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The LendIng ISSUe november 2013 voLUme 8 ISSUe 11 9.95 The Basics of Managing Interest Rate Risk and the Concept of Duration A Mid-Sized Credit Union Spreads Its Wings how Congressional Federal migrated From Using a mortgage CUSo to offering Full-service Lending OFFERING LOANS BUT NOT INSURANCE It s like offering burgers without fries. If you re not offering insurance with every auto mortgage and business loan you close you re basically giving your borrowers money away to someone else. Think about it--you wouldn t go to one place to buy a burger and then another to buy fries so why make your borrowers do just that when purchasing a car or home IF YOU D LIKE TO START OFFERING INSURANCE BUT DON T HAVE THE RESOURCES TO SUPPORT AN IN-HOUSE AGENCY CALL SWBC INSURANCE PARTNERS AT 866-316-1162 OR SCAN THE QR CODE ConTenTS Credit Union BUsiNess november 2013 v o L U m e 8 I S S U e 11 4 6 8 pov A Time for Thanks Tim O Hara AChIevIng SkIllS Holly Herman CU opeRATIonS 24 28 32 CU MARkeTIng Mark Sullivan AT C level Grow by sending Your Members Away The Creators Mark A. Bringman TeChnICAllY SpeAkIng Present and Future A Mid-sized Credit Union spreads its Wings How Congressional Federal Migrated From Using a Mortgage CUsO to Offering Full-service Lending Jeff Klein What s in Your CU Wallet Roy W. Urrico Control of Member Loyalty Data and Perhaps interchange Fees 40 CU SpoTlITe 11 14 18 20 CFo CURRenCY The Basics of Managing interest Rate Risk and the Concept of Duration Emily Mor Hollis CU CReDIT CARDS expansion Team is Key to successful Acquisition Sharon Sweda Making the Move to Variable Rate APRs Why and How to Get started NOW Christopher D. Joy CU lenDIng Get it for the entire executive team register Why Aren t You Already in the Leasing Game Robert O Hara lenDIng lIne Building The Plan for New and existing Members Jack Kelly November 2013 Credit Union bUSIneSS 1 AboUT US Publishing Team Tim O Hara Publisher tim Steve Magnuson Managing editor steve Iliana Nord Operations Manager iliana Patti Manzone Designer Ashok Kumar Circulation Director THE LENDING ISSUE NOVEMBER 2013 VOLUME 8 ISSUE 11 9.95 The Basics of Managing Interest Rate Risk and the Concept of Duration A Mid-Sized Credit Union Spreads Its Wings Staff Writers Holly Herman Achieving Skills Emily Mor Hollis CFO Currency Sharon Sweda CU Spotlight Roy W. Urricho Technically Speaking How Congressional Federal Migrated From Using a Mortgage CUSO to Offering Full-service Lending CUB_NOV.indd 1 11 10 13 12 22 PM Subscriptions Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine inc. A one-year membership costs 89 for print or 69 for Digital. An online membership form is available at register. Contributors Christopher D. Joy Jack Kelly Jeff Klein Robert O Hara Mark Sullivan Sales and Advertising Bernie Fitzgerald Advertising executive Bernie or 561-282-6015 1 Greg Halpern Advertising services Manager Greg or 561-282-6015 4 Contact Information Credit Union BUsiNess Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim 2 Credit Union bUSIneSS November 2013 COMPLIANT ARE YOUR E XECUTIVE BENEFITS We Work to Ensure Compliance with State and Federal Regulations. BFB specializes in executive benefits for Credit Unions. Our knowledge of ever-changing regulations will allow you to rest easy knowing your plans have been designed to be compliant and defensible... and our ongoing support will ensure they stay that way. Contact us today to find out how your organization can BENEFIT FOCUS FRO M OUR 888-494-8911 tquigley FROM tiM Publisher s POV A Time for Thanks it s almost Thanksgiving and a good time for me to tell you what i m most thankful for as we speed into the Holidays i am thankful that Credit Union BUSINESS is alive well and growing every day My first job out of college was with a building materials firm that manufactured concrete block and steel. it was the booming 70 s in south Florida and you couldn t make enough of the stuff. Marshall e. Doc Rinker--the founder of the 40-yearold company--had come to Florida from Georgia as a young man. He started with one old pickup truck and grew his company into one of the giants in the building trades industry. it was my first serious job and i was naively surprised to learn that Doc Rinker worked every day of the year. Whether it was Christmas easter or the Fourth of July he and Mrs. Rinker could be seen driving in their car as they inspected one or another of their many manufacturing plants. While i thought that was fairly bizarre at the time i now realize that it just might explain why Doc had a scale model of a private jet on his desk and a real one at the airport Now nine years into building Credit Union BUSINESS i look forward to coming to the office everyday even on weekends and holidays. i am thankful to have the interest drive stamina and opportunity to do so. i am also thankful that the brain doesn t necessarily turn itself off at night. i ve had several brilliant ideas shake me from my slumber at two three and four o clock a.m. and the good fortune to be able to remember them clearly in the morning. Of course i ve had my share of real stinkers as well But i am most thankful for the people with whom i ve managed to surround myself beginning with my wife Tierney. i don t make a move without consulting her first. Over the years i ve learned to remember that she is correct 100 percent of the time i m grateful for everyone connected with this magazine both in print and increasingly in digital formats. Marc Bringman was the editor-in-chief of CUB from 2006 to 2010. Marc had a sense for corporate working environments and he produced my all time favorite column-- At C-Level --that posed a workplace problem and wrote up a solution. 4 Credit Union bUSIneSS i was hugely fond of Marc and was crushed when he lost his war with cancer in 2011. i m thankful for knowing him and for all that he taught me. We are reprising one of my favorite At C-Level columns The Creators on page 28 and i hope you enjoy it. But i m very thankful for where CUB is right now. We have a terrific team putting together Credit Union BUSINESS in all of its many parts from printed magazine to electronic versions that are read on smart phones tablets computers and e-readers. steve Magnuson joined us late last year as our new editorial director. steve has an exemplary background in book publishing having spent the greatest part of his career publishing some important business books with such well known authors as Peter Drucker Deepak Chopra and a CU favorite suze Orman. steve toiled in Manhattan prior to moving the sunshine state where he s shining a bright light on Credit Union BUSINESS. i m tremendously thankful to have steve to lean on and learn from as we propel CUB forward. i am often complemented on the editorial improvement with CUB and i have only steve Magnuson to thank for those enhancements. Patti Manzone has been the designer of CUB for many years. Another graduate of big city book publishing Patti started out in the art department of simon and shuster and has grown into one of the best graphic designers in the country. i recently told you about our operations manager iliana Nord. i m grateful to be working with iliana and delighted to congratulate she and her husband Bryan on welcoming their new son Jaxon into the world last week. Jaxon joins their beautiful three-year-old daughter Arryana. The newest member of our fast growing CUB family is Ashok Kumar our research and circulation director. Ashok joins us from india where he majored in mathematics. He is a brilliant guy and is growing our CU executive circulation and shaping our social media offerings. While i m very thankful to have such a wonderful team working diligently to produce a continually improving Credit Union BUSINESS magazine i most appreciate you the fine CU professionals who take the time to read what we offer. so once again thank you for reading November 2013 AChIevIng SkILLS Present and Future H By Holly Herman training different experiences a change of attitude or a new project Taking even small steps can significantly help further your goals. Perform small actions each day and stay focused on the long term. ave you ever thought you should be farther along in your career than you are Most of us have. Take a lesson from this page of Zen philosophy whenever you have these thoughts stop agonizing about how this isn t the way it should be accept that this is the way it is and put all of your energy into making it what you want it to be. These simple words aren t always easy to put into practice but once you do your life will run more smoothly and your stress will decrease dramatically. Work on some of these tips to try shifting some of your thinking. Tip 1 Know what you want. You can t change the past-- it is what it is. But you do have the power to shape your future. Find some quiet time to think about what you want. Then perform this simple exercise. Take a piece of paper and make two columns. Head column one What i Don t Want and column two What i do Want . Write down all the things you don t want under column one and include everything you can think of regardless of how insignificant you think it might be. Once you ve finished the first column go back to the top of the page. Under column two list what you do want by working from your entry in the first column. in other words if you don t want x then you do want y. This exercise will help you get rid of your negative ambitions and clarify your priorities. Tip 2 Take action. Look over your entire list and pick one or two items to tackle first thinking about what actions you need to take in order to get what you want. Do you need more Tip 3 enlist support. People love helping others being asked is a compliment to them. Find a mentor to work with. Look for people who have achieved what you want and ask them how they did it. Think about whether or not they would make willing and appropriate mentors. successful people use all the resources they can find to get what they want and that includes other people. You don t need to go it alone. Tip 4 Learn Patience. There will always be bumps and detours along the road to achievement and you must learn to recognize that they are temporary obstacles not roadblocks. Don t give up on your dreams just because the course of life doesn t always run clear and smooth. Take the detour the new path may be necessary to getting what you want. 6 Credit Union bUSIneSS November 2013 CroSSWord Tip 6 Accept change. There is never just one right way to achieve your goals. experiment and see what feels right to you. ignore what anyone else might think about your ambitions unless they re one of your mentors their opinions don t matter. Judge yourself by your own standards. As long as you remain ethical you won t go wrong. Whatever we do today determines tomorrow and blaming the past doesn t help. Look toward the future with renewed energy and focus. You ll soon feel the excitement that comes with reaching your goals. You may even find that you exceed them. Tip 5 embrace Growth. We all experience discomfort whenever we travel toward growth down new unknown paths. This is completely natural. Fight the urge to return to the comfort zone of old ways. Taking risks is an essential aspect of growth and stretching ourselves. Do you remember how you felt the first time you drove a car Were you nervous Hasn t it become second nature and routine isn t that the way of all growth Holly Herman is a former CEO of two credit unions Chief of Staff for National Credit Union Administration Chairman Johnson and currently an Achievement Coach helping individuals and organizations. She can be found at www. or contact her at Holly AchievingSkills. com. Pam Swope says reading Credit Business especially like format. isi enjoyeasy to navigate Unioni find greatMagazine and leading industrythe digitalthat are it very and resources for trends beneficial to me in credit union marketing and development. They have great appeal to the next generation of credit union leaders. Director of Marketing and Compliance at Financial Edge Community Credit Union Join Pam in the CUB Winner s Circle... ...and win an Apple iPad Mini Tablet and a Year s Subscription to CUB Read it and Reap Contest 1. Read this magazine. 