Words of Wisdom From a Former Credit Union CEO

The term “small credit unions” is relative. That said, even when times are good, the “small credit union” tends to face challenges in a way that “larger credit unions”, another relative term, do not.  Speaking from experience, the pressures on the small credit union leadership looms large on a daily basis. The leadership must be intimately involved in all aspects of the operations.  Regulatory burdens alone loom large for the small credit union. Small credit unions have a more intimate relationship with their members. These smaller institutions are under a higher degree of pressure as they assist their members.

Asset quality in small credit union has not changed over the past several years.  The net worth ratio remains robust.  Navigating the economic uncertainty can be difficult.  Negative trends catch the eye of examiners, boards and management.

There are no quick answers here, however, with that said, there are common themes, of which, regardless of asset size are helpful.

• Place negative trends in context.  Make sure interested parties know how other credit unions are fairing.  Information will help directors and management make informed decisions and transparency reduces the likelihood of knee jerk overreactions.
• Most small credit union have plenty of capital.  Avoid penalizing members with higher loan rates. higher fees, lower dividend rates. service reductions, and layoffs just to maintain net income.  Analyze the impact of those decisions.
• Rising delinquency and loan losses require close monitoring and active collections.  Don’t simply tighten underwriting standards. Revisit loan quality parameters.  Analyze the remaining inherent risk in the loan portfolio.  Score the loan portfolio and analyze the scoring migration.
• Mortgage defaults are on the rise.  One mortgage delinquency in a small credit union can have a large impact.  Develop a mortgage modification policy and guidelines to assist the membership during economic downturns.
• Avoid big strategic initiatives in uncertain times.
• Loan demand falls during economic downturns.  Reliance on investments takes center stage.  Investments yields are low so be conservative when placing investments. “SLY”-Safety, Liquidity, and Yield.  Build a basic ladder.
• Since market conditions are volatile asset-liability management becomes more important.  Set policy parameters on fixed rate mortgages.  The federal reserve is out of policy options on the short-end of the yield curve.  The federal reserve through quantitative easing or now QE2,  is forcing mortgage rates down to historic lows.  Market rates will rise at some point.  Credit Unions with large portfolios of long-term fixed rate (rate insensitive) assets will pay a high price (compressed NIM) in a rising rate environment.
• Engagement with outside 3rd party vendors require additional caution during uncertain economic times.  Have a robust vendor due diligence program and policy in place.
• Stress that your deposits are federally insured.
• Reduce to writing your plans and be able to communicate your credit union’s tolerance for risk.  The regulators will expect the leadership has considered where the credit union is financially headed and there is a road map containing a reasonable achievable plan.

During times of financial dislocation credit unions, regardless of asset size, can show others the benefits of the cooperative movement.


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. 

Is “Silence” The Newest Credit Union Fee To Hit Consumers ?

Classic Look Back
I have reposted this blog entry from earlier as I  think it is perhaps even more relevant to our times. Big Banks are looking for new ways to separate the average consumer from their hard earned money. Credit Unions not only need to resist this trend but need to make sure they are vocal about the real choice they offer each person who lives, works or worships on Main Street. 


What Will Be the New Strategic Flavor of the Month
A few months ago I had the chance to listen to a presentation for credit unions on how to increase growth and revenue. As the presentation continued ideas would surface that the moderator would add to a flip chart page. The ideas ranged from increasing fees for convenience services, creating virtual kiosks for remote branch networks, and moving into social media. All of these are worthwhile ideas and they all have a place on the map when credit union leaders talk about strategy. What never made it to the flip chart was accountability or performance metrics. Briefly the topic of sales came up (the moderator mentioned it) and quickly segments of the audience voiced their discontent with the idea of proactive sales within the credit union space.

