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the LendIng IssUe september 2014 VOLUme 9 IssUe 9 9.95 How to Go All-In A. Rex Johnson Entrepreneurs Rising Bill Prichard Small Businesses Find Support at Their Local Credit Union Key Duration Analytics Emily Hollis Buried Under A Mountain of Paperwork and Regulatory Red Tape With SWBC Mortgage s outsourced lending program you can increase the number of mortgage loans in your portfolio while mitigating some of the administrative hassle of paperwork or compliance-related risk. Our turnkey outsourced lending program provides you with a loan officer as well as processing underwriting and closing services for your members. Best of all we take on the full scope of the compliance and regulatory burden that accompanies mortgage lending. Let SWBC Mortgage help you with the administrative and regulatory hassle of your institution s mortgage lending efforts. Call 800-460-6990 or visit http PaperTsunami for more information CONVENTIONAL VA FHA 2014 SWBC. All rights reserved. Loans are subject to credit and property approval. Certain restrictions and conditions may apply. Programs and guidelines are subject to change. Rates change daily. SWBC Mortgage Corporation NMLS 9741 Corporate Office located at 9311 San Pedro Suite 100 San Antonio TX 78216. COntents Credit Union BUSineSS september 2014 V O L U m e 9 I s s U e 9 4 5 10 13 16 19 PUBLiSher S POV The CU All Stars Tim O Hara 25 28 CFO CUrreNCY Emily Hollis Key Duration Analytics CU SMALL BUSiNeSS OUTreACh LeNDiNG SOLUTiONS How to Go All in A. Rex Johnson CU COMMeNT James Collins CU e-BANKiNG Missing the Cyber Security Boat ww32CU reGULATiONS What the Regulatory exam Process Could Be Ryal Tayloe 34 36 CU CONTeNT Laura Enock Converting the e-Channel to Recognize Members and Realize ROi Michael Carter COMPLiANCe UPDATe is Your Web Content Doing its Job CU CreDiT CArDS What s Ahead for Mobile Banking & Payments Compliance Andrea Stritzke LeADerShiP The Pursuit of the Ultimate Credit Union Credit Card Program The Great Rate Debate Ondine Irving 40 TeChNiCALLY SPeAKiNG Roy W. Urrico Using Social Media to Better Communicate with Those We Lead From Baby Boomers to Generation X and Y Dr. Sandra L. Torres Biometrics Helps Put a Finger on Members 21 CU MOBiLe PAYMeNTS The Mobile Payments ignition Point How The Rise Of Host Card emulation Makes Deploying Consumer-Centric Mobile Solutions Possible For Financial institutions Brian Day September 2014 Credit Union bUsIness 1 AbOUt Us publishing team Tim O Hara Publisher tim Iliana Nord Operations Manager iliana Patti Manzone Designer Ashok Kumar Circulation Director THE LENDING ISSUE SEPTEMBER 2014 VOLUME 9 ISSUE 9 9.95 How to Go All-In A. Rex Johnson staff Writers James Collins CU Comment Laura Enock CU Content Emily Hollis CFO Currency Dr. Sandra L. Torres Leadership Roy W. Urricho Technically Speaking Entrepreneurs Rising Bill Prichard Small Businesses Find Support at Their Local Credit Union Key Duration Analytics Emily Hollis SEPT_2014.indd 1 9 8 14 9 07 PM subscriptions Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine inc. A one-year membership costs 99 yr x 3 for Print ( 297.) or 75 yr x 3 ( 225.) for Digital. An online membership form is available at www.cubusiness. com register. Contributors Michael Carter Brian Day Ondine Irving A. Rex Johnson Bill Pritchard Andrea Stritzke Ryal Tayloe 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 September 2014 Engage serve and grow with electronic bill payment. Security Smart fraud prevention tools detect suspicious payment activity. Control Subscribers set their own payment and funds withdrawal dates. Scale Over 400 million payments processed since 2001. Mobility Members can make payments on the go anytime and anywhere. Efficiency Subscribers embrace low-cost service channels. Due Date payment model Marketing campaign support Account transfers 24 7 365 subscriber support E-bills from over 300 billers Make the most helpful connection with your members. FROM tiM Publisher s POV The CU All Stars As i am putting together each issue of the magazine i often think of a C-Level team meeting being held in a CU conference room (see the lower right hand corner of this page for an illustration) where each participant represents the CU s primary departments compliance finance lending marketing operations and technology. While they stand for the key links in the chain of every credit union s ultimate success it is the CeO s job to pull everything together. The purpose of CUB is to offer you--and every member of your credit union s C-Suite--timely and important information to help you best perform your job and better serve your members. i am particularly proud of this September issue s group of monthly contributors. They ve consistently offered excellent information on a routine basis that is targeted to each of the key areas i ve mentioned above. in fact i call them the CU All Stars and they are the same team we featured on the cover of the June 2014 issue. Once in a while in everyone s work magic happens and forces align to create excellence. Happily this issue represents one of those times for CUB. This month s lead Lending issue article is called How to Go All in and was written by the dean of the Lending University Mr. A. Rex Johnson. The article offers a formula for growth and profitability that really works and because it represents the best of what we offer readers i urge you to read Rex s article. it follows-up last month s article it s Time to go All in (eCUB and e newsletter readers please note that that article is linked here). in addition to the superb advice it offers Rex includes a special incentive in the form of a no-money down consulting offer to help you get your CU on the path to improved profitability and better member relations. it s a new idea and something i encourage you to look into. i look forward to hearing from you THE BRANCH BUSINESS TRAINING ISSUE JUNE 2014 VOLUME 9 ISSUE 6 9.95 The CU All Stars Paul Nunn (CU Training) Emily More Hollis (CFO Currency) Jennifer Anderson-Kapke (Compliance Update) Keith Kelly (CU Mobile Mortgage) James Collins (CU CEO) Rex Johnson (Lending Solutions) Laura Enock (CU Content) Miriam De Dios (CU Outreach) Get it for the entire executive team register The Best Way to Build Branches is to Knock Them Down by James Collins The Changing Face of Business Lending by Laura Enock Top row from left Emily Mor Hollis Paul Nunn Jennifer Anderson-Kapke Keith Kelly Middle row James Collins Rex Johnson Bottom row Laura Enock Miriam De Dios 4 Credit Union bUsIness September 2014 LendIng sOLUtIOns how to go All in e agreed to work with CU Business magazine because of their commitment to excellence. in my last article i promised to reveal a formula for growth and profitability that really works because i wanted to recognize what elga Credit Union has accomplished and show you how this formula enabled two credit unions to perform well over the last few years in an extremely tough economic environment. Both credit unions are very very successful and have experienced above average earnings and growth. What do these two credit unions have in common Let s look at elga Credit Union first. As of June 2014 elga was the number one credit union in its peer group with assets of 377 million. in June 2010 elga had assets of 260 million which means their assets grew 117 million in four years a 45 percent increase. Their loans grew 122 million or 63 percent over that same timeframe and their loans grew faster than assets. When you grow loans everything else grows. To recap elga s results are Assetgrowthin4years 45% Loangrowthin4years 63% The second credit union was in the top 85 percent of its peer group and also delivered great results. it continues to climb very fast and i have no doubt that they will be in the top 95 percent of their peer group by the end of this or early next year. Here is their growth or Return on Assets (ROA) over the last four years December2010 Networth .23%ROA December2011 Networth .84%ROA December2012 Networth 1.19%ROA December2013 Networth 1.25%ROA June2014 Networth 1.51%ROA This shows consistent growth over four years in a challenging environment. Like elga the second credit union went all in W By A. Rex Johnson to increase their earnings. Let s look at what these two credit unions have in common through June 2014 Loan Growth elga CU Credit Union in Southeast 11.08% 11.76% Loan Yield 5.89% 6.09% ROA Fee & Other income 2.01% 3.04% 1.51% 2.52% Do their results look similar How does this compare to their peers as a percentage Loan Growth elga CU Peer Group Credit Union in Southeast Peer Group 11.08% 1.57% 11.76% 9.49% Loan Yield 5.89% 5.16% 6.09% 4.86% ROA Fee & Other income 2.01% 3.04% .51% 1.30% 1.51% .83% 2.52% 1.44% What do these comparisons tell us That both credit unions are focused on LoanGrowth(Goalisover10%) LoanYield(Goalis7.5%afterchargeoffs) FeeandOtherIncome(Goalis2.5%plus) Earnings(Goalis1.5%plus) Are they hitting their targets The answer is yes--except for loan yield--and they are doing far better than their peer groups. Of course by increasing their yield they can substantially increase September 2014 Credit Union bUsIness 5 LendIng sOLUtIOns their earnings. They were both very successful in increasing their non-interest income--also known as fee and other income-- as well. How did they do it By going all in They specialize in Servingalloftheirmembers Takingrisk Trainingtheiremployees Credit unions that continually focus on training get the best results. Remember the cost of training is not what it costs you to train your employees but what it costs you when you don t. Trying to be very aggressive without training staff will cost you a lot of money. CUs that are well staffed with welltrained employees are in a much better position to take on more risk and increase their