2. Submit October crossword puzzle answers at 3. Contest runs each month until Dec 14 2014. Winners announced on the last day of each month. November 2013 Credit Union bUSIneSS 7 CU oPerATIonS A Mid-Sized Credit Union Spreads Its Wings how Congressional Federal migrated From Using a mortgage CUSo to offering Full-service Lending ll credit unions share the goal of offering a robust set of financial products and services to meet their member needs. With that goal come important decisions such as whether or not to outsource a product line or create an in-house operation. These decisions are often polarizing as there are compelling arguments to be made on both sides. Taking the outsourced route allows you to offer a full suite of products at a low cost but you will have less control over the member experience. Bringing the operation in-house allows you to keep control of the member experience but comes with significantly increased costs (many of them fixed) as well as additional operational and compliance risks. One thing that is certain however is that there is no right or wrong decision. every credit union must take its strategic goals risk tolerance capital investment budget and member demographics into account in order to make an educated decision that weighs both benefits and costs. Congressional Federal Credit Union faced this exact conundrum over the past year as we pondered ways to improve our mortgage lending business. After a great deal of deliberation and analysis we opted to launch our own in-house mortgage lending operation. A By Jeff Klein Reevaluating the CUsO Model Congressional Federal is a mid-sized credit union serving the U.s. House of Representatives the U.s. Capitol Police Architect of the Capitol and other select employee groups in Washington D.C. Founded in 1953 by eight Capitol Hill staffers with 40 in 8 Credit Union bUSIneSS deposits the credit union has grown to over 767 million in assets. Currently CFCU has five branches and over 40 000 members and still retains its original focus of primarily serving House employees. in fact 80 percent of our members either work or have worked on Capitol Hill. serving the needs of busy members of Congress and their staff has been an important constant making value service and flexibility CFCU s key drivers. Congressional Federal began offering more products and services during the rapid-growth decades of the 70s and 80s including first-trust mortgage loans in 1983. But like most small institutions CFCU didn t have the volume to justify creating an in-house mortgage department. instead we partnered with a CUsO to offer low-cost lending options for our members. That model worked well for many years and allowed us to offer a turnkey product with little downside risk. However as volume increased we were unable to provide the customized solutions we felt our members wanted and deserved. so a little over a year ago CFCU began investigating what it would take to create our own mortgage department. We were ready to spread our wings and felt that bringing mortgages November 2013 CU oPerATIonS The CFCU Lending Team in-house was the logical next step in our evolution as a full-service member-driven financial institution. But was the timing right After all the writing was on the wall the days of fat margins super-low rates and seemingly unlimited refinance demand were numbered. On the other hand many factors were working in our favor. sustainable Mortgage Demand Because Congressional Federal serves the Capitol Hill community we ve long known that our member base was extremely transient. The steady influx of Hill staffers along with constant election-cycle churn ensures a sustainable base of purchase-mortgage demand that we felt would help minimize the impact of rate cyclicality. Home values in the D.C. metro area held up relatively well throughout the recession. Like most credit unions CFCU has an extremely loyal membership base that has repeatedly shown a willingness and enthusiasm to use our products and services. And we have a forward-thinking management team and board of directors who appreciate the importance of controlling the member experience and are willing to accept the increased costs and risks that entails. CFCU also understood that there were many advantages to sticking with our CUsO. simply put originating mortgages is difficult. Managing the expectations of extremely stressed borrowers going through the most important financial transaction of their lives while juggling numerous third parties (real estate agents appraisers title companies etc.) is to put it mildly a challenge. Plus using a third party to handle the heavy lifting is certainly cost-friendly. Add in a regulatory environment that continues to get more and more complex and you wouldn t blame any credit union for choosing to take the outsource route. Nevertheless CFCU felt that the juice was worth the squeeze. We simply could not continue pitching tailored white-glove service to our members without controlling all phases of the transaction including price technology and communication protocols. Building the shop Once we made the in-house choice CFCU banded together as an organization and tackled the six-month job of building a new business. The project was a cross-departmental effort encompassing Human Resources (hiring the team) iT (procuring systems) compliance (building policies and November 2013 Credit Union bUSIneSS 9 CU oPerATIonS We made a conscious decision to bring our mortgage operation in-house while keeping our eyes wide open. We anticipated as many challenges as possible and planned contingencies as part of our early analysis. While we have experienced the usual bumps and growing pains inherent in any startup we have seen enough positive results to validate our decision. For example we were able to fund a member s loan in three weeks because it was absolutely necessary in order for his purchase offer to be accepted in a hot real estate market. We sat with another member for three hours walking him through countless loan scenarios because he needed a little extra handholding (okay a lot of extra hand-holding ). We ve begun mining the incredible amount of data on mortgage applications to produce valuable cross-sell opportunities for our other business units. Are we where we want to be Certainly not in fact we feel we are just getting started. Launching the business was the easy part The challenge of adjusting on the fly as you learn your lessons and gain experience is the real test. We have a laundry list of enhancements and process improvements lined up for Q4 and into 2014. Our biggest lesson has been realizing that you can t tackle everything at once. But we still feel confident in the choice we made and in the direction we are heading. Amid all the regulatory and macroeconomic uncertainty the one thing i am certain of is that our members will continue to need mortgages and Congressional Federal will be there to provide them. Jeff Klein is director of mortgage lending for Congressional Federal Credit Union. Before joining Congressional Federal he spent 10 years at E TRADE Financial in the retail wholesale and correspondent mortgage lending divisions. Prior to that he advised numerous public and private sector clients as a senior consultant in KPMG Consulting s mortgage banking practice. Jeff can be reached at jklein We anticipated as many challenges as possible and planned contingencies as part of our early analysis. procedures) and legal (negotiating vendor contracts) to name just a few. One of our biggest challenges was figuring out how to accommodate the fact that the mortgage business is extremely cyclical and prone to large volume swings. While some of these swings are predictable (seasonality) most are not. As everyone in the mortgage industry has seen repeatedly over the past few years the slightest change in interest rates often sends application volume soaring with no advance warning. such fluctuations can spell trouble for mid-sized credit unions that don t have the bench-depth of large banks. Congressional Federal s solution was to supplement our core team with key overflow vendors. We developed relationships with several temporary outside vendors with no volume commitments or upfront costs. This allowed us to handle sudden influxes in volume without having to hire and fire unnecessarily. We also felt it was important for us to be able to quantitatively measure results in all areas. This meant having easy access to every piece of data collected by our Loan Origination system (LOs) for analysis and reporting which would allow us to measure and analyze everything from turn-times to member satisfaction scores. This key data is rarely available when the business is outsourced and was one of the non-negotiable requirements we imposed on our iT team. CFCU accepted its first mortgage application on April 15 2013 and didn t have the luxury of a slow ramp-up. After just two weeks rates rose suddenly and lock volume soared. But we worked through that initial surge and have continued to improve ever since. Looking Back six months after our launch interest rates have increased significantly and the government has finalized a few more regulations that will go into effect in January. Do we still think we made the right decision The answer is a resounding Yes 10 Credit Union bUSIneSS November 2013 CFo CUrrenCy Managing Interest Rate Risk and the Concept of duration By Emily Mor Hollis The basics of T here is nothing wrong with managing a high amount of interest rate risk. in fact there is nothing wrong with leveraging your capital actively managing an investment portfolio or issuing 30-year loans to members. Hedges built into leverage strategies can manage interest rate risk and starting next year it can be managed by outright derivative purchases. Today a credit union can do all this by regulation but it takes work and focus to assess how much is enough. You can t make that assessment without understanding the basic underpinnings of interest rate risk which is duration1. A common misconception is that any term that references duration refers to a period of time. That is simply not correct. Macaulay duration is the only duration that can accurately be quoted by length of time. effective and modified durations estimate bond price changes and the correct way to reference them are not by years but by percent. They measure the ratio (percent) of the proportional change in bond value (price) to the parallel shift of the spot yield curve. investment professionals use duration to quickly assess price volatility. (To calculate the real price volatility the concept of convexity would have to be discussed .) The difference between effective and modified duration is that modified duration can only be used for fixed-rate bullet securities. The derivative of bond-price volatility relative to yield changes that result in the modified duration formula is embedded with the assumption that the cash flows of the bond do not change as rates change. This means the modified duration 1 formula is inappropriate for any bond in which the cash flows change as interest rates change. That includes callables stepups floaters or any mortgage-backed security. For example consider a callable bond with a four-year maturity in the upward rate scenarios and one-year maturity in the downward rate scenarios. in these scenarios the durations will be different depending on interest rates. Modified duration would be approximately 3.75 percent in all scenarios. However the effective duration would take the call option into consideration and could be 1 percent 2 percent or 3.75 percent depending on the security s coupon and market rates. To more accurately calculate price changes on these more complex non-bullet securities the fixed-income markets developed the concepts of effective duration and option adjusted spread (OAs). Duration is the first derivative (slope) of the price yield function. It is fairly accurate for small changes in market interest rates (typically - 50 bps). Convexity is the second