Ever Feel Like A Stranger in a Strange Land
As a reformed banker I was quite on the issue. It felt like one of those weird moments when you see a couple you know start arguing and you have an opinion but don’t want to intrude on the conversation. Yep…it just felt awkward. I wanted to engage in the conversation as the “anti sales” segment of the audience clearly marked their position in the ground. They did not want their employees to sell at the member expense. No product pushing. No individual incentives. No one should be in a position to have to sell or risk being fired. As each point was articulated I could see heads nodding in agreement in unison. I agreed with every point being made. All of those things should be taboo in credit unions

Soon the topic turned to education and how members of the audience felt that credit unions needed to do a better job of working with their SEGS (select employee groups) and explain to members how they could save them money on auto loans and increase their savings rates. The mood was visibly different as more and more audience members agreed that SEGS and younger members were of vital concern to keep credit union membership growing.

To me the disconnect between the two positions could not be more clear – how could so many people agree with SEG education and involvement and young adult marketing efforts (Facebook, Twitter) and not consider the proactive use of sales in a credit union friendly way? Then it occurred to me what the difference was. It was a matter of perception and word choice.

For many credit union advocates the idea of adopting any bank like behavior is moving in the wrong direction. Sales being the very worst of the bank behaviors they want to avoid. After all wasn’t it Big Bank “sales” that put people into subprime mortgages with option ARMs? Wasn’t it Big Bank “sales” that credit card companies engaged in when they sent out mailer after mailer encouraging people to take on more debt and live beyond their means?

The answer is “Yes” it was "selling" that did that… and that is exactly why credit unions have to speak up and talk to their members about the products and services they offer. People accept bad advice most often when they have nothing else to compare it to. It is the absence of having the credit union voice that most quickly leads to our member being sold on a product that does not help them. It is allowing members to hear only the Big Bank sales presentation that leads to members being in positions they can’t climb out of. How would your member ever know they don’t have to pay 22 percent on a credit card unless you tell them?

I think now more than ever as people look for ways to make lower paying salaries stretch further credit unions have a responsibility to proactively engage their members in conversations about the choices they have. Call it member advocacy or any other term to fit the culture. Bottom line our collective silence in not engaging our members only hurts them. Our silence and our aversion to the concept of sales only come at our member’s expense...a hidden fee on our membership.

Practical Application:

• How do you get your staff engaged in proactively engaging members and helping them improve their savings returns?
• How do you get your staff engaged in helping members restructure their debt to save them interest?
• What impact would you create for your credit union? Would it help you lower your dependence on non interest income?
• What is the opportunity you are leaving on the table because your staff is reluctant to move beyond being “order takers?”
• As Big Banks have turned their branches into retail shops with high pressure sales tactics have you allowed  your employee “silence” become the newest member fee you have passed onto your membership?

Big Banks Kicking Up Smoke on Free Checking and Free Bill Pay

The Game Changers
In 2002 the proverbial shot that was heard around the world of online banking was...free bill pay. The culprit credited as being behind the shot was the Big Bank that calls Charlotte, North Carolina home. Actually the first “free bill pay shot”  was fired by the “Big Bank That Never Sleeps” five years earlier when it did a major marketing campaign on the streets of Manhattan touting its no-fee electronic banking message but it was largely ignored by the financial services industry. Yet, in 2002 when the world took notice of this "game changer". Big Banks were no longer charging five dollars a month for online banking and soon the rest of the industry was forced to follow its lead. Since then every new service or feature associated with the online channel has been basically “free”.

So now it is interesting to watch the rest of the industry as the same Big Banks attempt another game changer by change the rules once again. In the "The Billy the Kid Checking Account” post I highlighted the new pilot testing that is happening in test markets in Arizona. Most of the article focused on the cost of having a checking account. This is because I looked exactly where the Big Bank marketing department wanted me to look. I was supposed to look at the checking account fee structure as it was the smoke that obscured what was really going on.

I Didn't Like the Song till I Saw the Video
This morning I saw another example of shifting peoples attention as I was watching a music video that came on TV. The video looked rather boring and I was about to change the channel until it cut to a scene with a dancer in a pirate or historical costume dancing and kicking up smoke. Suddenly I was no longer noticing that the singer in the video never moved or that I never saw the band. Instead my mind was focused on the "Cool Ninja Pirate Dancer" who was kicking up all the smoke. The same thing is happening as people are watching the changing trends in consumer fees and are focused on watching what the marketing department wants them to.