yield and helps them better serve their members. Does taking on more risk suggest you will have higher delinquencies and charge offs Yes it does but not taking that risk will cost you far more in the long run. Let s look at our examples again Delinquencies Charge Offs earnings 1.48% 1.02%% 2.01% .97% .85% 1.51% .86% .52% .51% elga s earnings were 294 percent higher which is not a typo. That means they realized an income of 2.01 percent nearly four times higher than the 0.51 percent of their low-risk taking peer group. The credit union in the southeast earned 1.51 percent versus 83 percent or an increase of 82 percent--almost double that of its peer group. This shows that any losses in write offs are more than offset by increased earnings which should tell you that not taking risk could cost you a lot of money and good members. Members will never forget that you were not there when they needed you most especially those who have always paid back previous loans. By taking more risk and giving more money back to shareholders aren t these two credit unions better serving their members Aren t they doing their job examiners often prefer low delinquencies and charge offs--and so do i--but i also believe that CUs have an obligation to serve all of its members not just the ones that don t need help. Plus i like giving more money back to members. i have always tried to encourage CUs to serve all of their members hoping they will reach out to the D and e paper members the same way they do the A and A paper members. Most credit union members are good hardworking and honest people. Occasionally they hiccup and make mistakes sometimes it s their fault and sometimes it s not. if with all of our training we can t come up with ways to help our members then shame on us. if we don t train our employees then shame on us. if we are not spending the time we need with our members then shame on us. Why do we continue saying no to our members Forcing them to seek financial help elsewhere means losing lifetime memberships. Do your lenders believe that all they have to do to make loan decisions is look at credit bureau report risk scores and loan applications that might not be complete is it possible to make the right decision with just that information Might decision making be easier and more thorough if they talk to members Something has gone terribly wrong with the process when loan officers believe that quickly scanning a loan application and credit report is all they need to make a quick decision before moving on to the next application. elga CU Credit Union in Southeast Peer Group Credit unions that take the most risk have slightly higher delinquencies and charge offs than their peers. On average delinquencies were 63 percent higher with elga CU and 18 percent higher with the credit union in the southeast. Charge offs were 5 percent higher with elga CU and 63 percent with the credit union in the southeast. Still both credit unions had very acceptable delinquencies and charge offs. More importantly even though the two credit unions had somewhat higher charge offs and delinquencies they made a lot more money for their shareholders and show earnings that are three to four times that of their peer group. How do their earnings compare to those of their peer groups 6 Credit Union bUsIness September 2014 LendIng sOLUtIOns So what is the answer Here s what i would do to start getting great results Go All in now is the time and here is how you get started 1. Include your CU s statistics in the Ratio Analysis checklist provided in this article. Compare your numbers to both elga CU and the credit union in the southeast. note elga CU is in the 100M- 500M category and the credit union in the southeast is in the 500M plus category. 3. Put together a game plan. You can do it yourself use our services or someone else provided they have a proven track record. Please don t wait it is important that you make a commitment now. Doing nothing is the biggest weakness so get started now. i m so confident that you ll succeed that we will help you even if it is not in your budget for this year. You can pay us next year. 4. Let the examiners know what changes you have made when they come in. Show them you are ready tell them that you are training your employees and that management and the Board of Directors are all in . Show the examiners you are making changes based on Howyoucomparetocreditunionsthataregettinggreat results and tell the examiners you are benchmarking against those high performing credit unions. Howyoumonitorandtrackeverythingyoudoandtell them you will continue to do so 2. Show the results to your Board of Directors and your staff. include those areas where you out perform these two credit unions as well as areas where you fall behind. Get the Board of Directors and Senior Management team to agree that they are ready and willing to commit to making a change. C M Y CM MY CY CMY K September 2014 Credit Union bUsIness 7 LendIng sOLUtIOns The results you are getting The increases in Loan Why will it work Because you are all in . Growth and Loan Yield what is happening to earnings Again we encourage you to measure your results against the etc. two credit unions that went all in . Both credit unions are located in different parts of the country. They had to make 5. Train your employees. Use internal and external changes. They saw change as an opportunity not as more work. training resources. You cannot do this without making Their strategies were similar. Their results are outstanding and a commitment to training and that training should never they continue to get better every year. All they had to do was stop. include all new and existing employees even implement all in and stay committed. They agreed that they employees who have been around a long time. wanted to be the best of the best . So can you 6. Set challenging goals and monitor the results. every department and branch should be assigned challenging goals. Standards are how you expect every employee to perform goals ask employees to exceed standards. Set standards for everyone. 7. Reward accomplishment. Give employees the opportunity to make more money provided they produce the results you want. establish both individual and team goals and have management monitor individual performance to make sure every employee is toeing the line. 8. Keep both employees and members informed. Let them know where you are heading. Make sure your members know you are in the loan business that you have money to lend and have solutions for their financial problems. You want to motivate employees and members. Your members deserve to talk to highly trained and motivated employees who really care. 9. Marketing both internal and external is critical. Get creative with marketing. Market as heavily to D and e paper members as you do to A and A paper members. 10. Have fun. If your employees are not having fun they need to find a new job. if senior management isn t involved and in the office all day every day they need to find a new job. if every employee is not all in they need to find another job. This shouldn t be an option that s what all in is about. nothing great ever happens without passion nothing remember that. You ve got the best job in the world and it s called people helping people. Tell your competition to look out it s a new day 8 Credit Union bUsIness Look at your Financial Performance Ratios (FPR s) enter your results into the grid and compare your results to the other two credit unions. We hope you will do this right away. Call us--or someone you trust--to make it happen. It worked for them and it will work for you. note the last pages are an example of what you need to use from your FPR s. To pull your FPR from nCUA you must do the following ClickonCreditUnionDataandApplications ClickonResearchaCreditUnion(FindaCreditUnion) ClickonGoToResearchaCU Enteryoucharternumberorname RequestFPR Note Therewillbe3options.Werequestthefirst option--i want an FPR emailed to me for one credit union Interval RequestQuarterlyreports ReportCycle Thedataweshowedyouwasbasedon 6 30 2014 results A. Rex Johnson is the Founder Owner of Lending Solutions Consulting Inc. (LSCI) September 2014 LendIng sOLUtIOns Ratio Analysis 1. net Worth 2. net Worth Growth 3. Loan Growth 4. Total Loans to Total Shares 5. Yield on Average Loans 6. Average Shares per Member 7. Average Loan Balance 8. Fee & Other income 9. Return on Average Assets 10. Delinquent Loans Total Loans 11. net Charge-offs Average Loans 12. Cost of Funds Credit Union in the Southeast June 2014 ActuAl percentile 10.53% 55% 14.75% 82% 11.76% 77% 92.98% 6.09% 8 520 7 962 2.52% 1.51% 97% 85% .46% 87% 96% 20% 7% 95% 85% 82% 98% 46% Your CU June 2014 ActuAl percentile Are you maximizing income for shareholders Ratio Analysis 1. net Worth 2. net Worth Growth 3. Loan Growth 4. Total Loans to Total Shares 5. Yield on Average Loans 6. Average Shares per Member 7. Average Loan Balance 8. Fee & Other income 9. Return on Average Assets 10. Delinquent Loans Total Loans 11. net Charge-offs Average Loans 12. Cost of Funds elga CU June 2014 ActuAl percentile 10.51% 42% 20.84% 97% 11.08% 60% 94.86% 5.89% 6 368 10 141 3.04% 2.01% 1.48% 1.02% .47% 92% 84% 16% 36% 92% 97% 91% 97% 67% Your CU June 2014 ActuAl percentile Are you maximizing income for shareholders Once you finish comparing your results to the credit unions we used (elga CU under 500M or Credit Union in the Southeast over 500M) this should give you the direction you should follow to get outstanding results. if you have any questions feel free to contact us at 877-915-7675. September 2014 Credit Union bUsIness 9 CU COmment missing the Cyber Security Boat By James Collins i recently watched a Bloomberg TV show that was a presentation by SiMFA (Security industry and Financial Markets Association [also known as every Large