?  Here are a couple of simple examples to provoke some ideas:

• If one credit union’s branch is incapacitated, for whatever reason, other credit unions in the community could offer working space or teller space, especially if it were a mutual assistance agreement.  This is ideal if both use the same core systems.
• Consider supporting each other with staffing assistance.  Why pay the fees to temp agencies for temp staffing when another credit union might lend a person who’s already trained?
• Consider using staff from other credit unions to assist in facilitating Business Continuity exercises with inputs and role playing.  They could act as press, disgruntled members or members with off-the-wall questions to enhance the stress of the exercise.  They could also work as trusted agents assisting the exercise facilitator.
• What about some joint public events?—Sponsor a lunch & learn about credit unions; host balloons and ice cream event in the park for kids and young parents (potential members, right?); organize a pet parade to support the local animal shelter; provide staffing for the local public radio fund raiser.  OK, I may not be the most creative in the world, but you get the idea!

The Battle for Board Walk and Park Place

Like power hungry community titans in a real life Monopoly game some credit unions seem bent on owning all of Board Walk and Park Place and leaving only Baltic Avenue to their credit union neighbors. This credit union distrust seems especially intense where several credit unions share overlapping community charters.  Each credit union sees the same pool of potential members as “theirs" and as they seek to increase their membership they perceive themselves in competition for those members with other community based credit unions. 


This sense of competition can be a good thing.  It could force each of them to evaluate their mission, their service, and their approach to the various segments of the community.  Yes, even though they all have community charters, their potential new members are grouped into different and specific demographic segments.  Credit unions should play to their strengths, play to their best demographics, play to building a loyal following. Viewed correctly, each should find a synergy with the other credit unions that can become a growth multiplier in the membership recruiting game.

OK, so who is the enemy?  It’s certainly not the other credit unions.  It’s the banks who see us as playing on an unfair field.  It’s the banks who try to impede credit union progress (should we be looking to them for critical services?).  It’s the banks who want to make sure credit unions are taxed.  It’s the banks who won’t support the underserved.  It’s the banks who are so creative at imposing additional hidden fees. It’s the banks, with their lack of real interest in their customers’ welfare, who should drive credit union membership.

That’s where the credit unions should focus their animosity.  Not at each other!

This blog article was written by Ken Schroeder, Vice President for Business Continuity at Southeast Corporate, where he is responsible for the life cycle management of all business continuity functions. Mr. Schroeder provides consulting services to member credit unions and has been a featured speaker at numerous conferences, forums and other events. You can learn more about Ken at Ken Schroeder

CFO Corner: A Glass of Liquidity – Hold the Rocks: Your Liquidity Strategy

Everyone Is Drunk on The Spiked Kool Aid

It was a nightmare…flashing lights…loud music…empty dance floor. No, I wasn’t in some 70’s throwback bar it was actually the client party for a financial services convention. Everywhere I looked people were laughing and drinking to music that most of them had never heard before. These same industry leaders last year were wringing their hands unsure of NCUA assessments, watching their capital reserves drop before their eyes as commercial loans in sand states literally bit the dust.

Last year the only liquidity anyone was thinking about was what they could pour into their glass as they were hoping it was all a bad dream. Fast forward to today and the world is upside down as Big Banks have emerged stronger with higher assets, broader consumer bases and TARP has becoming a bad memory as quarterly profits erase past mistakes.

Credit Unions have begun to breathe again as evidenced by the record attendance at this convention. Credit union leaders are feeling better about their financial positioning and are starting to get some swagger back in their step. Watching everyone else talk about recovery even I was starting to get a smile on my own face. Then I read this great article written by Edward Lis, our CEO guest blogger, and suddenly I had to wonder why were all of us drinking the spiked Kool Aid when 12 months ago we thought the sky was falling. 

So here is the million dollar question, “Why be concerned now about liquidity when most credit unions are awash with funds resulting from a flight-to-safety fund inflows and loan portfolio outflows due to lack of loan demand?” Edward lays out some thoughts every senior management team should be considering as they prepare a liquidity strategy for the next rising-rate environment that some economists are predicting could kick off by late-2011.