derivative of the price of a bond with respect to interest rates and is used with duration for accurate depiction of price sensitivity. November 2013 Credit Union bUSIneSS 11 CFo CUrrenCy You must then move the starting yields up and down To calculate effective duration it is first necessary to calculate the OAs. To do this you begin by projecting a series (keeping the security coupons constant) to produce a new of interest rate paths into the future and evaluate the bond along tree. The entire analysis is performed again holding the OAs these paths. These interest rate paths can become extremely constant and new prices are calculated. Once the OAs has been established you then can estimate effective duration by backing into the price change formula. Now that we have discussed modified and effective duration let s briefly tackle other duration measurements. There are many different types of duration and more types are being developed every year. Although duration has historically been based on explaining price volatility as a series of cash complex depending on how many are used what change flows more types of durations are being developed to represent (volatility) of interest rates is used and how the paths are sensitivities that have nothing to do with interest rate changes. developed. The most simplistic method is one that represents a Below is a list explaining the various types of duration. it is not tree in which rates diverge up and down consistently from each comprehensive but represents the durations that we mainly use at ALM First when performing investment and balance sheet knot on the tree branch. As an oversimplified example let s assume we start in analytics. period one at 1.50 percent and that rates move up and down by a determined amount of 50 basis points (bps) from one Macaulay Duration knot on each branch to the next. You then have two branches in This is the only duration that can accurately be quoted as length period two. Rates will then move up and down from these two of time. Discovered in 1938 by Frederic Macaulay this duration branches to produce four more branches and so on as shown is calculated as the present-value-weighted time to receipt of below. each forward branch uses projected forward rates. in cash flows which is why it is quoted in years. each cash flow time is multiplied by the present value of the associated cash flows and then the sum of all of these terms is divided by the sum of the present values. Modified Duration this example it is assumed that the yield curve is flat. The OAs is determined by forcing a spread over the discount rates (assumed to be Treasuries). This is done until the average present value of all these paths equal the current price of the bond. if this average spread is 20 bps then the 20 bps OAs indicates the bond is trading option free and 20 bps over a riskless security. in other words if the security is yielding 2.50 percent and the relative Treasury is yielding 2.00 percent the OAs determines that the cost of the embedded option is 30 bps. Therefore the security at 2.50 percent offers a yield 20 Portfolio Duration bps over the like Treasury after consideration of option costs. This is defined by price sensitivity of an entire portfolio as an Theoretically the security has value aggregated unit versus the weighted average price sensitivity of each individual security. 12 Credit Union bUSIneSS November 2013 in 1966 Larry Fisher presented a proof of the relationship between duration and bond-price changes. Known as modified duration because it modifies Macaulay duration it is a measurement of the change in value of an instrument in response to a change in volatility can be expressed as follows Percentage price change - Modified duration x Yield change x 100 For example if a bond has a duration of four years and market yields fall by 10 bps then the price of the bond can be expected to increase by 0.40 percent -4.0 x -0.0010 x 100 CFo CUrrenCy Partial Duration (Key Rate Durations) This is a measurement of the price sensitivity of a bond (or a portfolio of bonds) to changes in specific parts of the yield curve. To calculate this type of duration the investor will shift a key rate such as the three-year rate by a predetermined amount (e.g. 25 bps). The price change is then figured based on its relation to this key rate. fully understand risk versus reward. Although these tools are mainly used for managing investments they are also used in ALM analyses as well. And they are critical if derivatives are introduced. effective duration is the most common duration used at ALM First. it helps in managing investments and determining risk in balance sheet market values. For credit unions the end result of managing duration well is greater income within your risk profile. Emily Mor Hollis CFA is a partner with ALM First Financial Advisors LLC. spread Duration As a measure of the percentage price change to a change in the spread (OAs) of a bond this is a very important duration measurement for floaters. As an example the effective duration of a capless 20-year one-month LiBOR floater is close to 0.08 percent. However suppose the floater is currently priced at par with a coupon of LiBOR plus 50 bps. Also suppose that due to some adverse reason the market dictates LiBOR plus 100 bps on the floater. The price change will be close to a 20-year fixed-rate security given a market rate that has increased by 50 bps moving from par to approximately 93.0. The effective duration is 0.08 percent but the spread duration is closer to 14 percent. That is quite a difference. empirical Duration empirical duration was developed to deal with how the security has been trading instead of estimating how it will trade. in other words it uses historical measurements that calculate actual price changes and changes in the level of the market to measure how the security is actually performing. Constant Dollar Duration Constant dollar duration measures duration for securities in particular price ranges. it is mainly used in mortgage-backed securities. Price changes of these securities vary greatly if the security is at a premium versus a discount. Is this a lot to consider Yes but duration tools are important for any financial institution to quickly determine potential price changes and to November 2013 Credit Union bUSIneSS 13 CU CredIT CArdS Making the Move to variable Rate ApRs Why and how to get Started noW C By Christopher D. Joy At some future date interest rates will rise because there is nowhere for them to go but up. Regardless of the precise route we take to higher interest rates the stakes are higher now because one thing is certain When interest rates do rise the provisions of the CARD Act-- in place since 2009--will quickly become more onerous for credit unions. The CARD Act dramatically restricts credit union portfolio re-pricing options in ways that are easily dismissed when rates are low. in fact Advisors Plus believes that only by moving beyond the question of if interest rates rise to focus on the more pertinent issues of when and how much they will rise can credit unions begin to prepare for how higher funding costs will impact their card portfolios. redit card portfolio managers routinely ask our Advisors Plus Credit Consulting team whether to price their credit card APRs on a variable or a non-variable basis. This question always sparks excellent in-depth discussions on the vital importance of finding the right match between a credit union s portfolio funding and its pricing approaches. Recently the need to strike the right balance has taken on even greater urgency. Driven by a rise in various interest rates a growing possibility exists that increases in market funding costs could threaten the earnings and capital generated by credit card portfolios that rely on non-variable APRs. Advisors Plus believes that many credit card portfolios are still vulnerable and recommends that credit unions immediately begin to mitigate their risk and protect their profitability by marketing all new credit cards with variable APRs and consider taking steps to migrate existing portfolios toward variable APR pricing as well. We will explain in greater detail below why variable rate APR pricing will help protect your credit union s pricing flexibility and profit potential as well as outline two potential action plans for re-pricing an existing portfolio. A CARD Act to Follow How Did We Get Here One of the CARD Act s many provisions is a major change in issuer re-pricing flexibility issuers no longer have the ability to change the APR on existing balances except in a limited number of situations. This provision has eliminated the de facto insurance policy of being able to change terms at any time for any reason which is especially troublesome for issuers who utilize non-variable APRs. As a result of the CARD Act utilizing a non-variable APR becomes a dicey proposition because issuers have to gamble that the non-variable APR they adopt will provide enough margin to cover a range of potential funding costs and still remain profitable. The process of estimating a range of potential funding costs means that issuers are betting that they can predict the upper end of the cost range and still maintain a profitable Ask When Not if We are now five years into what has essentially been a record low interest rate environment. The Fed Funds Rate and Prime Rate have been stalled at 0-0.25% and 3.25% respectively since the end of 2008. so regardless of whether the Fed begins to taper bond buying the U.s. experiences a currency crisis asset bubbles exist in multiple markets or even if inflation rears its head this time around the eventual outcome remains the same 14 Credit Union bUSIneSS November 2013 CU CredIT CArdS price point while remaining competitive. Any move they make to recover from a rapid rise in market rates by stopping card plan issuance or re-pricing new transactions will be painfully slow. non-variable cards can bring about or accelerate. As credit cards get shorter shrift in capital weighting formulas or even as capital requirements simply increase variable APR cards are less vulnerable to decreased earnings. 7. Due to CARD Act regulation issuers can no longer count on the de facto insurance policy that allowed them to re-price at any time for any reason. Building the Case for Variable APRs With regulatory limitations in place and funding costs likely to increase over the next few years Advisors Plus believes that variable APR credit cards offer the best balance of protection to your credit union and fairness to your members. Your credit card products provide a unique win-win scenario in the sense that they are simultaneously key contributors to your credit union s capital base and a very important way to return value to your membership. Time and again Advisors Plus has seen instances where credit card loans represent five to ten percent of a credit union s assets while contributing 15-30 percent of the credit union s earnings. Managing such a vital profit and member satisfaction engine highlights just how important it is that you make the right decision on credit card pricing. Two suggested Action Plans for Changing to Variable APRs so far most of this discussion has been focused on comparing the theoretical virtues of variable versus non-variable APRs but now it s time to focus on the logistics of rolling out an actual variable APR program to your members. New Card Programs The process is easy for new programs since there are no legacy price points or member issues to deal with and neither account mapping nor change-in-terms comes into play. The emphasis rests entirely on matching the right product set with the right price points and margins. in clear-cut cases like these variable APRs can be employed from the beginning of a new program and your credit union can be assured that it is building and growing a portfolio free from inherent interest rate risk. Mixed-rate Portfolio Phase-ins What do you do about a currently successful card portfolio with non-variable APRs in its mix when management has growingconcerns about future rate rises and or margin compression if your credit union is facing this scenario Advisors Plus recommends that your credit union immediately switch to variable rate pricing on credit cards for new card accounts. This will stop the build-up of balances at non-variable rates and start your portfolio on the path to reduced risk. The Top 7 Reasons to Use Variable APRs Here are seven reasons why Advisors Plus believes that variable APRs are a credit union s best choice 1. Members understand variable APRs and how they work. 2. Variable APRs allow issuers to offer members the lowest possible rates because issuers do not need to cover a wide range of funding cost possibilities. 