Corporation You ve Learned to Hate ]) which focused on their proposal to create a cyber war council to help thwart system-wide threats to the financial system. Yikes i thought to myself here i am dealing with a sixteenth-century-like document titled How are you Preventing Janitors from Stealing Blank Copy Paper for my regulators when i should be focused on bigger issues. i hate to admit that i can agree with a bunch of large banks but this time they hit the nail on the head. While regulators are pouring over our individual prevention and mitigation strategies we are at the mercy of much larger organizations. And they ve had their own share of problems. For example Federal Reserve Hacked by a British national Lauri Love from October 2012 through February 2013. Electrical Grid Attempts at infiltrating the electrical grid were successful via the Dragonfly incident (February 2013) and with Smartreaders (which many homes have) in 2012 by a netherlands teenager. International Monetary Fund 2012 via a spear fishing incident. RSA Even one of the premier suppliers of security RSA was hacked in 2011 In every chain of reasoning the evidence of the last conclusion can be no greater than that of the weakest link of the chain whatever may be the strength of the rest. Thomas Reid Unfortunately regulator efforts have been somewhat haphazard. The nCUA for example has not issued a letter to credit unions regarding cyber security since June of 2011. instead the nCUA seems to have delegated responsibility for this issue to the FFieC across town which proudly carries the motto The Only Five Letter Acronym of the Bunch . Thankfully they regularly post commentary on various cyber security issues on their website (https cybersecurity.htm). Recently the FFieC embarked on a project to assess the vulnerability of larger community banks and credit unions through a series of special examinations. According to early reports the methodology used is secret and i mean double-encrypted secret-pinkie-ring type secret. So secret that all interviews are conducted under a literal Cone of Silence module which explains a lot about dealing with examiners. 10 Credit Union bUsIness September 2014 See what you re A Collateral Protection Insurance Program that pays you up to 20% more in claims See the complete story at Based on State National Companies analysis of actual competitor claims paid between September 2011 to August 2012. 2014. 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-875779.1-0314-0416 CU COmment Anyhow i managed to get my paws on what at first blush looks to be a legitimate copy of their preliminary interview questionnaire. This is what it looks like Note This form is to be filled out by the examiner. Nobody else. If you are really really busy you may have the financial institution fill it out but only then. 6. Ask them to give you three numbers correctly birthdate bank account and SSN. They get five points if they answer with yours. Give them a zero and head off to Belize if they give you theirs. 7. Do they know what a Denial of Service attack is Five points for knowing it s an internet attack that overwhelms an internet site three points if they say it is something that slows down their game of Mindcraft and zero if they indicate it has anything to do with their significant other. if they score more than 30 points check your math you are showing extraordinarily poor math skills. if they score fewer than 10 points write them up for being as dumb as a TRS-80 and relish in the irony when they don t get the joke. Less than 29 points 1. Is the Financial Institution on the list of Too Big to Fail organizations If the answer is YES then this questionnaire is complete grade them as Passing . IftheanswerisNO proceedto 2 Give each of the remaining questions a score of 0-5 with 5 being thoroughly knowledgeable and zero being as clueless as the CeO of General Motors. 2. What is the manager s experience with Think D-O-R. cybercrime nothing is more frustrating than spending countless hours Rank them zero if limited to watching Office Space and five working on something that will--or could--have very little if they give you your current account balance. positive impact on your credit union. Personally i would rather spend an extra half hour enhancing our after earthquake 3. What type of cell phone do they use disaster recovery plan (which is always a threat) than writing Score them zero if it s a flip phone and five if it is an iPhone rules that include why employees should not mention where 7. they work in their Facebook post. in some arenas this would be called prioritization sadly 4. Do they know the keys to staying on top of it is too often called under documentation . intrusion logs Assign them zero if they do not review their logs and five if they mention Pop Tarts and Red Bull in the same sentence. James Collins is CEO of O Bee Credit Union based in Tumwater Washington and can be reached at jcollins 5. Ask which of the following is make-believe tooth fairy Santa Clause or Microsoft Security patches. Grade them zero unless they say Microsoft. 12 Credit Union bUsIness September 2014 CU e-bAnKIng Converting the e-Channel to recognize members and realize rOi By Michael Carter T Because credit unions have members rather than shareholders delivering exceptional service determines why one CU is superior to another. Yet more and more credit unions are struggling to meet member expectations as digital and selfservice channels grow. it is much easier to understand member needs if you re sitting down with them in a branch rather than trying to decipher their digital footprints. But that is quickly changing. he idea of mining digital data to personalize member service whenever members access credit unions online is often discussed but usually as a utopian long-term vision. According to The Financial Brand 60 percent of north American financial institutions believe that data analytics offers significant competitive advantages and 90 percent think that successful data initiatives will define future financial institution winners. So what is keeping Fis from reaching this Digital Promised Land in The Financial Brand survey the majority of financial institutions polled (57 percent) feel that having too many service system silos is a big impediment to successful datafocused implementation. And this is a big problem for many credit unions most of which are holding on to a considerable amount of useful member behavior data. That data is jailed -- or inaccessible--because it sits in separate legacy systems. Because each system was designed for a specific service delivery channel they don t communicate with each other. even within digital banking--the branch of choice for many members-- CUs will often have separate systems for online mobile and the next digital device to come along. However there are existing strategies that will allow CUs to analyze data properly and better serve members. But those strategies require CUs to think of all digital--mobile online and next generation--as one channel which means providing September 2014 Credit Union bUsIness 13 CU e-bAnKIng straightforward money movement experience not only satisfies member expectations of how the digital world works it also allows credit unions to help members get their payments to recipients on time. Members often prefer paying a small fee to get money to a needy relative quickly rather than incurring a late payment fee. Because credit unions cannot easily access data associated with member money movement real dollars are being lost that could be reinvested in member services. One financial institution recently analyzed data associated with third party processed monthly bill payments and discovered that it was its own largest bill pay recipient. in other words the Fi was paying a third party to send them payments coming from their own clients. That institution saved over one million dollars in annual fees by switching to internal routing options. But that is only part of the picture. By allowing third parties to control money movement data credit unions do not get to see other critical information--such as recurring bills interest rates etc.--associated with member activity. Having access to such information opens the door to a host of opportunities including increased efficiencies eliminating unnecessary costs and offering members new products and services. To compound the downside of these third party arrangements some credit unions dilute member relationships by allowing third party vendors to list their brands on the institution s website. Controlling the user experience and the data associated with member money movement activities means credit unions can provide members with relevant information such as timelines showing scheduled payments and predicting future cash flow based on past activity. This data allows credit unions to issue member s potential low-balance alerts saving them time and money by helping them avoid overdraft and late payment fees. it also helps credit unions differentiate themselves from other institutions whose fragmented digital banking infrastructure limits what they can do for their customers. Credit unions should also examine how they handle personal financial management (PFM) services. The industry generally embraced PFM when it arrived on the scene because it allowed consumers to gain better insight into and more control of their finances while allowing financial institutions to deepen their relationships with their customers and members. But PFM adoption has plateaued. According to Javelin Strategy because credit unions cannot easily access data associated with member money movement real dollars are being lost that could be reinvested in member services. member-users with a consistent experience across all digital channels. Doing so allows credit unions to