It is easy to miss with all the smoke being kicked up over checking accounts that the "silent shot in the dark" is actually on free online bill pay. Only this time around the Big Banks are not doing a major advertising campaign on the new fee structure like they did back in the day.


The Products Behind The Smoke
Below I have listed the two lowest cost accounts being offered in the test markets in Arizona:

·                     An “Essentials" checking account is a basic account with a monthly fee (six dollars) and a debit card. Sadly you do get online banking but you do not get bill pay with it. Bill pay, well that is 4 dollars more per month.

·                      An "eBanking" account has no fees if the customer opts for e-statements and makes deposits and withdrawals online or by ATM. Also includes mobile and bill pay for only nine dollars a month.  

Notice that online banking is free but the cost of actually having bill pay adds to the monthly charge. To pay bills online you have two options with the accounts listed above. Those options are listed below.

·                     Option #1: You can have the entry level “essentials account” and add bill pay as an ala carte item for 4 dollars a month. This brings the total expense for checking and online banking with bill pay to 10 dollars a month

·                     Option #2 is to upgrade to the “ebanking” account which has no monthly fee when you make all deposits and withdrawals online or at an ATM (not at a teller) and sign up for paperless statements. However if you walk into a branch or call someone that visit will cost you as you then get hit with a monthly service fee of 9 dollars.

The pricing on this is shady. They have positioned the lowest cost option first and then added an ala carte bill pay feature that is more expensive than the next product up the product line.

The sad fact is that the people who are in the most need of watching their balances, paying their bills on time, and having access to someone to talk to them about improving their financial lives are being discouraged by add on fees from ever talking to the very people who could help them.

There are around 130,000,000 consumer checking accounts in the United States and most of them belong to people who most of us would consider residents of Main Street society. Given this fact it is not hard to see that the smoke being kicked up is directed onto the lower and middle class households on Main Street that are in need. 

Migration of Checking Accounts 

If you were to look back to 2009 you would find that Big Banks and Regional Banks with deposits over $50 billion enjoyed about 45 percent of this market. Today you would find that about five million accounts in 2010 shifted from Big Banks to community banks and credit unions. This shift is expected to continue throughout this upcoming year as community banks and credit unions grab up to 65 percent of the checking account market. Looking back over the last several months, from July 2010 to February 2011, community banks offering free checking increased by one percent and credit unions by nine percent! 

This is great news for credit unions and small banks. When you stop and consider how hard it is to get someone to change their financial institution you really appreciate just how much resentment is out there on this topic. This migration tells us that this is an issue worth talking to your product managers and marketing experts about. Five million people saw past the smoke and went home to fill out a switch kit. They went through the trouble of changing their online banking bill pay recipients and their direct deposits. Bottom line they were aggravated enough to take action.  

The silent message being sent by the Big Banks is that free checking and free online bill payment are things of the past. In their drive to maintain fat margins they have kicked up smoke and fired a shot at every person who lives or works on Main Street. Big Banks taking aim at the consumer is nothing new. No, what is really interesting is that five million people saw through the smoke and shot back firing their Big Banks. 

Practical Application:

Now is the perfect time to tout your free services. Don't let Big Banks define the trend you follow or set for your membership. 

Source link: wall-street-banks-continue-to-drop-free-checking-lose-market-share-to-main-street-institutions

The "Billy The Kid" Checking Account

Church...Credit Unions...Stepping on Toes
I was having lunch with a group of people when the topic of friendship came up. As everyone was talking about what they liked or disliked about their friends one person said something that really took hold with the group.

The person said, “I need friends that when I get lost they tell me and are not afraid to step on my toes. I need to hear what I need to be doing no matter if I am doing it or not. I want that type of moral compass” Everyone at the table nodded in agreement and said that was exactly what they were looking for in their friends.

Keeping one's business moral compass can be difficult as you try to navigate changing regulatory landscapes. Just when you think you have it figured out some new piece of legislation is passed. Added to that is the challenge of all the unspoken rules for financial services that seem to be continuing to shift.