The Fly in the Kool Aid

Before you waive off the article as the fly in your spiked Kool Aid consider that rising rates typically are used to manage economic recoveries. So it is likely rising rates will be accompanied by a return of flight-to-safety funds to the market and a spike in loan demand, putting many credit unions back in the tight liquidity environment of a few years back. Many credit unions have rate floors under their variable rate loans.  As rates move up, rates on these loans won’t move for a while. But your cost of funds will. The result is a compressed net interest margins or NIM.

The objective of a viable liquidity policy and strategy is to provide a framework to minimize the adverse effects of a significant and sustained liquidity crisis.  This can result from changing economic or interest rate conditions, deposit outflows, unusually strong loan demand, intense competition, an international crisis, or any other factors that can deplete the liquidity of the credit union.

In the event of a serious and sustained liquidity crisis, you might find you need to adopt various strategies. Some of these strategies are preventative and must be implemented prior to the onset of a crisis.  Other strategies are reactive and may be implemented immediately.   The strategies will differ in terms of the implementation time, costs, risks, financial implications and regulatory consequences.

  

Looking for a Glass of Liquidity – Hold the Rocks

The first place to look for sources of liquidity is within your own balance sheet. Some areas to consider are listed below.

• Loan Payments and Prepayments-a credit union may write loans with long repayment schedules, however, with that said; loan portfolios continue to be relatively short term-the turnover rate. Track and test loan payments and prepayments in all economic environments to estimate the level of cash inflow to the credit union under a variety of scenarios. As a reminder, when interest rates are falling-prepayments will increase, and when rates are rising-prepayments will slow down.

• Increasing Member Deposits-to bring about an inflow of deposit funds without cannibalizing previously deposited funds are often referred to as “disparity” or “segmentation” strategies. They are designed to identify depositors based on rate sensitivity and encourage an inflow of deposits when needed.  You should be forecasting your liquidity needs and anticipating those needs in the marketing of your deposit products.

• Selling of your Assets-mortgage loans written to conforming loan standards can normally be sold in a short period of time with one major issue to remember: Loans will be sold at their “market price”, which may be more or less than their “book value”, depending on the current level of interest rates. Other types of loans have the potential for sale as well, i.e. consumer loans

• Non-Member Deposits-non-member deposits, also referred to as brokered funds, can provide near-immediate and short-term funding.  Note these come at a high price and the funds are very rate sensitive.

• Loans from the Corporates-the corporate credit union is still the lender of first choice for a majority of credit unions. Loans fall into two major categories: A line of credit and a term loan. A Line of Credit-these come in two varieties: committed and uncommitted. A committed line, most common, the credit union pays a fee based on the size of the line and its duration. There is a contractual assurance that the funds will be available to the credit union when those funds are needed.  An uncommitted line of credit, funds may be available based on the lender’s-the corporate-ability and willingness to fund. Generally, there is no charge for an uncommitted line of credit, but the certainty of obtaining the funds when you need them could be in doubt.

• Term Loans-these involve a specific amount borrowed for a specific period of time. It may be a bullet loan with the principal due in full at maturity, or an amortizing loan similar to an installment loan. Rates can be fixed or variable.

• Federal Home Loan Bank (FHLB)-the FHLB is a quasi-government organization with the objective of supporting and providing loans to financial institutions that make first mortgage real estate loans or that purchase and hold mortgage-backed securities. These organizations offer a diverse line of lending services to qualifying credit unions. Much like the corporate system, liquidity from the FHLB involves lines of credit and/or term loans at fixed or adjustable rates often at more favorable rates than the corporates.

To borrow directly from the FHLB, a credit union must be a member. To be eligible for memberships at the New York Federal Home Loan Bank refer to

 http://www.fhlbny.com/aboutus/membership.htm.

Note: For a credit union not belonging to the FHLB, check to see if your corporate credit union has an agency relationship allowing the natural-person credit union access to FHLB resources without becoming an FHLB member.