retain and access all member activity data use it to better understand member needs and develop products that satisfy those needs. This will help cement CU member relationships. To get there some existing habits must be broken. For example member expectations are quickly changing and they expect to be offered more and more options for moving money. Currently members expect to be able to write checks or go online to pay bills. increasingly members also expect to be able to move their money from account to account (A2A) or make person-to-person (P2P) payments. Most credit unions turn to third parties for help providing these options without realizing perhaps that they are surrendering control of the member experience and any data associated with member activity. Surrendering these user experience elements compromises a CU s ability to provide members with the quality digital experience they expect. And because consumers increasingly choose their financial institution based on their digital experience this is no small matter. To further complicate this scenario the baseline for member satisfaction has been set by their experiences dealing with expert digital companies like Amazon and Apple. This is why many credit unions need to overhaul how they let members move their money. Members do not need to know the difference between a bill payment a transfer or a P2P transaction nor should they have to move from one page to another (from one-third party vendor to another) to complete such transactions. instead they should be able to select the recipient and the date of transfer or payment from one dashboard page. This kind of simple 14 Credit Union bUsIness September 2014 CU e-bAnKIng & Research only 21 percent of Americans are mixing and matching financial management desktop software PFM services from banks and credit unions direct-to-consumer PFM web sites and mobile PFM apps. The percentage of active users is probably far less than that. Why There are two reasons. First some effort is required in order for a user to benefit from PFM services. While some PFM offerings are very user friendly others are not and in almost every case users must take the time to set up accounts create rules categorize transactions and re-categorize incorrect entries. Only a small segment of consumers are willing to put in the time it takes to do this work. They are what my friend Mark Schwanhausser at Javelin calls Moneyhawks. Although they represent a valuable client segment for financial institutions most PFM systems make it very difficult for institutions to engage with Moneyhawks in any meaningful fashion. And that brings me to the second reason PFM has failed to live up to its hype. PFM is typically staged as an ancillary system to digital banking. Most institutions use third party PFM providers that are presented to users as a tab on their digital banking dashboards. As with money movement the primary controller of the user experience and the data associated with it is not with the Fi itself but a third party vendor. even when the PFM vendor s system offers a level of integration that allows user and institution to integrate digital banking data the view is incomplete for both and their ability to analyze information limited. even though Moneyhawks have invested considerable time on their report details the data provided still gives them just a partial glimpse of their positions. PFM must be built within the digital banking offering itself rather than as an add-on offering if it is to deliver on its promise for credit unions and their members. if PFM services include automated intelligent categorization algorithms with a high level of accuracy and are built into a CU s digital services foundation then members will not need to do the heavy lifting. And the credit union can get a full view of every member s financial position not just those that choose to use the tools. Members who wish to leverage the full power of the PFM tools can still do so meanwhile anyone who did not utilize PFM in the past will reap its benefits without having to do the work. Because member data is available and accessible credit unions will be able to fulfill their role as trusted advisor to their digital banking members by using the patterns and preferences expressed in member profiles to offer useful suggestions on how members can better manage and save money. For instance a credit union could determine that a number of members are paying too much in interest on their mortgages or should consolidate revolving debt using home equity if they used the view provided by this integrated approach. Perhaps another member segment is saving to purchase a new car is about to have a child or needs to open a college fund account. By integrating financial management tools into the foundation of the digital banking experience and applying basic data segmentation your credit union will be in a position to advise each of these members on a ways to manage all of these issues. imagine being able to reach out to members in the emerging affluent category as they re building their net worth and are looking for a financial partner to help them with the financial products and services they need to prepare for the future. Think about the possibility of approaching coveted demographic categories such as Gen Xers and Millennials with relevant offers. Studies indicate that these groups want assistance with their financial lives but they want it to come in a convenient easy to access form that requires little effort on their part. Using data analytics allows credit unions to personalize offers to existing members rather than deploy a one-size-fits-all campaign which help retain and strengthen member relationships. The effectiveness of this approach is especially well documented. Rethinking money movement and personal financial management are just two areas in which an omnichannel digital strategy with powerful data capabilities can help credit unions keep their competitive advantage by delivering superior member service. The digital channel represents the branch of the future and products that are now sold in branches must migrate to the digital channel. This cannot be accomplished using disparate solutions that offer differing user experiences or by surrendering data and user experience to third party vendors. Member conversation must be continuous consistent and relevant regardless of the device or channel they use to communicate. Credit unions that can map out and execute a digital banking strategy that achieves this will distinguish itself with both members and financial institutions alike. Michael Carter is CMO of D3 Banking an innovator in data driven digitalTM banking. He can be reached at mcarter Credit Union bUsIness 15 September 2014 COmpLIAnCe UpdAte What s Ahead for Mobile Banking & Payments Compliance By Andrea Stritzke M Savvy credit union leaders know times are changing. That s because one thing in life is certain Change is constant and that means financial services will continue to evolve. obile banking and mobile payments are two areas that are experiencing sizable disruption and are very much on the mind and radar of financial regulators. Consumer protection and financial regulating services such as the Consumer Financial Protection Bureau (CFPB) the Federal Reserve Board (Fed) the Federal Deposit insurance Corporation (FDiC) and the national Credit Union Administration (nCUA) are increasingly focused on both. What follows is an examination of what the future holds for mobile financial services as well as how much continued change credit union leaders can expect. Mobile earning Gets Positive Regulator Attention From a technology perspective mobile banking and mobile payments are rapidly changing and evolving. While they already earn some attention from the regulators the current focus by the regulators is positive. Regulators have indicated that they want to be helpful in progressing mobile banking and mobile financial services and are looking for ways to assist credit unions and banks in integrating mobile financial services into the marketplace. Meanwhile they have indicated that given the current state of the technology the existing regulatory environment is generally sufficient for the protection of consumers using mobile financial services. This is terrific news particularly for credit unions and CUSOs looking to innovate in this area. Keeping new and proposed rules to a minimum allows for initiatives like the TMG innovation Lab to flourish. A project of credit union payments processor The Members Group (TMG) the Lab recently rolled out a wearable payments app for Google Glass. According to TMG s Vice President of Product Ryan Anderson there is more to come 16 Credit Union bUsIness September 2014 COmpLIAnCe UpdAte from the innovation Lab including a solution that combines mobile banking and mobile payments functionality. Given regulators perception of the current mobile financial services landscape this is one area where we don t expect to see drastic changes--at least not in the immediate future from a compliance perspective. However there have been some discussions worth examining. services. The CFPB stated its intent was to seek information on how mobile financial services can be used to empower and address the financial needs of consumers in affordable and safe ways. One thing we can derive from the field hearing and the request for information is that the CFPB expects mobile financial services to be provided at a lower cost to consumers. The CFPB may also want to see mobile enhancements that specifically provide safe and affordable access to financial services for lowincome or underserved consumers. The Fed and the FDiC are also evaluating mobile financial services. in March 2014 the Fed issued a report detailing its findings from a 2013 survey examining mobile