Wanted Dead or Alive - Free Checking

Most recently the latest unspoken rule to change seems to be the new trend of killing free checking. This basic vanilla product is on the most wanted list and clearly becoming a product of the past. Just as Main Street is trying to get their feet underneath them the Big Banks are looking for new ways to cash in.

The good news for credit union members according to Bankrate’s annual Credit Union Checking Study is that free checking accounts are alive at many of the nation's credit unions. The study revealed that of the 50 credit unions surveyed, 38 of them -- or 76 percent -- offer free checking accounts with no strings attached.

So why have The Big Banks suddenly targeted checking accounts? It is all about profit pure and simple. Big Banks are trying to earn more revenues from their existing customer base by requiring Main Street consumers to use more products and services in order to avoid monthly fees. One Big Bank is currently testing a variety of fees based checking programs in target markets. The options being tested fall under four types of checking accounts:

•  An “Essentials" type of account is a basic account with a monthly fee (six dollars) and a debit card. Sadly you do get online banking but you do not get bill pay with it. Want bill pay well that is 3 dollars more per month. 
• An "eBanking" account has no fees if the customer opts for e-statements and makes deposits and withdrawals online or by ATM. Also includes mobile and bill pay for only nine dollars a month.
•   An "Enhanced" account will have a fee (fifteen dollars) if a customer doesn't keep a minimum of $2,000 balance. It includes two checking accounts, savings, debit card, and bill pay.
• A "Premium" account requires a minimum of $20,000 balance and provides a tiered checking account with debit card, online banking, bill pay, free money orders and check printing. If you fall below the balance minimum then you are paying twenty five dollars a month.

No matter the option being tested the fact remains that for large banks free checking is becoming a product of the past. This rush to fee reminds me of someone who has lost their sense of direction as they think about their customer base.

Big Banks -No Loyalty  

If you check out the advertising in the target markets (Arizona is the one I checked) you see a picture of a smiling woman pondering which of her checking account options she will choose.  The tag line for the ad is “Checking that fits: Get a solution that fits your needs.” How can Big Banks roll this out in Arizona and not take into account the impact on the average person trying to make ends meet?

The last numbers I saw for Arizona indicated that the state had unemployment rates around 10 percent. This is an economy that lost about 300,000 jobs during the recession, or around 11 percent of the state's total.

In a recent article talking about the job market of Arizona Ioanna Morfessis, founding chief executive of the Greater Phoenix Economic Council and an economic-development consultant, stated, “The Great Recession has redefined the standard of living for most Americans, and in Arizona it has really compelled people to adapt, change and lower expectations.”

I think it is sad that one of the things the people of Arizona have to lower their expectations on is on being able to avoid extraneous fees from their financial institution. I think there is an opportunity to gain market share from the Big Banks as people grow tired of having new fees for existing services. Remember back in 2009 when there was a flight to safety as people were worried about the Big Banks and credit unions gained new members? Today the banks have given credit unions another shot in the arm as they try to fee customers out of their branches. 

Free Moral Compass Moment

Recall my lunch time observation that people sometimes need a moral compass to let them know when they have lost sight of what is important? Well, in the spirit of reaching across the road to our misguided neighbors at the Big Banks here is your wake up call.

“Ahem, to any Big Banks reading the blog…feeing the middle class who are struggling to make ends meet for the same old services just so you can pay for the litigation cost of doing robo signatures on sub prime mortgages…that’s low….even for you guys. Really think of the mentality behind this strategy. Don’t call us…Don’t visit us… just give us your money and nobody gets hurt…that’s a little “Billy the Kid” don’t you think?"

Everyone Needs Some Work Place Passion

Recently I had the chance to attend a chamber of commerce  meeting in which the key note speaker mentioned that many financial institutions have paid a high tuition for a very painful education during this recession. That for many of us part of that education was in seeing what happens when people are extremely passionate in creating profit with no regard for how they make that profit. Sadly the lessons of Wall Street and the meltdown that followed are starting to cool on the political memory. TARP companies are back in the saddle and are moving forward with a renewed passion for finding ways to make more profit. 