The Central Liquidity Facility-the Central Liquidity Facility is administered by the NCUA Board.  CLF advances to natural-personal credit unions are normally limited to short-term, temporary needs. Borrowing directly from the CLF requires that the credit union apply for membership in the CLF and purchase stock. However, many corporate credit unions are appointed as CLF agents and may be able to facilitate an advance to natural-person credit unions that are not members of the CLF. For more on the CLF refer to the following link :  Http://www.ncua.gov/Resources/CreditUnionDevelopment/ResourceConnection/Files/Partners/NCUA-CLF.pdf

The blog entry you have just read was written by Edward Lis who was a former CEO and CFO of two different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com

Don't just read the blog become part of the blog by submitting your own article or by leaving a comment below.

Money To Burn: Three Strategies To Rethink

Nerd On The Run 

What a great memory touring Washington DC on a Segway. Yep, that sentence automatically nominates me to the Nerd Hall of Fame. There I was gliding around people and taking in the historical sights of the Capital. As I was trying to move around town and not run over people or fall on my face I could not help but notice the different ways people were taking in the sights of the capital. Some people were on tour buses, some were on rented bikes, some roller blades, and lastly some just walked from one point to the next. No matter the method people were taking in the sights and enjoying the weather in a way that fit them. 

What really struck me was that even though we were all going down similarly marked paths we were going about it in different ways with each of us expecting different things from the journey. You could literally see the difference in generations by the reaction I created as I glided past someone on the Segway. Small children pointed and said they wanted to ride. Young adults looked bored as seeing a Segway was nothing new; just a guy in a nerdy bike helmet riding a Segway. Older tourists stepped to the side and looked at me with distrust. They were visibly afraid I would suddenly lose control of the technology I was riding  and go crashing into them. Each group saw the same technology on their path as something different. Some saw amazement, some saw the normal or routine, and some saw something they simply did not trust or understand.

I think the same reaction is happening in financial services as we try to understand the sweeping changes that have enveloped our industry over the last three years. To combat consolidation in the market many credit unions are adopting technology that is supposed to help understand  the member and deliver cost efficiencies . Yet, that same technology is often sweeping in nature. So credit unions find themselves trying to navigate a path with all those same groups I almost ran over with my Segway. Like me on the Segway many credit union management teams face the same challenge of trying to create a uniform experience across age groups and delivery channels. They face the same concern that they don’t want to lose control of the technology and end up taking themselves out.

There are many different strategies out there and all of them seem to come with a complimentary white paper and free webinar on how they will revolutionize the way we serve our members. One thing I do know is that some of these strategies are the wrong strategies. I suspect that for some credit unions the key strategies they are adopting fall into a couple common themes. As you ponder these three strategies I want to share with you some research, that I believe is relevant, from the Raddon Financial Group (http://www.raddon.com). 

Tell Them We Are Not a Big Bank and They Will Come…

Yawn….they paid the money back! People have put TARP in their rearview mirror. The truth of the matter is that Big Banks went to Capital Hill, got a spanking, and then on the way out of town they grabbed all the assets, improved market share, and got a nice check for a couple billion as they walked out the door. Anyone seen a Ally Bank commercial lately? We all know they were wearing black hats at the start of the congressional hearings but when they left the building they had a new image, a new name, and a new slogan. This means that for many small community based financial institutions they are now competing with Big Banks with even more assets, with larger consumer bases which allows them to lower their cost per transaction even more. The added insult for many credit unions is that the average consumer has a very short memory or is oblivious to all the changes that have happened over the last three years. There simply is not a lot of road left on this message and strategy.

Free Checking –Leave it Free and They Will Come … Be Careful What You Ask For

Many of us are aware most Big Banks have eliminated or reduced free checking. On the other end of the spectrum most credit unions have adopted a “wait and see” strategy hoping that they will pick up deposit growth from dissatisfied bank customers. There are some basic assumptions in this strategy that credit union leaders need to validate. The chief assumption is that the growth will come from depositors you would want as members. If you break down consumers into six broad categories (Fee Driven, Credit Driven, Middle Market, Low Depositor, Middle Depositor, and Upscale) the majority of consumer movement is in on the lower end of the spectrum. Big Banks are driving away non profitable customers and credit unions are assuming that they will suddenly turn into profitable members.