adoption use trends and how the emergence of mobile financial services impacts the way consumers interact with financial service providers. Similarly the FDiC issued a white paper in April 2014 examining the potential for mobile financial services to draw unbanked or under banked consumers into the mainstream banking system. The nCUA has also been involved hosting a webinar in June 2014 on mobile applications. Regulators Actively Collecting & Analyzing information in a June 2014 new Orleans CFPB field hearing on mobile financial services Director Richard Cordray discussed the bureau s intent to collect information about mobile financial services which the CFPB identifies as mobile banking services and mobile financial management services. interestingly mobile payments are not included other than those payment products targeting low-income or underserved consumers. Following the hearing the CFPB issued a request for information to begin collecting data regarding mobile financial COMPLIANCE IS OUR POLICY PolicyWorks is a national leader in credit union compliance solutions. Our team of experienced professionals offer a wide array of compliance services. We re your partner to make compliance easy. Visit us online to learn more September 2014 Credit Union bUsIness 17 COmpLIAnCe UpdAte Some existing Regulations Already Apply Although regulators are not evaluating whether to change the rules--yet--some existing regulations may apply to mobile payments. These include but are not limited to the following StillOutstandingRegulatoryQuestions There are still various compliance questions and issues that may arise with mobile banking and payments. For now credit unions and banks should look to the existing regulations for how to handle these compliance issues. However changes to Reg E the regulations and how they may apply are inevitable due to Reg e governs an electronic funds transfer that authorizes changes in technology the players in the market and other a financial institution to debit or credit a consumer s asset factors. Be prepared for change but don t let the fear of it keep account. you from innovating and exploring the mobile banking and payments market. Reg Z Reg Z may apply if the consumer is using a credit card or a consumer credit account instead of an asset account to fund the Andrea Stritzke is vice president of regulatory compliance for PolicyWorks. Andrea assists credit unions with strategic mobile payment or transfer. compliance program management. As a national leader in Bank Secrecy Act credit union compliance solutions PolicyWorks is known for The Bank Secrecy Act (BSA) including customer identification having the vision and expertise necessary to assist with the procedure requirements also applies to mobile banking and most challenging compliance issues. For more information payments. visit in addition depending on the payment channel used the The services provided by PolicyWorks should not be construed transaction may also be subject to Visa MasterCard or nACHA as legal services legal advice or in any way establishing an rules. attorney-client relationship. 18 Credit Union bUsIness September 2014 LeAdershIp Using Social Media to Better Communicate with Those We Lead From Baby Boomers to Generation X and Y L By Dr. Sandra L. Torres are anticipated to exit corporate America over the next five years many are postponing their planned exit for economic reasons. There are roughly 46 million Gen X-ers (born between 1964 and 1982) and Gen Y-ers (born between 1981 and 2000) also known as the Millennial Generation to take their place. This means there are fewer potential leaders coming in to replace Boomers which makes the impending Boomer brain drain an even greater concern for business. This intensifies the importance of knowing how to communicate and transfer knowledge and social media is intergenerational communication s most effective tool. eading across generations has never been as difficult or as easy as it is now thanks to the rapidly changing and growing volume of content that is created and consumed via technology especially social media. And what an incredibly diverse media it is Social media allows users to constantly interact with each other which is completely unlike legacy media that allows little two-way contact. This interaction allows you to produce consume and share content with an enormously divergent audience across a wide spectrum of experience. But do today s leaders know how to deliver all this content creation Communicating Across Generations Most of us believe that multiple generations can influence each other s attitudes and beliefs and that it is possible for any one group to change the degree of social connectedness within that group. There are social and cultural differences among today s generations particularly in the use of communication technology some use technology at higher rates than others. This means that people who lead multiple age groups should be able to communicate effectively across generations. Take the Baby Boomer generation as an example. it has dominated society s cultural taste in music and fashion for decades but what about communications Because the Boomer population (77.5 million) has held leadership positions for some time it is especially critical that this group knows how to best communicate in today s technological world. Although a high percentage of Boomers Social Media and Boomers Social media is an incredibly broad category and refers to blogging wikis video-sharing sites such as YouTube and Vine photo-sharing sites like Flickr and instagram and social networking sites such as Facebook and Twitter. The good news is that high numbers of Boomers are already using the internet. Although most use it for information gathering and a fairly high percentage of them have Facebook accounts they have not fully migrated to other forms of social media. So how do Boomers decipher learn and choose from all of these forms of communication How do they know which are the most effective in reaching their target population Choosing the right communication tool is largely a matter of personal choice and most communication consultants advise that you begin by simply trying one. Credit Union bUsIness 19 September 2014 LeAdershIp Why Use Social Media to Communicate Across Generations fashioned vanity. According to the new York Times A selfie is simply the currency of communication for a new generation and There are several important reasons why Boomers should an increasingly valuable one as face-to-face communication. A study conducted by Pew internet research (2011) embrace social media. First is feedback. Using social media-- confirmed that Boomers mostly use the internet for websuch as Facebook or Twitter--allows us to hear what people are saying. Attracting attention is another reason. We can tweet search and email--both analytic and informational gathering information out to reach a targeted audience and know if our tool--and not as much for social business. Cross-generational message is being read. Social media is also great for helping communication differences can affect your ability to recruit others. By posting useful information on a micro blogging site manage and retain employees and can affect how leaders such as Twitter we can give users a real-time look at trending lead and teams function. it can also strongly influence your topics including what s going on within the organizations organization s ability to achieve goals. Boomers are currently where they are employed. Lastly social media can be used to the nation s economic leaders and they have been slow to empower staff to use social media effectively to win support for adopt social networking as a tool for reaching out to younger generations. Boomer business professionals needlEADErSHiP to bridge that the organization. Linkedin is a business oriented social networking service disconnect by embracing social media. So grab your mobile your social media and tweet it post that should be standard for all business professionals regardless device take a selfie choose that leaders develop skills in this area. Take this Thanksensure leaders needor up load it. You ll be a pro in make your workplace the exception and use evgiving season to very short time. it to say thank of generation. Linkedin members actively look for jobs and read ery opportunity to work-related content on the platform. As it provides you in a genuine manner. recognition demonstrate your is for staff members and the organization it is Your team members will likely gratitude to your speaker and leadership tremendously Dr. Sandra L. Torres author work much harder if they feel based Dr. Torres has researched leadership advantageous for leaders to support this site for their entire consultant. Miami Author that what they re doing reallythe world. speaker than 20 years of experience practices around More staff. and leadership makes a difference and union consultant MiYouTube a video-sharing site is useful for delivering in the credit that industry has made her an ardent believer ami-based Dr. their efforts and practitioner training or important messages to the entire organization. it is are noticed by of the credit union philosophy people Torres has researched leadership practices around the world. More than Si offers bilingual leadership those with power. helping people . Leadership 20 years of experience in the credit union indusone of the most popular internet video sites. try has made her an ardent believer and practitioner of the ed message will bring you expertise via her writings training workshops people. Leadership Leaders can share conference news or a golf tournament success in employee motivation as credit union philosophy people helpingand speaking well as in building a positive productive workplace. engagements. of their Si