3. if the index portion of a variable APR changes--in either direction--no additional disclosure is required to change the APR on an account (assuming proper upfront disclosures were made). 4. Using variable APRs avoids the trap of lending long and funding short i.e. mismatching asset and liability pricing and duration. 5. The NCUA is extremely concerned about interest rate risk in its exams and is looking at all areas that can be negatively impacted. The NCUA is even exploring a proposal to allow the execution of simple interest rate swaps using derivatives. 6. Variable APRs avoid the increased capital requirements that thinning interest margins from 16 Credit Union bUSIneSS November 2013 CU CredIT CArdS Knowing that your credit union is not growing its risk pool you now face deciding what to do with existing non-variable APR accounts. You can use 1. An attrition approach which leaves existing accounts at their current non-variable APRs and allows them to phase out over time OR 2. A re-pricing approach which re-prices new transactions on an existing account using variable APRs. This may involve change-in-terms adverse action risk-based pricing notices and or a six-month review requirement depending on the nature of the actions taken. Let s look at the pros and cons of each approach The Attrition Approach This approach is the slower of the two transitional approaches but spares the credit union from potential cardholder confusion and complaints. interest rate risk will still be present in the existing portfolio and will transition only as fast as old accounts phase out and new accounts grow. Depending on the strength of the portfolio and the anticipated magnitude of any funding cost increases credit unions should consider this approach only if they value reducing negative cardholder feedback over risk mitigation. While this approach does minimize member complaints it will have additional costs associated with the need to maintain multiple disclosures and service multiple rate type accounts. The Re-pricing Approach if interest rate risk is a credit union s primary concern or if management feels that funding costs are going to rise sharply it can opt to re-price new transactions for existing accounts in addition to taking action on all new accounts. The change to cardholders is negligible if the new variable APR is lower than their current non-variable APR. issuers can afford to do this since they will no longer have to cover the wide range of funding cost contingencies associated with a non-variable price point. They should also be willing to accept less margin income in exchange for more certainty. While this scenario potentially risks short-term cardholder irritation displeased cardholders will be unlikely to jump ship since low-rate non-variable card product replacement options have all but vanished from the marketplace. in the final analysis while substituting variable APRs for nonvariable APRs should not be undertaken lightly it should not be viewed as a never-to-be-crossed member services line either. Protect Your Profitability Using Variable APRs such member services dilemmas underscore how important it is for credit unions to offer the right product at the right price to their members now that the CARD Act has made it more difficult and expensive to switch gears. With the specter of increasing interest rates on the horizon-- whatever the eventual timing--Advisors Plus believes that credit unions need to begin the vital work of transitioning their portfolios to variable APRs sooner rather than later or run the risk of sacrificing some portion of the 15-30 percent earnings contribution Visit us at to read our entire POV white paper on variable rate APRs Transitioning Your Credit Card Portfolio to Variable Rate APRs A Look at How... and Why Now and learn more about Advisors Plus Credit Card Consulting services including our innovative instant insight Credit Diagnostics . Christopher D. Joy is Director of Credit Consulting for Advisors Plus. With over 25 years of experience helping credit unions to grow manage and optimize their credit card portfolios Chris has earned an industry-wide reputation for creating balanced and effective solutions for clients in the areas of portfolio growth profitability enhancement member reward programs and insightful counsel on the competitive and regulatory environments. Before joining Advisors Plus Chris served as VP and Manager of Portfolio Profitability for National City Bank (now part of PNC Bank) and as a financial analyst with Bank One (now part of Chase). Chris holds a B.A. in Business Administration from Ohio University. November 2013 Credit Union bUSIneSS 17 CU LendIng Why Aren t you Already in the leasing game uto leasing is all the rage in these changing economic times. industry statistics confirm that auto leasing has grown 22.5 per cent in each consecutive month of this year with no end in sight. Yet even with these compelling numbers many credit unions are not currently in the auto-leasing business. They are missing out on highly lucrative revenue generating opportunities and might be losing members to other credit unions who are actively in the auto leasing market. if this is you don t wait any longer Now is the time to ask yourself why you re not in the market too. Think about it. The leasing focus has shifted from luxury cars to mid-sized and family autos which means that leasing has become very attractive to an expanding consumer demographic. This shift in lessee demographics presents credit unions with a new consumer member stream that has the highest FiCO (Fair isaac & Company) credit quality scores with a broader range of lifestyle backgrounds. Bethpage decided to begin buying prime credit new auto leasing paper through the indirect auto channel as a means to increase auto loan balances explained Michele Dean senior Vice President of Lending at Bethpage Federal Credit Union in Bethpage NY. By introducing a leasing product we have diversified our auto portfolio maintained high credit quality and achieved the desired growth in our auto loan portfolio balances. since few consumer finance companies offer lease options credit unions have a rare opportunity to capture-- yes capture--this virtually untapped market by pre-empting auto dealers from sending potential deals to multiple finance companies and keeping credit unions out of the picture. it is a well-documented fact that dealers will send lease applications to lenders that offer the lowest payment options for A By Robert O Hara specific vehicle makes and models. Lease applications are not shot gunned to several different financial institutions as is the case in traditional auto financing for one very simple reason leasing is strictly about which option offers the lowest payment. Auto leasing allows credit unions to compete as top tier players by offering a full suite of auto loan products to its members. in strong lease markets many dealers will lease between 50 and 70 per cent of their new vehicles sales each month. Credit unions that do not offer auto lease products to their members are missing out on a large piece of the new vehicle market and can only compete in the highly competitive market of securing vehicle purchase money. Moreover in stark contrast to conventional loan products auto leasing allows both credit unions and dealers to develop and sustain working relationships. More often than not the dealer in this scenario will actively seek out a credit union partner. some Auto Leasing History Once primarily a tool for selling luxury vehicles leasing is now commonplace among best-selling family sedans such as the Ford Fusion and Honda Accord. supported by high usedcar prices low interest rates and Americans tendency to buy vehicles based on monthly payments U.s. auto leasing is at its highest level in more than a decade and pacing the industry s best year since 2007. in fact GrooveCar s data indicates the year-over-year increases for May June and July 2013 are up on average by 218%. Leasing s strength extends beyond the race for the topselling U.s. cars however. industry wide gains in product quality and strong used-car prices have allowed automakers to project higher values for their vehicles after a lease expires. This trend combined with record-low interest rates allows the companies to offer cheaper monthly payments. 18 Credit Union bUSIneSS November 2013 CU LendIng Buyers recognize improved automobile quality too and have begun leasing in more market segments including midsized cars according to Bill Fay Group Vice President and General Manager at Toyota Motor sales UsA. The prices paid for Toyota s vehicles at the end of their lease--known as resale or residual values--tend to rank among the highest in the industry. Fay says We re going to leverage the good position we have from resale values and use that as an advantage. it allows us to offer very competitive monthly payments. spreads which makes the program more profitable than conventional automobile lending. Can your credit union afford to wait any longer Robert O Hara is Vice President Strategic Alliances at GrooveCar Inc. ( a Long Islandbased loan aggregator that serves credit unions nationwide. He can be reached at rohara Why the Market shift to Leasing Generally consumers gravitate to leases--essentially long-term car rentals--because they offer lower monthly payments. This is especially true for consumers who prefer driving a new car and don t mind having monthly car payments. Leasing also allows drivers to get their new car with no money down an extremely attractive option not lost on younger consumers. Chuck Price Assistant Vice President Lending at Nassau educators Federal Credit Union in Westbury NY says that the expansion of their auto leasing program has helped offset the slower than forecast growth in their conventional auto finance program and has augmented the expansion of their overall loan portfolio. Our lease portfolio consists of primarily A-quality paper and the performance has been outstanding. When you combine this with the product s payment driven financing approach the resulting yields exceed traditional auto loan CEO SUBSCRIPTION WITh BENEfITS Benefit your CFO COO CMO CCO CLO CIO HRD With fREE Monthly E-Newsletters Subscribe NOW register November 2013 Credit Union bUSIneSS 19 LendIng LIne Building The plan for new and existing Members H By Jack Kelly Jr. ow do you construct a plan that is tailor-made for all of your members whether new or existing You might begin by asking yourself a few very simple questions Do you provide your members with a financial life plan When you say no to a new or long time member are you putting the relationship on hold or worse are you jeopardizing the relationship altogether When you say yes to a member are you doing the appropriate follow-up to grow and nurture the relationship How you answer these questions will tell you a lot about how much business you re leaving on the table and how many members you may never hear from again. While these may be tough questions you need to ask them once you come to grips with the answers you can move forward to build The Plan for your members. The best time to build new lifetime relationships is whenever a new member joins your credit union. After all they were motivated enough to drop what they were doing and come see you for whatever reasons--reasons you need to know--and were ready to make a change the moment they walked through your door. sadly too few credit unions are taking advantage of this great opportunity. Why Welcoming New Members