Imagine a large exodus of millions of people. Each person is simply being driven out from where they were. They end up going down the path of least resistance and end up in a temporary camp. Imagine the town next to the camp being filled with kind hearted people who decide to take them in and help them back on their feet. This action is noble and it is in many ways heroic. What it is not is profitable in the short term. The towns resources are used without anyone paying additional taxes. The same thing will happen with credit unions as they become the refuge for unprofitable Big Bank customers.  Many of those that are being driven from the banks are the people who are “Fee Driven” and that segment simply is not credit worthy for the loans you will want to lend to them. So now you have low deposit, high transaction members who are credit challenged. 

I am not saying credit unions should not be the refuge for these members – we are here to serve the underserved. I am simply suggesting that the strategy has inherent challenges that need to be thought through.  Maybe you are counting on the fee income from overdraft from these members. Looking long term that source of income is squarely on the radar for the new Consumer Financial Protection Bureau who will see this income as part of their mission to make sure that markets for consumer financial products and services are fair, transparent, and competitive.

Build or Buy the Technology and They Will Come

The media loves technology and all the buzz words that come with that technology. Apps, living in the cloud, DROID, mobile, tablets, all of it just sounds cool. When you listen to that tech vendor with the great PowerPoint you almost think it is time to shutter the branch network and go virtual. Well, before you make any big budget decisions I want to provide some additional points of thought to consider. One thing to ask yourself is what do members value the most at a financial institution. The answers are as follows; Free Checking 76 %, Good Service 70 %, Convenient Branch Locations 48 %, Good Online Banking Experience  41%, NSF Fees (under 30 $) 28%, Loan Rates 18%, Deposit Rates 17 %, and Mobile Banking 12 %.

It seemed odd to see the branches ranking 3^rd on the list when it seems in the past month or so I have read numerous blog articles calling for the reduction of branches as they are becoming obsolete.  I have no doubt that members will continue to shift from branches to other delivery channels like online and mobile. That being said the biggest driver of member satisfaction other than free checking was good service. Where does the majority of that good service happen? In the branches. True, a great call center and back office staff are added bonuses but most member interaction is still face to face in the branch network.

When members were asked what would make you move your PFI the answers were; Lack of free checking 34%,Service Issues 31 %,NSF Charge (over 30$),Branch Hours/Location13 %, Deposit Rates 13 %,Online Banking 11 %,Loan Rates 10 %,Product Range 9 %,& Mobile 4 % .

What does all this mean? It suggests that it is hard to move the type of members we want to move from Big Banks. When polled 50 % of financial institution consumers said they believe they receive better service at a smaller financial institution. We also know that service continues to resonate with consumers. I believe any strategy we adopt has to also find a way to empower that teller or member service specialist in helping them feel valued in what they are trying to do for the membership. This is a hard sell. It is more fun to buy tech than it is to create incentives for great service.

So now I have poked holes in the three strategies I have heard recently. Please feel free to pass this blog article along to someone else so they too can mutter under their breath. As always this is a dialog in which I hope to generate additional ideas on how we can all compete and thrive against Big Banks. Now leave a comment so you can influence the next reader and let’s make a difference for small community financial institutions together. 

Moving Past Our Jekyll and Hyde Debate - Selling The Credit Union

“Desires dictate our priorities, priorities shape our choices, and choices determine our actions. The desires we act on determine our changing, our achieving, and our becoming.”

A Story of Jekyll and Hyde

One of the most famous stories on our desires dictating what we become was written by Robert Louis Stevenson who captured this constant struggle between the warring nature of desire when we he wrote the novel about Dr. Jekyll and Mr. Hyde. The story tells us that in the beginning “Dr. Jekyll is a highly respected London physician [picture Brad Pitt] a good and kindly man, who in his youth had showed inclinations toward evil which he put behind him. As a doctor who has to learn about various drugs, the doctor comes across one which enables him to change his external form to that of a repulsive monster, the very embodiment of the evil lurking within him, whom he calls Mr. Hyde.”

This same warring between two sides is alive and well within the credit union movement. The irony is that each side sees the other side as the evil “Mr. Hyde”. To some in the credit union industry the drug that brings the hidden evil to the surface is the concept of “sales”.  They worry about greed and lack of internal controls. They picture member business lending running wild or tellers trying to push product through the drive through lanes. Sadly, there are examples of this in recent headlines. Texans Credit Union at 1.6 billion is the most recent victim of a sales process that went awry as they concentrated their efforts into business lending only to end up under NCUA convseratorship.