offers bilingual leadership expertise via her writings trainleadership. Get is highlights with the folks back at the office with picturesmanyvideosemployee appreciation is partHer specialty is women s engagements. Her specialtyto For or leaders ing workshops and speaking DNA application scarce commodity. in fact many women s via instagram. instagram is a popular social networkbut for others it can be aknow her better by visiting leadership. Get to know her better by visiting leadorganizations are offering leadership development training to that allows you to upload edit and caption your own photos. Take a picture or video choose a filter to transform its look and feel and then post to instagram--it s that easy. You can even share your images on Facebook or Twitter. it s a great way to Dedicated to developing leadership across cultures. communicate across generations. Last is the selfie phenomenon which Leadership Programs Develop Talent and Achieve Results can be integrated into most of the above Studies show that on average leadership development programs have a 20-40% significant impact on the following mentioned media. A selfie is essentially a Personal Ability--Communication - Collaboration--Teamwork self-portrait taken with a digital device Productivity--Quality and Cost of Work Dr. Sandra L. Torres Leadership authority and founder of which is then shared via iM or a social Consider how an investment into coaching mentoring or training initiatives Leadership Si (see) offers bilingual will result as a positive ROI on your organization s income statement. leadership expertise via her writing networking service such as instagram training programs workshops and speaking engagements. Twitter or Facebook. Perceived as Become an extraordinary leader Develop great leadership skills. For more information contact her at narcissistic by some others call it olddrsandi 20 November 2012 Credit Union BUSiNESS 21 Credit Union bUsIness September 2014 CU mObILe pAyments The Mobile Payments ignition Point how the rise of host Card emulation makes deploying Consumer-Centric mobile solutions possible for Financial Institutions e By Brian Day different industry players has slowed delivery of a knockout mobile solution--one that makes the average consumer say i ve got to have that. ven the most influential disruptor in the emerging payments landscape has to confront one powerful principle Consumers continue to view financial institutions (Fis) and card issuers as trusted providers for emerging payments solutions. That said strongly branded tech companies are gaining ground with consumers. To bring mobile payments to the inevitable (albeit longawaited) ignition point tech developers and issuers will have to link up. Host Card emulation (HCe) technology may be just the innovation to grease the wheels for such a marriage. To fully understand the potential impact of HCe on the emerging payments market we have to examine the full picture. Today swiping a card or handing over cash isn t all that hard so consumers have been slow to clamor for a new payments solution. The industry however sees the value in allowing fast anywhere anytime payments. indeed many industries have a strong history of improving that which wasn t broken consider the paperback book turned e-reader or further back the horse-and-buggy turned automobile. Fis telecoms device manufacturers retailers and internet giants will ultimately drive consumer adoption of next-generation payments. They just have to figure out how to play together first. At the end of the day jockeying for position among these three main technologies stand out as leaders in the emerging payments landscape barcode cloud bluetooth low-energy (bLe) near-field communication (nFC) Credit Union bUsIness 21 September 2014 CU mObILe pAyments The lack of agreement on one core technology to power mobile payments has also complicated issuer merchant and consumer adoption. Simply put a plethora of choices for both providers and consumers exists today. Among these options three main technologies stand out as leaders in the emerging payments landscape. They are barcode cloud Bluetooth low-energy (BLe) and near-field communication (nFC). them unfettered access to user accounts.4 There also exists a lack of standards in terms of how barcodes are put together what information needs to be contained on them and how they will be secured. What s more barcode acceptance often requires merchants to perform terminal hardware and software upgrades. With the present need to re-terminalize for eMV-capable machines most retailers are unlikely to pump even more investment into their terminals--especially if you consider the possibility of a set of standards someday requiring universal changes to payment barcodes. Barcode Cloud Cloud technology for mobile payments is best demonstrated by Starbucks. A customer scans a barcode displayed on his or her device at the point-of-sale (POS) credentials are held in the cloud. The Starbucks app had been called the canary in the coal mine of retail mobile payments and indeed its success with a niche set of consumers has raised eyebrows.1 in fact the Merchant Customer exchange (MCX) in partnership with Paydiant has recently announced its plan to roll out a barcode cloud mobile payments app similar to Starbucks.2 The MCX solution is reported to offer a different consumer experience than the Starbucks app because the consumer will scan a barcode produced on the POS device or on a receipt instead of displaying a barcode on his or her phone. PayPal too has made good use of the cloud. The company recently piloted a cloud-based payments technology with Home Depot in which consumers can pay without even taking their phones out of their pockets. engagements with Home Depot and other retailers allowed PayPal to enable payments at nearly 2 million physical store locations in the U.S. by January 2014.3 PayPal partnered with Discover to get better POS acceptance as they found creating partnerships with merchants directly to be a tall task. Why should PayPal s aggressive stance toward mobile payments worry today s card issuers Because as PayPal works to maintain low-cost transaction routing by using the ACH rails issuer interchange becomes further threatened. Brand erosion too is possible with new technologies like those from PayPal and Starbucks as issuers interaction with consumers is removed almost entirely from the transactions. Of course serious attention to security and encryption are critical with any cloud-based technology. earlier this year Starbucks admitted to storing sensitive customer data in plain text. The tech community has also been quick to point out the ease with which fraudsters could duplicate barcodes allowing 22 Credit Union bUsIness Bluetooth Low-energy (BLe) BLe is one of Apple s favorites as evidenced by its most recent operating system and the iPhone 5s. When iPhone users turn on Bluetooth and walk by an Apple Store they receive special offers designed to entice them to walk through the Apple Store doors. Here again PayPal is showing some interest in using BLe for payments. its Beacon tool for example automatically detects shoppers who have enabled Bluetooth on their devices when they are in a participating store. it then allows those users to make payments at the POS hands-free with voice recognition. geofencing is becoming an important competency for retailers and other marketers building out their omnichannel and data analytics roadmaps. Aside from payments the marketing strategies that BLe enables are becoming very attractive to retailers. Geofencing as it is sometimes called is becoming an important competency for retailers and other marketers building out their omnichannel and data analytics roadmaps. With BLe merchants can pinpoint very precise locations of their customers and prospects. A department store for example can use BLe to identify users in a specific department and use that information to push out a highly targeted and relevant discount offer to those customers. Macy s Best Buy Sports Authority and others have tested this idea via an app called Shopkick. September 2014 CU mObILe pAyments That s because most are reterminalizing for eMV. As they do so contactless features generally come along for the ride. in fact global shipments of nFC-ready terminals doubled to fewer than 4 million units in 2012 and are forecast to grow to nearly 45 million units by 2017.8 Designed to understand when a customer is in the physical position to make a purchase or engage in some other activity geofencing will no doubt also be used to predict the behaviors of target consumers. There is a question of how much BLe-powered interaction consumers will tolerate however. Similar to the way Tom Cruise s character is inundated with unsolicited marketing messages in the film Minority Report a world full of BLe could become irritating. This may cause consumers to opt-out making mass-market solutions unviable. hCe complements nFC hardware in two major ways 1) the technologies work together to keep card issuers in play 2) they allow for a seamless user experience Already powerful in its own right nFC-powered payments received something of a shot in the arm when Host Card emulation (or HCe) came on the scene. Google enabled the mainstream acceptance of the technology with its Android KitKat update. The internet giant leveraged HCe in response to wireless carriers that were blocking Google Wallet s access to the secure nFC chips in their units.9 Recently endorsed by both MasterCard and Visa HCe complements nFC hardware in two major ways 1) the technologies work together to keep card issuers in play and 2) they allow for a seamless user experience. By blocking access to the secure nFC chips wireless carriers kept nFC-powered mobile wallets off Fi radars. With the introduction of HCe however