While I do not approve of the means or methods of the Wall Street machine I do have to give them credit for being able to attract people who are willing to do anything to accomplish their goals. There is a zeal and energy you think of when you think of Wall Street titans and their hunter/skinners who are looking for the next big deal. No matter how poorly the industry is portrayed it is rarely portrayed as lazy or apathetic towards hitting business goals. 

What role does passion play in our work lives? All of us have seen them. Those coworkers who seem to light up when it’s time to get to work. I recall early in my career working with a lady who was the kindest, gentlest soul that I had ever seen. Not a harsh word or a sharp tone ever escaped her lips as she interacted with her coworkers. Her handbag had a cross-stitch of her grandchildren on the side.

Then the clock would hit the start time signaling that it was 8:30 am which meant it was now legal to call people at home and remind them of prior obligations that they had overlooked last paycheck (yep- Granny was a bill collector).  That sweet old lady was still sweet but her fingers were a blur on the phone, and as she spoke to each person she would light up as she would use her sweet voice and occasionally crack her knuckles and lean forward using hand gestures at the screen. Like some kind of auctioneer the sound of dollar figures would start going back and forth between her and the person on the other end of the phone. It was verbal swordplay to see who would get what they wanted. At the end of the call she would thank them and remind them in her sweet voice she was counting on them to not disappoint her. She loved the game and the challenge of the job and it showed. Each month this kind old granny took home the top collector incentive and top spot on the collections floor. 

That experience taught me a lot about not judging a book by its cover and what impact having passion for your work plays on your performance. It also taught me that in order to really obtain success you have to want to do more than the minimum. When you are passionate about what you are doing then you will find ways to do it better. On the other hand if it is a drudgery to do what you are doing then most of the time the minimum become the most you will do. Today companies need leaders who are strategic, proactive, principled, savvy, flexible, and authentic. All of that goes without saying. Yet, what often drives the business forward is the level of passion a leader feels and is able to inspire. Can anyone imagine Apple being the success it is today if its CEO was not passionate about its future and its products?

The power of passion cannot be over rated. Many of us have turned on the news each morning and seen the crowds of demonstrators who were passionately demanding change in Egypt. The ability of the people of Egypt to demand and receive political change is a stark reminder of the power passion can ignite. It brings diverse people together and pushes aside the boxes we like to put people into. Passion allows us to demand the ability to look forward. It ignites us to either fix some wrong or to pass along something we believe to be right. Passion helps us push past obstacles not because we have to but because we want to achieve that goal that fuels the passion we are feeling.

Consider your own teams. How would you gage the level of passion that is being displayed to accomplish the goals at hand?  Probably many of us work in jobs that do not appear to impact society in a manner that calls for passionate displays. After all, being a manager is hard enough without also having to be the official cheerleader for the group. Yet, what if…what if you could get people really excited about achieving that goal? What if you didn't have to do all the heavy lifting? What if you had someone on the team just waiting for the chance to do more?

Most of us are probably the type that when the goal is on the line we want to be the person in charge. We want to have control. Our internal passion to succeed blinds us to the potential passion in others. I remember one meeting in which I was feeling somewhat sorry for myself because I was feeling so overworked (que sad music for background). So I went and spoke to another leader (my mentor) about my situation. This leader offered sound advise but no matter what she said I kept hearing that I had to do more. Finally exasperated with me (I have that effect on people at times) she said, “ You are not that smart, not every answer has to come from you. You have extremely capable people around you and if you are telling me that none of them can help you then you are a sorry leader!” My pride in tatters I left that meeting angry with her lack of understanding. She obviously had no clue what it meant to be passionate about something and having to do it yourself. Luckily some hours later her words finally penetrated my fog of self pity and I was able to see what she was trying to tell me.