Perhaps your employees are process driven and neither trained nor motivated to look for opportunities. instead they are trained to follow procedures and their first new member encounter might begin by checking off the following list of priorities Are they in your field of membership Do they have two forms of iD Will they pay the 25 fee with cash or by check What is their current and previous address What is their credit score etc. etc. etc. instead of focusing on procedures your credit union staff should be trained in the following Recognize that every new member represents an opportunity Find out why the member came to your CU Care enough to show how to help save the new member money Begin developing a relationship Conduct a world class interview Look for the positives even when they re not readily apparent Use credit scores or ratios as tools to help get you to a decision rather than use them only to say no if today is not the day you say yes then make sure you have a No but solution. For example Today the numbers just don t add up but i have come up with a plan that i think will get us to say yes in a very short period of time. every new member brings opportunities that you must learn to capitalize upon. Too often the onus is put on new members to earn our trust before we are willing to take the risk by 20 Credit Union bUSIneSS November 2013 LendIng LIne providing them with financial products and services. What other retail business requires that customers must earn the right to do business with them The opposite is usually true good retailers make an effort to get to know their customers find them products that fit their needs and do everything they can to earn their customers repeat business. Too many times and in too many Credit Unions i hear something like this said to new members Thank you for joining the credit union today. i was able to get you approved for the 500.00 share secured credit card but i cannot get the car loan approved until you ve established yourself with us. That means that members must prove themselves to the credit union before it even considers taking a risk on them. Doesn t that sound backwards is that how you would like to be treated You should be working hard to cement new member relationships from their very first visit. You don t want their financial needs met elsewhere. Have they seen any of your marketing initiatives Have they come to you as a last resort Note Your Marketing Department should be sitting with your employees during these interviews to see what has drawn new members to your credit union. This will help them develop marketing plans that best cater to your credit union s strengths. New members can become big assets in getting the word out that your CU is different and a terrific place to borrow and save. 2. Where have they been banking How has their current financial institution fallen short in meeting their expectations How can you meet and exceed those expectations Nurturing The New Member Relationship How do you provide new members with enough services to keep them loyal while walking the fine line between offering no services and giving them too many too fast This excellent question often comes up in my training seminars and i have seen many credit unions struggle to figure out what the right balance ought to be. every new member represents opportunity but because they are new knowing what financial products to offer and how fast you introduce them begins as a mystery. in order to solve the mystery you and your employees must learn to nurture each new member relationship. Here is a basic outline for information gathering along with some simple questions to ask when determining which products and services might best suit member interest 1. What was their motivation for joining the credit union Why did they decide to open an account Why did they decide to join a credit union (Motivating factor) Do they like your savings rates What about your no fee checking Do they know about your Loan programs and your competitive rates Did anyone refer them to you 3. What does their credit history tell you is the new member s credit score headed up or down Have they experienced some adversity that has affected their credit Do they understand how credit works should you offer them a plan to help them repair their credit By asking questions and digging deep to find out new member motivation we can help them out immediately as well as assist them in realizing their long-term financial goals and achieve financial peace of mind. November 2013 Credit Union bUSIneSS 21 LendIng LIne is we are usually told--if they re at all knowledgeable of the FiCO scoring system--a number that is way off their actual credit score. We see credit reports for lots of young people with no score at all multiple collections or even judgments against them. You must take the time to teach each of your members how the FiCO system works what their score is what it means and most importantly how they can improve it. They should have a basic understanding of how the model works before they get up to leave. if it s allowed they should take their credit report home review it with their spouse and bring it with them for use in future visits to gauge their progress. Goals Give members the knowledge they need to understand credit and how important it is to their financial future. Help them establish reasonable achievable goals to improve their credit standing. if they are saddled with credit card debt help create a program for them to pay down their highest interest credit cards first while making minimum payments on their other cards. They need to regain or establish control of their credit. Remind them that they will become empowered and motivated to work even harder to get out of debt by setting and achieving goals. Timelines Creating effective timelines requires something many credit unions do poorly develop ongoing follow up programs. You need to set up a realistic timeline for members to achieve mutually agreed upon goals which will require you to follow up with members periodically whether over the phone via email or in person. This is so crucial to turning a member s financial life around that you must make it a priority. We all have calendars you must mark yours with the next day and time that you want to talk to or meet with a member. if the member is coming in make sure you pull a new credit report and have them bring in the old one so together you can chart their progress reeducate them or--best of all--offer them the loan The fun part comes after you ve done all of the necessary work the member has a good credit score and you are able to tell them that they have been approved. Here are some important questions you should ask yourself Have we laid enough groundwork so the new member will know when they should come back for additional credit By this i mean have we scheduled or created the motivation for a future appointment Have we educated them on how credit works Have we clearly explained to them how to improve or repair their credit Have we given them a copy of their credit report to take home Are you sure that you ve made it clear that it should now be part of their everyday thought process When You Must say No. Try as hard as you might there will be times when you have to say no to one of your members. There will be instances when a member is in such dire need that you will want to give them anything they ask for even if it means giving them money out of our own pocket. But you have to remain realistic. Any time you must say no to a member you should make it your goal to educate them help them create achievable goals and establish a reasonable timeline to achieve these goals so you will be able to say yes to them in the future. Education Unfortunately a large percentage of your members are not aware of their credit status. Whenever we ask members what their credit score 22 Credit Union bUSIneSS November 2013 LendIng LIne i recently had the opportunity to work with a young woman who had just turned 18 when she came in to join the credit union. she wanted to open an account by giving us 5.00 and two forms of identification and then call it a day. When we asked her for permission to pull her credit report she said sure but it was obvious that she wasn t quite sure what we were asking. it was no surprise that her report showed no credit score due to insufficient history. We took the time to teach her how credit works and to tell her how important it was for her to start out her adult years with a good credit history. We opened a shared secured savings account and gave her a shared secured Visa card with a limit that we both felt she could manage. We also let her know that we would be following up with her over the next six months to see how she was doing and told her that if she handled the credit card responsibly we would make it an unsecured credit card. Nine months later i followed up with the MsR who told me that she was indeed doing very well and they were able to give her the unsecured visa card as well as her first car loan after the six-month probation period. Follow up is the key to any plan and in this case we were able to start a young member on the right financial path and a lifetime relationship. When You say Yes The fun part comes after you ve done all of the necessary work the member has a good credit score and you are able to tell them that they have been approved. That s when you ll find yourself on the right path to a lifetime relationship. What happens when you don t follow up with the member and run the risk of letting the relationship deteriorate Do you think you will still be their first choice the next time they need a loan You need to have a Plan for the times when you say yes just as much as you need to have a Plan when you say no. i work with a few credit unions that implement a 2 2 and 2 plan. They will make a follow up phone call two days after closing a loan or opening an account another call after two weeks and a third call two months after the loan closed or the account opened. The calls range from asking members whether or not they have received their checks or debit cards if they were satisfied with the level of service they received or even how their new car is working out. i overheard one MsR ask a member to send him a picture of the new house we mortgaged. The key to credit union success is building and maintaining relationships so that you become every member s primary financial institution for a lifetime. Remember you typically get just one opportunity to make the best new member impression possible so make it your goal to give every member a positive experience they will never forget. Jack Kelly Jr. is Vice President for Lending Solutions Consulting Inc. (LSCI) November 2013 Credit Union bUSIneSS 23 CU mArkeTIng grow by Sending Your Members Away U By Mark Sullivan woo prospective members with their broad array of offerings more favorable interest rates and better personal service. These are features existing credit union members know and love but which are difficult and expensive to promote. The perfect promotional incentive must accomplish four things 1. it must bring in new members by providing a high value benefit everyone enjoys. 2. it must not cause undue hardship on the credit union s resources to fulfill. 3. it must allow new members the experience of using the credit union s services to solidify its favorable position in their minds without causing churn and burn . 