Fis and other card issuers can insert their customers credit and debit accounts into payments apps created by third-party developers. Consumers too will be excited by the technology as it allows them to make mobile payments with their existing card accounts. in a traditional nFCbased payments app card credentials are stored on the phone itself. With HCe the credentials are stored securely in the cloud which allows users to access them virtually anywhere. This creates a really nice user experience where all consumers need to do is tap their device to access card accounts they already own. Credit Union bUsIness 23 near-Field Communication (nFC) if you ve ever heard Tap is the new swipe you ve picked up on the predicted influence of nFC technology. Today nFC is used best by isis Wallet the mobile payment platform owned by three telecom giants Verizon AT&T and T-Mobile. The collaboration made big news recently with its announcement that isis Wallet is earning an average of 20 000 new users every day.5 All three wireless companies have a strong adoption plan in place. They introduce isis Wallet to their customers with special discounts and rewards when customers upgrade their phones to nFC-enabled devices. it s certainly becoming easier for the wireless companies to do last year worldwide shipments of nFC-enabled smartphones climbed to 275 million units up 128 percent from 2012. Shipments are expected to grow to 416 million units in 2014.6 There are now more than 300 different nFC-enabled handset models in the market today.7 From the merchant perspective nFC-enabled terminals present less of a burden than they may have in previous years. September 2014 CU mObILe pAyments evidence of the attractiveness of HCe can be seen by a movement of one of the world s largest banks. in May Russia s Sberbank and California-based Sequent Software inc. announced their plans to partner on the development of an HCe mobile wallet.10 As well Capital One talked about its partnership with MasterCard to explore an HCe solution at the 2014 nFC Solutions Summit. That said in the past the right blend of technology has not been available for Fis to fully leverage those consumer relationships for a successful mobile wallet rollout. it does now. effectively creating what some are calling The World of Open nFC HCe will make deployment of truly beneficial mobile solutions possible for issuers and exciting for consumers. Just as card issuers have long pursued top-of-wallet positioning very soon it will be top-of-app positioning they most cherish. With HCe and nFC working together long-standing cardholder relationships are not only safe they are poised to take off. Brian Day is a Senior Product Manager for The Members Group. In this role he is responsible for identifying and researching market trends discovering new solutions and overseeing the effort to construct those solutions into marketable products for financial institution clients. Brian has a diverse background in the financial services industry including roles in product development product management and operations. He is a frequent presenter at As another great benefit of nFC and HCe working together payments and innovation events and contributes regularly once credentials are in the cloud and able to be accessed by to industry publications as both a source and guest author. multiple platforms it becomes much easier to offer consumers Brian holds a BA in Marketing from the University of Northern a complete mobile experience. Today there is a significant lack Iowa. He can be reached at briand of apps that sufficiently combine mobile banking and mobile or on Twitter at TMGBrian. payments together in one seamless interface. With the successful 1 Starbucks Mobile POS Success Shows Barcode s Potential American blending of mobile banking and mobile payments consumers Banker April 2011 will begin to perceive mobile payments as easier better and 2 MCX to Use Paydiant for Cloud-Based Mobile Payments PaymentsSource Feb. 14 2014 more convenient than swiping a card or paying with cash. Who 3 PayPal Sizes Up its Audience for new Payments Tech PaymentsSource Jan. wouldn t want a real-time highly customized controllable and 14 2014 secure way to both monitor funds and make a payment from the 4. Starbucks App Stores Log-in Credentials Location info in Plain Text same app The Members Group believes this will be critical to engadget Jan. 1 2014 5 iSiS reports 20 000 new Mobile Wallet Users a Day nFC World May 15 creating real value for consumers. With the successful blending of mobile banking and mobile payments consumers will begin to perceive mobile payments as easier better and more convenient than swiping a card or paying with cash. The Right Technology is Here now Largely because of the relationships they already have with consumers Fis have the potential to be a huge force in the mobile wallet marketplace. Consumers themselves report a desire to follow their credit union or bank s lead when it comes to payment innovation. Although 38 percent trust PayPal most with their mobile money Fis and card issuers come in a very close second with 35 percent of consumers willing to try their mobile wallet solutions.11 24 Credit Union bUsIness 2014 nFC-enabled Cellphone Shipments to Soar Fourfold in next Five Years iHS Technology Feb. 27 2014 7 Orange Fast Facts Orange 8 One in Three Mobile Phones to Come with nFC by 2017 nFC World June 5 2013 9 Mobile Payments Smackdown Did Google Wallets Just Outplay isis Mobile Commerce Daily February 20 2014 10 Sherbank Biggest Bank So Far to Adopt Host Card emulation Aims for 3 million Users Digital Transactions May 19 2014 11 As Wallet interest Rises Consumers Go With Players They Know ABA Banking Journal Dec 17 2013 6 September 2014 CFO CUrrenCy Key Duration Analytics hile effective duration is a critical tool in portfolio analysis and balance sheet risk management it is important to recognize that this single duration number is an estimate of an asset s (or liability s) sensitivity to a parallel shift in interest rates. not all yield curve shifts are parallel. Key rate duration measures the effect of a change in the yield curve that is localized at a particular maturity and restricted to the immediate vicinity of that maturity. Robust risk management through key rate duration analytics requires us to understand that although changes in interest rates are often highly correlated across the curve in reality the slope and shape of the yield curve changes over Exhibit 1 time--sometimes dramatically so. 2.00% W By Emily Hollis CFA Partner Computing key rate durations has three basic steps First selecting the key rates assume the third fifth and seventh year as an example. To compute the third year key rate shift the three-year rate upwards by 50 bps and adjust the neighboring spot rates between one and seven years. (The selection of 50 bps is arbitrary.) note that the third year and seventh year spot rates do not change. (See exhibit 1). next compute the new value of the asset as a result of this shift and lastly compute the percent change in the asset s price as a result of the shift in the spot curve. if more key rates are chosen each key rate is increased and neighboring rates on the curve are adjusted as described above. Computing Key Rate Durations 1.50% Key rate durations measure the price 1.00% sensitivity of an asset or portfolio to independent shifts along the yield curve 0.50% at key points. in 1992 Thomas Ho introduced the concept and defined 0.00% 1 11 maturities as key specifically the third month and years one two three five seven 10 15 20 25 and 30. Although defined key rate durations can also be modeled for any number of key points. Key rate durations are computed by decreasing and increasing each individual key spot rate by some number of basis points (e.g. up or down 50 basis points [bps]) and re-computing the asset s (or liability s) price given that shift holding all other spot rates along the term structure constant. The average percentage change in the asset s value resulting from a given pair of these up-and-down key rate shifts is its key rate duration for that point on the curve. The sum of these partial durations is the asset s overall effective duration. Rate Adjusted Rate 3 5 7 9 Key rate duration analytics are used by balance sheet managers who need to account for changes in the shape of the yield curve in detail. At both the individual asset and portfolio levels key rate durations can provide valuable insights about term structure sensitivity in a way that no single duration measure can. even if the option-adjusted durations of the assets and liabilities are perfectly matched this says nothing about their relative sensitivities to non-parallel yield curve shifts. One example is hedging. A key rate duration analysis makes it easy to reveal structural mismatches not readily identifiable by other summary measures. identifying these structural September 2014 Credit Union bUsIness 25 CFO CUrrenCy Exhibit 4 The outputs cFO cUrrENcy cUrrENcy cFO have significant implication on the ALM conclusion. The of time. allowing need to be mismatches allows specific hedging flows with an end maturity assumptions used should be limitations Credit willus intervals inputs allow the user to model cashneeds to be measured and Key rate durations overcome thesechanged in progressiveto do reviewed and authorized and thus the ability to are similar to appropriate part and the output analyses. and decay rates thathedge the moreamortizations. of the yield more rigorous riskshould be recalculated to determine the impact this can take weeks. curve. Dividend and discount rates allow for the present value of a different assumption. if you are uncertain as to in addition to identifying modeled interest rate scenario. calculations (premiums) in eachinterest rate risk exposure to