I took a fresh look at the staff roster and sure enough a name stood out. I scheduled a meeting with the person and explained that I wanted to place them on a special project to help me out. The person was thrilled and tackled it with fresh eyes and energy. Soon they had taken the project farther than my original expectations. To add to my lesson of personal humility the person sent me a thank you note for allowing them the opportunity to do more and made a small donation to a school in South America in my name. Clearly I had found the right person for the job.

Practical Application:

Who have you identified that could do more on your team?

How have you  encouraged a high level of autonomy on your team?

What assignment can you hand off to allow someone else to achieve success?  

Has your own level of passion ignited the potential passion in others?

Managing In The Dark: The Impact of Scarcity on Leadership

Years ago when I worked in training I recall being in an training development committee meeting in which we were within weeks of rolling out the pilot training for new managers on how to coach front line staff. Everything looked like it was set to move forward when one of the committee members, a senior branch manager who had been part of our profile group, said, “I have to admit I don’t know how I can afford to do this once we roll this out. I have eleven people in my branch and I still have to do my real job.”

Silence entered the room as each of us absorbed the potential reverberations of what one of the pilot designers had just thrown onto the table. The chairperson started going around the table asking for input from other members to see if they had similar concerns and then one young leader (who later stated she was nervous on speaking up because she was only a coordinator and not a “manager”) said, “I have around eleven people on my team and I can’t afford not to do these things with my team. So we have been doing this for the last year.” With that simple statement it became clear to me who the real leader in the room was.

This example also drove home to me the lesson of mental focus and how it can shift our deliberations. In how we can have people we trust operate from a scarcity mentality and if left unchallenged can limit the options on the table for our organizations. Take the example stated above. When that branch manager stated he couldn't afford the time to do something he enabled himself to place that task beyond reach. It shifted from being difficult but obtainable to simply not relevant as there was no perceivable manner in which the task could be accomplished.

Compare that to the 2^nd leader who by concluding she couldn't afford not to do it she changed the very focus of the leaders who were gathered around the table. She had concluded that she had to afford it and worked towards that goal. When we ask “How can I afford to do this” it shifts the playing field from scarcity in not doing the task to scarcity in not completing the task.

For many in the credit union industry this same type of scenario happened last year when new regulations required members to opt into courtesy pay. Some organization decided that they simply could not afford the time and effort to re-opt everyone into courtesy pay so they simply discontinued the service. Other organizations came to different conclusions as they realized that they very much needed the non interest income that courtesy pay provided to their credit unions. For them the question became the 2nd “How do we opt all our members into courtesy pay and still continue to do everything else we had planned?”

These leaders realized that there is a need to be able to see and operate in the dark. To take steps forward trusting in the talent of the organization to provide the next lamp of light before the last one fades. New ideas were presented, resources reallocated, and operational focus shifted. These leaders were able to decide what they wanted to accomplish. Too often we as an industry look to large credit unions or Big Banks to see what the options are and then follow in their lead. In effect we wait to be told what to choose.

I still marvel at the courage of Unitus Community Credit Union for charging a modest fee for personal financial management tools for their online members. The normal choice on the table is to offer it for free and simply let the membership of the whole credit union absorb the cost. Yet, what if the credit union is trying to keep rates low and still grow net worth. It would be very easy to come to the conclusion, “that we can’t afford to offer PFM for the online members.”  Instead they came up with a third option that goes against what everyone else in the industry would tell them they could choose.

One of my favorite chapters I have read recently is the first chapter of Rich Dad Poor Dad by Robert T. Kiyosaki who wrote of the dynamic of hearing two different world views from his parents.  He had been exposed to two opposing attitudes in thought that played out like you see below.

• One Dad thought that the rich should pay more taxes to take care of the less fortunate. The other said, ‘Taxes punish those who produce and reward those who don’t produce.”
• One Dad recommended, “Study hard so you can find a good company to work for.” The other recommended, “Study hard so you can find a good company to buy.”
• One said, “When it comes to money play it safe and don’t take risks.” The other said “Learn to manage risk.”
• One believed, “Our home is our largest investment and our greatest asset.” The other believed, “My house is a liability, and if your house is your largest investment, you’re in trouble.”
• One taught me to write an impressive resume so I could find a good job. The other taught me how to write strong business plan so I could create jobs.”