4. it should also be appropriate to offer existing members when strategically appropriate. so what incentive is capable of achieving all of those objectives Just one send members away. specifically provide non-cash incentives such as travel rewards. Why do these incentives work so well Dr. Jeffrey scott of the Department of Management services at the University of Waterloo in southwestern Ontario and noted researcher into incentive programs for membership type institutions recently wrote a paper for the incentive Research Foundation in st. Louis MO. He cites several reasons non-cash incentives such as travel rewards are such huge motivators at changing behavior. Perceived Value Non-cash incentives are difficult to attach a monetary value to because they don t fit the ledger side of the brain. Non-cash incentives must appeal to perceived value such as enjoying a tropical vacation when it s cold outside or spending quality time with family. This perceived value has a higher value to members than the actual cash value of the trip. ndoubtedly member growth and retention lie at the heart of the metrics that measure a credit union s success. All across America credit unions are brainstorming to figure out how to compete for more loyal members against a backdrop of large banks with bottomless marketing budgets that employ expensive advertising agencies. Most big bank ads contain lots of flash and zero in on strategic demographics which given the law of averages often produce upticks in deposits loan usage and credit card customer acquisitions. They also anticipate a lot of churn and burn and build lost customer numbers into their matrix for success. Their goal is simple more accounts coming than going. But credit unions by definition are very different animals and don t typically position themselves as large too big to fail institutions. instead they prefer to be known as local financial services providers that live and work in the communities they benefit communities where everyone knows your name. They can neither afford nor desire the churn and burn approach and their success is built on retaining happy loyal members for years--even generations--that continually use refer and support them. so how do credit unions promote themselves and attract new members who will immediately love them for what they are favorable local alternatives to big impersonal banks And how do they compete against large budgets and big bank flash Let s face facts in most cases promotional success depends on incentive. Offering rewards or benefits with high-perceived value is the best way to attract the attention of and motivate both prospective and current members. When a promotional offer is effective enough to generate an immediate response consumers will take quick action and contact their local credit union. That s the moment when credit unions are best able to 24 Credit Union bUSIneSS November 2013 CU mArkeTIng Justifiability When a non-cash reward is not something members would purchase on their own they can justify the reward. Cash doesn t have to be spent so the trip or other non-cash reward is justified as valuable in their mind and becomes a greater motivator. it rather than paid cash for it and the recipient feels great while bragging about what they received or enjoyed. A non-cash reward goes even further in benefitting the credit union because it is usually not something that staff has to fulfill. Travel incentive fulfillment for example can be contracted out. The travel incentive company generally provides fulfillment materials and white labels the entire fulfillment process according to client wishes. This includes complimentary companion airfare certificates (either paper or digital) membership cards reservation booking calls and ticket delivery. earning non-cash incentives can be easily hooked to CD purchases checking account openings new credit cards or other loan products. Mark sullivan Director of Partner solutions for Airline Promotion inc. offers this advice The low cost to perceived value of non-cash travel rewards make them perfect incentives for loan products as lenders can afford to award them to all applicants not just approvals unlike cash rewards. This advantage helps member satisfaction and retention and can be social Reinforcement Non cash rewards have trophy value . While many people have reservations about discussing cash salaries or money earned they generally have no problem discussing non-cash rewards. They are therefore more often promoted by word of mouth and recipients take great satisfaction in saying Look what i got For example a non-cash reward (such as travel incentives) as opposed to an introductory deposit bonus (i.e. cash ) takes care of the promotional qualifiers while providing something everyone enjoys. Recipients associate a valuable experience with the promotion can justify its use because they have won C M Y CM MY CY CMY K November 2013 Credit Union bUSIneSS 25 CU mArkeTIng especially important for organizations that place a high priority on egalitarian values. Awarding all credit applicants travel incentives can be cost effectively achieved without triggering adverse selection. This creates good will for those who apply but don t qualify for credit and is especially important to community-based organizations. it also helps cement long-time customer loyalty among people who have been trained to jump ship whenever they discover a lower rate. But most of all non-cash incentives offer extremely high value. With cash incentives dollars out is equal to dollars spent but a non-cash travel incentive is not only perceived to be of higher value than the dollar amount provided--the value of a dream vacation versus the value of cash in hand for example-- but the actual cost is also a bargain. For example an airline flight that normally costs 395 can be awarded for a little less than three cents on the dollar. For these reasons non-cash incentives work extremely well in attracting new members while retaining existing members. Once you get potential new members inside your doors they will experience the double benefit of the highly perceived value reward and all of a credit union s advantages a dynamic onetwo punch. This double benefit cements member loyalty which reduces back door member attrition and lowers acquisition expense. so if non-cash incentives are so powerful which of them are the most effective The answer might well be travel literally sending your members away. Travel is extremely popular. in 2011 domestic travelers took 1.5 billion leisure trips or seventy-seven percent of U.s. travel far more than the number of business trips. This number includes visiting relatives shopping sprees visiting friends gourmet travel and beach vacations. in fact travel industry employment ranks sixth highest in U.s. private sector jobs. it is estimated that every American household would pay an additional 1000 in taxes if not for the tax revenue generated by travel. it s obvious that Americans like to travel but more than liking to travel Americans like to dream about traveling. even when we have no immediate plans to travel we love thinking about going somewhere. We plan a long-awaited trip in our heads read about traveling think about traveling and dream about traveling. When most Americans are asked what they would do if they had lots of money they usually answer i 26 Credit Union bUSIneSS would travel. A great trip with family and friends to a location they would not normally visit tops most American bucket lists. so what if the local credit union could help make that happen What might it do for acquisition and retention goals Could there be a better way to represent the good will and community spirit credit unions are known for than offering free travel to a dream location Here s how travel rewards can benefit your credit union s member appreciation or acquisition drive 1. Members perceive the cost of the dream trip as being worth more than the trip actually costs. For just pennies on the dollar credit unions offer every member discounted rates plus free companion airfare for anyone who opens a checking or credit card account or purchases a new CD. 2. The credit union staff has almost nothing to do with fulfillment but the credit union reaps the benefit of new personal travel loans or increased spending on credit union issued cards. 3. The credit union develops a marketing campaign depicting members using their credit union issued incentive to travel and talk about where they have been. This reinforces member good will. This scenario is easy to implement builds member satisfaction and loyalty boosts member retention and underpins a successful new member acquisition program that is cost effective. And it will get the community talking about how your credit union realized success by sending your members away Mark Sullivan has spent 26 years working with membershipbased organizations. A past Director of Marketing for MBNA Mark was responsible for customer marketing and retention for large financial institutions and credit unions in the US and the United Kingdom. When properly structured travel reward incentives produce the best results when organizations are looking to retain or attract new members hands down. You can find more helpful information plus the full report by Dr. Scott Jefferies by going to www. November 2013 We see the same things you do. We see your members want ... Help not hype. Useful tools and information that make life easier. Anytime service that gets it right the first time. Satisfying interactions with people who care and products that work. A trusted partner for today and tomorrow. That s what your members want from you. That s what you expect from us. Payment Card Programs Fraud Management Digital Wallets Strategic Consulting Loyalty Rewards eCommerce Solutions 24 7 365 Contact Center Support 888.918.7357 AT C LeveL A grandfather watching his grandsons at play provides the perfect lead-in to the question Has creativity been lost on the innocent Does your credit union encourage the capacity and potential for creativity if not you could be missing out on many workplace benefits. While you re at it take a peek into a brainstorming session that generates some creative sparks. By Marc A. Bringman The two boys stood motionless in the corner of my living room a momentary lapse in a play-filled afternoon. The purpose of the break in action was to re-arm swap out weapons and discuss new strategies. For the last 20 minutes the two boys had been engaged in a stellar fracas. The battle was going well for fiveyear old Anthony until Dante the eightyear-old went into cloak mode. i m cloaked he screamed in the middle of the action. Anthony was well aware of the cloaking device. instinct told him he was in real trouble because Dante could now approach unseen from any angle. Anthony also knew that the cloaking device would not hold forever but in the meantime he needed to improve his weapon systems. Mindful of his wobbly situation he called a halt to the action. Anthony had considered a new weapon but clearly the better choice was a change in mode. Dante i have to see what damage mode does. At once Anthony took cover behind the couch pointed his imaginary weapon in Dante s direction and fired an imaginary ripple of energy across the room. As he did he clenched his teeth and let out a loud hiss. The recoil of the fantastic beam sent him back several inches. instantly Dante fell backward onto the couch and slid slowly down the side. When he hit the floor his body contorted and melted into the carpet. Dante s performance was worthy of an Academy Award. Without any prior knowledge of damage mode he showed real pain most importantly he illustrated the effect of the potent weapon. After demonstrating the consequence Dante jumped to his feet and warned Yeah but i m cloaked At that the meeting ended and the celestial war began again with Anthony shooting blindly at his invisible opponent. As the battle continued for every exotic weapon one employed the other produced an equally effective countermeasure. What amazed me the casual observer and sometimes victim of stealth attacks was the acting ability of the tiny actors on a barren stage. As i followed the action i discovered that all i needed was to abandon reality for just a moment. Then no longer a witness i found myself involved in a galactic war. i heard the sounds of mighty weapons. i saw what Dante and Anthony saw and i too wondered if the correct countermeasures were in use. Then it ended. Peace returned to the galaxy when the two discovered a better idea building the new spongeBob squarePantsTM Lego model of the chum bucket. Few professional actors can so steal my imagination The Creators 28 Credit Union bUSIneSS November 2013 AT C LeveL An idea is the only thing that people can make from nothing... without costume prop or graphics but