When you hear the word 'sales' what comes to your mind? For some credit unions, the word “sell” engenders a feeling akin to a tooth extraction with rusty set of dental tools. In other credit unions, the same word is on the hearts, minds, and lips of every employee. They walk around in some type of "bliss like" state trying to uncover unmet member needs.

Redefining Sales

However, almost every credit union misses out on the most important sale of all. This is not a product or a service rather it is the opportunity to “sell” itself as an institution to its members. Many credit union employees have been with their credit union so long that the value and benefits, which are derived from being associated with a credit union, are second nature. Unfortunately, this simply isn’t the case with their membership. Every credit union employee and volunteer (i.e. employees, senior management, and board member) should take every opportunity to discuss with their members the substantial benefits that come from using a credit union.

The practice of selling the credit union is much more than a theoretical exercise. There are real life consequences which will naturally follow. Taking a few minutes at the end of the loan process to share with the member, in terms of real dollars, how much they saved can make a tremendous difference. It is about painting a picture or telling a story that the member can understand. Sometimes the value we create gets lost in the numbers. Instead of talking about percentage points you have to put it into something more tangible. Imagine the member hearing “Mr. Smith, we have saved you $4500 in interest over the next 4 years as compared to that bank up the street”. That is real money that is going straight back into his wallet. This does two things: Mr. Smith will realize that he trusts the Credit Union and will want to make the credit union his primary financial institution (PFI) and he will tell many of his friends and family about how much money he saved the next time he sees them.

Many leaders in the credit union movement are extremely concerned about growing their organization in a sustainable manner. By simply reinforcing the perceived value (remember, the actual value is already there!) provided by the credit union, individuals will become promoters on behalf of your credit union. This will dramatically increase both the wallet share and the market share which the credit union enjoys among its membership. Wallet share will be increased in a number of ways. First, each new "promoter" will deepen their total relationship as they migrate from a “car loan” member to one in which the credit union serves as their PFI.

As your members tell other individuals that are “car loan” or minimum share members, their association will begin to evolve into deeper relationships. Ultimately, a higher percentage of existing members will yield far greater and far more sustainable income.

Another benefit that will come from selling the credit union will be the new members that will result from an army of "member-promoters" sharing their positive experiences with others. Some will become members right away. Others will hear the message and, when they receive poor treatment at their current financial institution, will decide to see what everyone is talking about. This becomes a self sustaining cycle. Happy members tell other people (members and non-members). These primary converts then tell others who then become secondary converts. The cycle continues.

Moving Past Our Own Reluctance

Unfortunately, with any new practice or habit, there is a tremendous amount of inertia which must be overcome. Organizational resistance and lethargy will, in the beginning, make progress seem slow. Some staff may feel that they shouldn't need to tell people what they should already know. However, with many things, practice makes permanent. Each time the staff sells the credit union, it will become easier and easier. It is critical that credit union sell occurs every time. If it doesn't, the cycle will grind to a halt.

At the end of the day everyone who works at a credit union is in the business of helping members understand the real value of what they belong to. To help them understand that value you have to help them wake up by sharing some real life practical advice.

Too often the only advice being offered by financial institutions is related to helping the wealthy plan how they will retire on a beach with a hammock. Let the banks fight over the same small slice of affluent consumers as they keep recycling tired overpriced “wealth management” services. As credit unions our mission should be a touch more noble.

We have to help our members with “life management” advice. We need to help our members who are caught in that cycle of purchasing things they don’t need, with money they don’t have, to impress people they don’t even like, see past the poor habits they have developed. We have to move past the debate of what type of sales culture we need to have and start getting our members to become our advocates by first being their advocates.

This blog article was written by Matt Mecham, who works for a large "small town credit union". In the past Matt has worked for several credit unions ranging from $250 million to $1.3 billion. He has seen firsthand the differences between large and small credit unions, as well as the different challenges faced by each. To learn more about Matt please visit his profile @Matthew Mecham