I think for many leaders who sit at our tables we have similar disconnects as some have one view and others have the opposite view. As our economy begins to pick up and Big Banks begin to rev up front line operations, acquire our talent and look to cross sell within their branch networks to our members we will find ourselves having to make decisions on how we will compete in an improving economy.  We will face similar questions and diverging worldviews.

• Is our goal to take care of the less fortunate or to go after more affluent or younger members?
• Is our goal to grow organically or to use our capital looking for a sweet out of state merger opportunity?
• Is our goal to conserve capital to appease our regulators or is it to push and manage risk for higher margins?
• Is our goal to help members get into homes or is it our goal to manage our pipeline to what mortgages we can sell to banks because we can’t afford to have low interest mortgages on the books for 30 years?
• Is it our goal to decrease cost by slashing jobs or is it our goal to increase sales and service, deepen wallet share to the point we have to create more jobs due to growth?

Whatever our choices are it is critical that we understanding how we arrived at them. To add a service or not add a service, to fee checking or not fee checking, to close branches or open in new markets, all of these questions are impacted in how we form our deliberations. Did we come from a place of scarcity to arrive at our conclusions? Are we certain we haven’t just looked across the banking divide and blindly allowed our Big Bank counterparts to tell us what to choose?

True Grit: Who Will Redefine The Model in 2011

 As a movie it was a classic, untouchable in many regards. True Grit was the only movie the “The Duke” won an Oscar for when he portrayed a scruffy, hard-drinking US Marshal named Rooster Cogburn. My initial thought when I heard that Jeff Bridges was in the remake of True Grit was blasphemy! [Editors note: keep reading it really is not a movie blog post.] It was going against an established standard that everyone else followed. It was John Wayne’s defining performance. For any other actor to follow would be folly and a huge mistake!  Guess what…I was wrong. The movie rewrote the standard and suddenly what was unthinkable was a stone cold reality…the new reality was Jeff Bridges in True Grit was simply cool and it worked. In 2011 as credit unions we also need to reexamine how we view some established standards.


Today in financial services banks and credit unions are waking up to their new reality. Big Banks are now in the position of having to wring more revenue out of customer accounts. The new trick and question on the table is how to justify new ways to raise fees on basic products like debit cards, ATM machines and checking accounts.


This new focus comes as many financial institutions brace for as many as 200 new regulations that could hit the books in 2011. Many of the new regulations will focus on reducing the fees that can be accessed by financial institutions on consumers. The end result is in my opinion a mixed bag for consumers and for credit union members. I fully believe this is the year that many bank credit-card users will experience higher inactivity fees and foreign-network exchange charges, while free checking accounts will simply fade into memory.


In a recent article in the Wall Street Journal author Robin Sidel wrote, “To counter that lost revenue, banks are thinking about imposing annual fees of $25 or $30 on debit cards, according to people familiar with bank strategies. Some are also considering limiting the number of debit-card transactions that a customer can make each month, these people said. Another idea circulating in the industry: Limiting the size of a purchase that a customer could make with a debit card. At the same time, reward programs for debit cards are likely to get the ax, these people say.”


This mad scramble for lost revenue will be even harder for credit unions as they have built their reputations on being less fee- centered than Big Banks. Sadly this becomes a more pressing issue as it is the smaller credit unions that are still expected to compete with the products and services of Big Banks. Following “the stampede” to fee on basic services is a mistake that will hurt those members who can least afford the fees.  It is low income members who will suddenly face new fees because they can’t maintain higher deposit balance limits or use self service access points like online banking.


The challenge for 2011 is how do credit unions pay for services with limited capital, share insurance premiums, and tighter margins as interchange income looks to be slashed as new proposals, part of the Dodd-Frank financial-overhaul bill , cap interchange at twelve cents a transaction become part of the new reality of 2011. By some estimates that could represent a reduction of about 84% from the current average rate of 44 cents.