these little players did. it dawned on me that i was witness to pure natural and contagious creativity. i sat stunned as the mini-actors created an entire galactic war and in the process stirred my dormant imagination. For the children spontaneous creativity brought fun happiness confidence and the continuation of a strong and permanent relationship between brothers. The grandfather watching the kids at play me experienced joy but soon reality set in. The momentary pressures from this and that began to lure me back in to what you and i call the real world. There i considered the creativity of these children. i grew fascinated by the quality and quantity of the kids ideas. Moreover i noticed that all prior rivalries were put aside during the creative period. soon i began to wonder about the benefits of natural creativity in the workplace. i wondered about the capacity and potential of creativity in the professional environment. Finally i asked myself Has creativity been lost on the innocent Can C Level employees be like children and reap the benefits of natural creativity i wondered.... lice called the meeting to order. As the ranking VP she had the authority and credibility to call what one senior exec referred to as the silliest meeting in the history of the company. Good morning everyone How are you today Heads nodded all around and accommodating smiles spread across most faces. seeing this Alice took a deep breath. As you know we re in a slump but i have an idea. smiles slipped from a few faces. she continued i know some of you think i m nuts calling a brainstorming meeting on creativity. But i m convinced we have lost our fire. And i believe that creativity is the answer. she paused for several seconds and examined the reluctant group. OK so i am nuts she said. Not sure where she wanted to take the meeting Alice tried a new tact. she turned and wrote a single word on the whiteboard CReATe. Then she turned to the group. An idea is the only thing people can make from nothing. This is our greatest asset and yet it often waits in a back stall like an unwanted racehorse. she pointed to the board. Yes bad analogy but please indulge me. i want to make one point and it s based on a principle i hold Creative people are happy and highly productive. Alice paused to let that sink in. if i m right then we can change things around here. Again she studied the group. The deadpan expressions spoke harshly. This won t be easy she told herself. Once more she began. OK let me ask What makes us creative Alex who had sat patiently through the opening remarks chose to exempt himself from any discussion by surrendering immediately. Well i m not very creative he said. i ll leave that up to smarter people. That s nonsense Alex she replied. stunned by the reaction he shot back No really i ve never been very creative. Oh yes you have she answered emphatically. Not really Alex persisted now in the odd position of defending his lack of creativity. sensing the need for a rescue Alice asked When you were a kid didn t you play Yes of course. What did you do for play A November 2013 Credit Union bUSIneSS 29 Imagination is more important than knowledge. Albert Einstein Although certain she had left her senses he played along and offered the information. We were very poor living in a small town in southwestern el salvador. There were no toys or places to buy toys. instead we found little sticks and fashioned them into little people. We would dress them create battles and sometimes create whole villages. And that s not creative Alex she asked. Well sure if you put it that way he replied. Alice turned to the group. so i ask this team what did Alex and his childhood friends have that we don t have With that she took a step back as if to let the group stand alone. After a moment of silence Dan the manufacturing chief cracked a big smile and said They didn t have anything else to do. More chuckles filled the room. Funny man she said but it s a fact. To be creative you do have to be unencumbered. she wrote the word on the board. And that s why we re here today without distraction. she smiled at Dan. Now what else she asked. Tierney the product management guru and one of the few who thought the meeting was a good idea spoke up. Along those lines i think kids just aren t inhibited. That leaves them free to entertain any idea as valid. Yeah Kevin the accountant added. Alex described a situation when the kids used sticks to create an imaginary town. They agreed to abandon reality and then advance ideas based on that agreement. Nothing was impossible Alice coached. Alex raised his hand i ve been thinking. We had something else driving our behavior necessity. We had to be creative. What else was there Alex put his elbows on the table and leaned forward. it was great fun you know ideas ran like water. each new idea generated more ideas and everyone participated. Alice clapped her hands together and then threw her open palms at the group. Yes Despite the poverty those kids had fun came up with better products and processes stayed motivated and developed a sense of loyalty to each other. see We re not so different are we Then she donned her business face and added Now let s see what we can do to be like Alex s gang. ears ago i read a study the stunning results of which have stayed with me until this day. Ninety percent of children age five were found to be creative but by the time they reached age seventeen regardless of age only ten percent were found to be creative. All groups above age thirty tested at only two percent creative. As we fill our heads with knowledge we seem to have less room for creativity. Albert einstein captured a similar thought with these words imagination is more important than knowledge. We at Credit Union BUSINESS are joined in the exciting pursuit of an idea. every day we come to work and stroll through a field of exciting ideas. it s fun and it s motivating. imagine that in your environment. if you have it congratulations if you do not you have only to cultivate it. Creativity is resident in every employee and the potential for great ideas money-making ideas is unlimited and always available for harvest. Cultivate and the ideas will come. Y 30 Credit Union bUSIneSS November 2013 TeChnICALLy SPeAkIng Control of Member Loyalty Data and Perhaps interchange Fees What s in Your CU Wallet By Roy W. Urrico i n a familiar seinfeld episode George Costanza carries a wallet so full that it throws his back out and finally explodes from being overstuffed. This isn t just my wallet. it s an organizer a secretary and a friend says George. To which seinfeld suggests Well your friend is morbidly obese. Nowadays consumers seek ways to organize items previously carried in back pockets or purses onto their mobile devices. items such as payment devices receipts and Kirk Drake access to point-of-sale (POs) systems ATMs and merchants now sit amid an unwieldy list of apps and widgets on smart phones and tablets. Or users can manage them with an e-wallet such as the newly announced CU Wallet--a mobile initiative created by credit unions for credit unions--which seeks to reach out to mobilizing members and also tackles the issue of diminishing interchange. Online banking pioneer Paul Fiore and long-time creditunion veteran Kirk Drake joined with credit unions from across the country in launching CU Wallet a credit-union centric mobile payments mobile wallet initiative. The CU Wallet aggregates credit union resources to bring banking payments and identity verification to over 90 million North American credit-union members said Fiore. He adds CU Wallet allows credit unions Paul Fiore to offer a best-of-breed mobile-wallet solution to members using their existing credit-union branded mobile-banking platform. To date more than 20 credit unions ranging from 100 million to more than 6 billion in assets and representing more than 2.8 million members nationwide have signed agreements with CU Wallet. Fiore explains that CU Wallet came about as a way for credit unions to help members gather everything into one area rather than sifting through a plethora of mobile payment initiatives. it is also a way for Credit Unions to actively participate in the mobile eco-system. it is credit unions coming to together to find a solution for the industry. it is also a way for a merchant to reach millions of members directly without third-party brands whether it is for marketing or payment purposes he adds. 32 Credit Union bUSIneSS November 2013 TeChnICALLy SPeAkIng A key strategy of CU Wallet is that the mobile transaction can come from the merchant s mobile payment system or the credit union s system. Fiore also indicated that his plan is to create a CU Wallet CUsO where the offering will be owned by credit unions. Why CU Wallet By now it should be quite apparent to the financial services industry that Millennials who are beginning to come of age are making a huge impact. Millennials want lower more transparent fees and convenient access to their money from financial services providers. Maybe that is no different from any other age group but Millennials more frequently turn to a mix of both traditional and alternative financial services. According to a study released by online financial-services provider Think Finance (conducted by Harris interactive within the U.s.) 92 percent of Millennials say they currently use a financial institution but more significantly almost half (45 percent) supplemented banking services with an alternative financial product or service (e.g. prepaid debit card money transfer service check cashing pawn shop payday loan etc.) within the past year. Additionally 29 percent report that they use a mobile app to help manage their money. CU Wallet is a way to reach out to younger mobile-savvy potential and current members and in the process offers a chance at fairer interchange fees. Mobile wallets should be a strategic priority for every credit union said Paul Parrish executive vice president and chief financial officer of One Nevada Credit Union in a press release. One Nevada Credit Union is one of the financial institutions collaborating with CU Wallet. We ve evaluated third-party mobile wallet solutions currently available in the market and there isn t a viable choice for credit unions. By aligning the credit union industry in a collaborative initiative CU Wallet is providing a solution that will meet members demands while protecting and building member loyalty. At a press conference at the annual CUNA Technology Council conference Parrish indicated that credit unions are facing steady erosion in interchange income and a growing array of non-bank players who are gnawing away at their traditional businesses. At One Nevada Credit Union for example debit interchange makes up about 15 percent of its total revenue. Just in the last 12 months we have had to grow our transaction volume almost 10 percent just to be able to tread water with November 2013 Credit Union bUSIneSS 33 TeChnICALLy SPeAkIng beginning stages of a new model and that a leveraged data-sharing arrangement is needed. seeking to Partner Up Fiore explains they are not looking to create its own CU Wallet tools or build a system from scratch but rather seek to use proven tools that already exist on the market and are available for use by third parties in a non-branded fashion. Our goal is to identify robust in-market solutions and white label and tailor them for the needs of credit unions. Along those lines the initiative seeks to partner with existing credit-union core system and mobile providers. We don t think members are going to want to download two apps one for banking one for payment says Fiore We see integrating it into one experience. An open environment will be critical. That strategy he suggested will let CU Wallet get to market comparatively fast. As for when CU Wallet might go live with digital wallet transaction tools Fiore pointed to Q1 2014 as the target date. Recently CU Wallet selected Paydiant a provider of a white-label mobile payments redemption loyalty and cardless cash-access platform for financial institutions and retailers to power its credit-union centric mobile-wallet