The answer comes in a change of perspective and a wiliness to challenge standards that for many of us we never thought we would challenge. As a industry we have to look at premium value added services. This idea hit me as my wife and I were joining a gym. Editors Note: Yes, I like millions of others around the world have already joined a gym hoping that this year it will “really take” and that I won’t quit in two months.


As my wife and I were filling out the paperwork the size of the gym and the types of equipment really impressed me. How could they afford to offer this gym with no contract for only 1 dollar down and ten dollars a month? Now many of you probably already see the business model behind the gym membership special. By charging a low cost of entry fee and low monthly maintenance fee the number of people opting out of the gym is not tied to the number of people not using the gym’s services.  Most people will cancel a gym membership if the cost is too high and they do not feel they are getting the value they thought they would.


However, with a low cost model this gym is counting on people continuing to pay the membership dues even without going to the gym. The ten dollars a month membership fee goes from being “membership dues” to “membership I will take advantage of tomorrow.” Simply put at ten dollars a month the membership is worth it to say, “I belong to a gym that I might use next week if I feel like it.” Ten dollars buys me convenience and peace of mind that I am not giving up on my goals. So what happens is that the many are now paying the membership price of those who actually use the gym on a regular basis. This sounds shady when you say it like that. I am not prosposing charging members for services they don't value or need. Yet, that is exactly what most credit unions do when they do not pass cost for premium value added services that do not pay for themselves.


For credit unions to offer premium services "free of cost" to a small select group of users (for example those 5 to 10 thousand members who use your PFM) and to then to pass that cost onto the whole membership is in fact doing what the gym does. You are charging members for a service that they are not using. Think about it... in the past if most credit unions were to consider offering personal finance management for online banking or adding the new iphone app for the small percent of members using mobile then the whole membership would bear the price of those costs as the credit union added those service costs to its operating expense which places pressure on credit union margins in loan or deposit rates.


Perhaps it is time to rethink this model. Two years ago the concept of free checking was considered table stakes for most financial institutions. Today the reality has changed. An example of this shift in mindset is being seen as credit unions exit 2010 and enter 2011 with new product offerings that are no longer free.


Take the recent headline in Netbanker which comments on Unitus Community Credit Union, a credit union with around 70,000 members and over $800 million in assets, as it unveiled its new personal finance management tool, “Total Finance” in late 2010. After, a 30-day free trial, members pay $2 per month for the service.


In years past the pitch would have been to make this service free as it makes members more “sticky” to your financial institution. The reality is that this sales pitch has been the highlighted bullet on PowerPoint sales presentations from vendors for far too many years. Credit Unions have been investing in bill pay, WAP mobile banking, electronic statements, account aggregation, credit score monitoring, electronic billing, and Short Message Service (SMS) text banking all with the same pitch line, “This makes your members stickier.” 

This year we will see credit unions begin to identify value added premium products and services and then pass those costs along to those members who want to opt into those services. At economic cooperatives this model seems fair to me. Offer free mobile and SMS text banking but if people want the newest DROID application with built in personal finance management with remote check deposit then you have those members opt into that. You share the cost with those members who value the service without passing the expense to the rest of the credit union membership by lowering rates of deposits or raising rates on loans.

After all I would have never have though you could redefine my favorite old west character Roster Cogburn. Yet, there I sat in the movie theater eating my popcorn and not once did I remember that this movie was a remake. I got exactly what I paid to see a story about my favorite US Marshall and left satisfied. The difference was in how the makers of the movie had defined the character.


This same challenge is what credit unions have to face in 2011. How are you going to add premium services with less non- interest income with loan rates at historic lows? Many people will see this issue differently but make no mistake the line is crossed and now others will follow. It is not a question of when only a question of who and how do you keep up.


No matter what side of the isle you find yourself on you now have to answer the question on the table. If you don’t charge can you add that new app or service and what will happen if your members don’t see you keeping up with the services they want? If you do charge do you risk public outrage by bloggers and disgruntled members who see you as adding fees?  No easy answers on this. Regardless of where you fall on the issue you will have to have True Grit to stick to your position.