offering. CU Wallet will integrate complete mobile wallet capabilities into its application including contactless mobile payments e-receipts offer redemption and cardless cash access on existing payment terminals point-of-sale (POs) systems ATMs and onlineshopping carts. The Paydiant platform is presently deployed in partnership with card-issuing banks retailers restaurants merchant processors debit ATM networks and POs providers. Paydiant s white label platform works with existing smartphones POs systems and payment terminals including entry-level countertop devices. it does not require consumers to buy new phones or retailers to invest in a new point-of-sale (POs) infrastructure. in addition the solution allows credit unions and retailers to avoid our interchange income and that is a trend we think is going to continue at an increasing rate explained Parrish. This is the reason merchants are scrambling to lower their costs and a lot of those methods are culminating in an ACH transaction as opposed to established payment channels. That is cutting into the credit union s regular level of interchange. in addition credit unions have to compete with Visa and MasterCard which are cozying up to merchants by lowering their rates as well as nontraditional payments methods such as PayPal. This not only impacts interchange revenue it also threaten membership. Members are converting or being converted away from traditional payment rails emphasized Parrish. in order to make up the difference in lost interchange fees One Nevada thinks it must grow traditional interchange volume by 20 percent in the next year to make up the difference. Not only that but currently available e-wallet solutions suggest Parrish are either not-ready for prime time or not in the credit union s best interests because the financial institution would no longer control member data s destiny. it has direct impact on member loyalty...member loyalty is at stake explains Parrish By offering a credit-union centric wallet we control the destiny of our data. Parrish believes the credit union industry is at the 34 Credit Union bUSIneSS November 2013 See what you re A Collateral Protection Insurance Program with One-call Resolution On 3 000 member calls daily. See the complete story at or scan this QR code. 2012. State National Insurance Company underwrites all coverages and endorsements available through the CUNA Mutual Group State National Companies Tracked Collateral Protection Insurance alliance in all states except Texas where National Specialty Insurance Company a State National company also provides underwriting services. Product availability and features may vary by jurisdiction and are subject to actual policy language. All statistics included in this ad were provided by State National and are based on internal statistics customer surveys and industry benchmarking studies related to Collateral Protection Insurance. CP-0812-B419 TeChnICALLy SPeAkIng sharing sensitive member data with intermediaries but benefit from new revenue streams from highly targeted mobile ads and offers. Paydiant s white-label approach allows participating credit unions to deploy complete mobile wallet capabilities and all the benefits that accompany them without giving up control to thirdparty intermediaries said Paul Fiore online banking pioneer and CU Wallet co-founder. it also enables credit unions to deploy these capabilities sooner and with far less expense. Just as importantly their platform will allow us to focus on delivering the credit-union specific business operation and go-to-market capabilities that CU Wallet is uniquely positioned to bring to the market. That s a win for everyone involved. The mobile wallet is about a lot more than payment said Chris Gardner co-founder of Paydiant. That s important but the real opportunity for banks credit unions and retailers is in targeted offers customer retention new services and new revenue sources. That s why it s so important to control this touch point. Working with Paydiant CU Wallet will provide credit unions with control and a real and tangible service advantage that appeals to members enhances loyalty and increases new revenue opportunities. CU Wallet intends to unite pioneering technology with direct credit union ownership. The plan is to help credit unions overcome major industry hurdles to mobile payments adoption while allowing them to better serve current account holders attract a new generation of tech-dependent members and better compete amongst increased competitive pressure from nonbank mobile payment ventures. Roy Urrico is a freelance ghostwriter and byline writer of books articles newsletters guides case studies and white papers about financial institutions financial technology compliance information security credit and collections foreign exchange and many other financial topics. To find out more about how Roy can help your organization check out Roy s profile on LinkedIn visit his Web site at or email him at roy Among the diverse group of credit unions credit unions that have involved themselves in CU Wallet are Quorum CU Purchase NY Affinity FCU Basking Ridge N.J. One Nevada CU in Las Vegas Workers CU in Fitchburg MA Arizona state CU in Phoenix University FCU in Austin TX Kinecta FCU in Manhattan Beach CA Washington state eCU in Olympia WA Northwest FCU in Herndon VA CommunityAmerica CU Lenexa Ks DFCU Financial in Dearborn Mi City & County CU in st. Paul MN Twinstar FCU in Olympia WA Digital FCU in Marlborough MA CEO SUBSCRIPTION WITh BENEfITS Benefit your CFO COO CMO CCO CLO CIO HRD With fREE Monthly E-Newsletters Subscribe NOW register 36 Credit Union bUSIneSS November 2013 vISIT The MARkeTplACe pAge AT WWW.CUBUSIneSS.CoM MARkETpLACE Card Processing Payment Solutions Virtual Banking Experience Coin Counters FoR ADveRTISIng InFoRMATIon Call GreG Halpern 561-282-6015 4 GreG Cubusiness.Com MARkETpLACE Currency Coin Handling What Does Automating Your Currency Handling Needs and Providing Self Service Coin Redemption do for Your Branch It Gives Your Tellers Tools for Success Increases Branch Teller Increases Cross Selling Efficiency Opportunities Helps to Meet Member Strengthens Member Expectations Retention Reduces Costs Adding to your Bottom Line What Does it Take to Learn a Little More Not a Lot... Just ask your Magner Representative Phone 800-243-2624 Email solutions Online Let s talk about doing things the right way... Self-Service Coin Centers Currency Dispensers Currency Recyclers Proven Performance and Quality Facilities & Design Lending A Nationwide Lender with the Expertise to Get Your Deal Closed Business Partners is a nationwide provider of commercial real estate lending services with years of experience funding loans. We provide financing for most property types in primary and secondary markets Loan amounts of 500K to 20MM Competitive rates Terms of 3 5 7 or 10 years 25 year amortization Up to 75% LTV of appraised value or purchase price of the loan amount Loan fees 1% Atlanta GA - Los Angeles CA - Chicago IL - Dallas TX - Denver CO - Stamford CT CU SPoTLIghT expansion Team is key to Successful Acquisition By Sharon Sweda G rowth and expansion are vital to the success of most organizations. However mismanaged growth and expansion will sink even the most sea-worthy ship. Attempts to broaden an institution s reach by growing too fast can quickly drain resources and capital setting the institution back rather than moving it forward. Managing growth and expansion into profitability requires skill and talent. The team at security service Federal Credit Union of san Antonio Texas understands the value of forward reach and is growing their institution systematically. security service FCU has been expanding both organically and through a series of mergers or more accurately acquisitions. Founded in Texas ssFCU now covers three western states--Texas Colorado and Utah--and is always on the lookout for more opportunities to continue their expansion. We aren t currently planning anything explains John Worthington executive Vice-President and Chief Communications Officer for ssFCU but we always evaluate new opportunities whenever they arise. This strategy has paid off and the credit union has grown into a 7.4 billion dollar financial institution becoming the 8th largest credit union in the Us. ssFCU boasts 70 locations in their three western states and 20 of those 70 locations are attributable to mergers. Anyone who has managed acquisitions knows that security service Federal Credit Union s aggressive appetite for expansion is not easy to satisfy but they ve developed and unique team system to smooth the transition process. There are plenty of challenges affirms Worthington. ideally we hope that the operational systems will be compatible but they rarely are. We end up having to run dual systems as our team works to integrate systems and migrate the data. The team refers to a specific group of employees--iT personnel member service specialists and human resource associates--whose unique role is to serve as the transition squad that executes all of ssFCU s acquisitions. iT covers the technology challenges for the project the member service team is responsible for the huge task of communicating with members and resigning them and the HR group handles employee evaluation and training. Once we acquire another institution all previous memberships are wiped clean and members must be re-initiated with security service. The previous entity is legally closed and membership must be re-offered to all of the members. Although we must also fire and re-hire all of the employees we try to keep as much of the staff intact as possible. it s best for the existing members who know them and who prefer working with the folks with whom they are accustomed stresses the executive V.P. it is apparent that this systematic process is a valuable element of the process. The same people are performing the same task and achieving the same successful result. Occasionally we will lose a staff member or two from the acquired firm but not that often Worthington explains. The change in culture or vagaries of transition do not always make for perfect alignments but those instances are rare. Worthington likens their multi-state operation to gathering a variety of individual markets under one umbrella. We created 40 Credit Union bUSIneSS November 2013 CU SPoTLIghT geographical regions that enable ssFCU to service members in ways that are appropriate to their specific needs. The Central Region which encompasses Texas is the most heavily populated whereas the Mountain Region and Mountain West areas span the greatest distances. The last acquisition occurred in 2011 and it is just a matter of time before security service will take their next plunge. Worthington affirms that ssFCU is always looking for areas where they can expand into while increasing productivity. Worthington knows that membership is key to survival and believes that growth can never remain static. it is obvious that ssFCU is never static either. Sharon Sweda is a freelance writer who has worked in the real estate and finance industries for the past 28 years. Contact Sharon at sharonsweda to SpotLite your CU. security service Federal Credit Union in 1956 Security Service Federal Credit Union opened its doors with eight members and 25 in deposits. the credit union was founded as a not-for-profit member-owned financial cooperative to serve the fiscal needs of the members of the U.S. Air Force Security Service Command and their families. From those humble beginnings the credit union has expanded to include not only military members but also a large and diverse number of members from companies organizations and geographic areas throughout the southwestern United States in its field of membership. today Security Service is the eighth largest credit union in the country serving more than 900 000 members worldwide. Become a 3-year Credit Union Business member and we ll send you a Kindle Sign up for a 3 year digital subscription and CUB will give you a Kindle e-Reader to enjoy every issue 69. x 3 207 Also available in print 89. x 3 267 Sign up at November 2013 Credit Union bUSIneSS 41