To summarize key rate durations have several advantages the many requirements of nonparallel rate calculations can then mathematically effective durationshifts and designing active hedging strategies be over existing measures. They can identify the price sensitivity Conclusion applying and using derivatives key rate duration compared to that of measures can also be used to case effective of an asset to each segmentcanthe spot yield curve. They can the institution s assets. in this decompose non-maturing deposits of be viewed as a franchise value consider engaging an external portfolio returns. We know we can structure securities in a also manage interest rate risk exposure arising from arbitrary duration is calculated by merely backing into the price change or benefits generated from loyalty of the membership when service provider number of ways to achieve a duration target and these various nonparallel shifts in the term structure of interest help you formula. For example if the liability present value is 100 in the deposits are retained when dividend rates are low in a higher through the steps. structures have different sensitivities to non-parallel yield curve base 101 in the up 100 basis point scenario and 99 in the down market environment. And vice versa A financial derivatives Properly used institution moves. But a significant shortcoming of this duration approach is Emily Hollis CFA is a partner with ALM First Financial 100 basis point can only bethe effectiveone bucket is one percent Advisors LLC. a non-maturity dividend rate higher than market scenario assigned to duration for example that offers can offset interest rate risk that each asset (i.e. (101-99) 200). to attract hot money will decrease the economic withinofthe the 10-year bond callable in two years can t be counted in that is inherent value its liabilities. it is imperative This is vital because as competition both the two- to 10-year final requirements. The second part credit union industry model these accounts for a more competencies andmeet the buckets. accurate depiction of allow rate unions sensitivity Analysis submitted when all requirements are grows derivatives can interestcreditrisk. to compete more and final application is The regulator strongly suggests sensitivity analyses as a means effectively. completed including dealer contracts. are calculated figures not assumptions. The to quantify the effects of changing assumptions. sensitivity Emily Mor Hollis CFA is a partner with ALM First Financial setting up a line at a dealer is similar to becoming a Advisors LLC. analyses are essential because the core share evaluation may Emily Hollis CFA is a partner with ALM First Financial member of the FHLB--it can be laborious and takes a good deal Advisors LLC. 26 Credit Union bUsIness September 2014 March 2014 January 2014 credit Union BUSINESS credit Union BUSINESS 17 13 CU smALL bUsIness OUtreACh entrepreneurs rising Small Businesses Find Support at their Local Credit Union By Bill Prichard C 28 it is more than likely that every small business or budding entrepreneur will need financial help at some point in its life. Credit unions are not only becoming an increasingly important lending resource they also provide other forms of support that can help businesses expand and ease entrepreneurs along their road to success. with 230 million in deposits. Bethpage is committed to helping local businesses reach their financial goals create new jobs on Long island and build economic opportunities said Kordeleski. it s crucial for Long island businesses to have more access to capital which is essential for growth. For Bethpage this means funding loans to support small business growth aid in expansion and stimulate the economy. Community America Credit Union in Lenexa KS is another credit union with its eye on helping small business by offering local business members unsecured fixed-rate loans of up to 10 000 based on their financial statement. And in a recent report the Wisconsin Credit Union League stated that Wisconsin credit unions are ready willing and able to help small businesses expand hire and grow. The report-- The 2013-14 Scorecard --says that Wisconsin credit unions had more than 2.7 billion in business loans on their books as of September 2013 with the average loan amount topping off at 178 455. it goes on to state that in December 2007--the start of the Great Recession--Wisconsin credit unions recorded 1.5 billion in business loans. Since then state credit unions business lending has increased by 73% while loans made by Wisconsin bankshasincreasedjust1.5% accordingtotheleague sanalysis. redit union business member lending continues to be a fast-growing segment of the industry growing ten percent in 2013 with an average loan size of 217 000 according to Patrick Keefe sr. vice president of communications for the Credit Union national Association (CUnA) in Washington DC. Credit Unions Stepping Up Bethpage Federal Credit Union new York State s largest credit union recently announced the formation of a new division to work with local businesses in nassau and Suffolk counties to help businesses achieve their financial goals according to Kirk Kordeleski President and CeO of Bethpage. Called the Bethpage Business Banking Group the new entity is comprised of three teams of experts with broad-based experience in commercial lending and cash management solutions. The teams will work in Bethpage branches throughout Long island to educate business members about the credit union s loan and cash management services and will focus on several key vertical business segments including healthcare medical professional services wholesalers and distributors and notfor-profit organizations. Bethpage s business banking portfolio currently includes more than 5 000 existing business accounts Credit Union bUsIness September 2014 CU smALL bUsIness OUtreACh Real Support for Local Businesses As they struggle to adapt to the changing nature--and or technology--of their business a credit union can become the entrepreneur s lifeline. CUnA s Keefe cites the example of freelance photographer Tom Hoebbel owner of Thomas Hoebbel Photo-Video in Brooktondale nY. When the time came to join the internet age and upgrade his equipment Hoebbel opted to work with his local credit union rather than his neighborhood bank. He had been a credit union member for years because of its free business checking services and he was impressed by the CU manager s commitment to helping him secure the loan he needed to expand his online business. His county--Tompkins nY--was offering economic development loans and Hoebbel needed 25 000 to purchase new equipment and initiate a small marketing campaign. After the county loan commitment had dragged on for several months the credit union manager helped Hoebbel apply for and secure an interim Small Business Administration loan while he waited for the county loan to materialize. Whenever a small business or rising entrepreneur needs a loan or financial advice Keefe suggests calling a local credit union to ask for help. Being cooperatives credit unions are genuinely interested in helping other credit unions depending on their staffing and time availability of course. if you don t qualify for membership most credit unions will give you the names of other local credit unions you may be eligible to join he said. According to Keefe it s maintaining this high level of personal service--a credit union hallmark--that keeps them connecting with all members including business members at every opportunity. it helps them stay successful. Credit unions support local retailers in creative and interesting ways too. One such program is an innovative rewards program called Shop Main Street which was developed by RewardsnOW inc. of Dover nH. RewardsnOW benefits credit unions their members and local merchants through a multi-faceted marketing and promotion campaign. CO-OP Financial Services a financial technology provider to credit unions has made the RewardsnOW program available to its credit union clients nationwide. it allows local merchants the opportunity to build repeat-customer business which means closer ties with members increased income and enhanced commercial relationships with local merchants. From a credit union perspective it all adds up to creating a sense of community with a program that keeps local dollars in the local economy. September 2014 Credit Union bUsIness 29 CU smALL bUsIness OUtreACh Here is how it works. With the Shop Main Street program whenever credit union members use their credit union-issued debit or credit card at a participating merchant outlet the merchant rewards the member with a minimum discount of 5% off the purchase price. This amount converts into credit points in the credit union s loyalty program which members can redeem for local merchant gift cards or certificates. Participating merchants can create offers via an online management tool and are given marketing material including store posters and window stickers to promote Shop Main Street in their establishments through social media and on their websites. Community Credit Union in Wyandotte Mi that approached a local restaurant near its branches to work with the owner to provide co-branded coupons for the credit union s employees during the CU Lunch Local event. An outgrowth of the flash mob movement cash mobs have become so popular they even have their own web site www. Other credit unions have also sponsored cash mobs including Ohio Health Care Federal Credit Union of Dublin OH and ORnL Federal Credit Union of Oak Ridge Tn. Other Ways Credit Unions Support Small Businesses Firefighters Community Credit Union of Cleveland OH is a business-friendly institution that offers financial counseling and other assistance to its members--not all firefighters--that own local businesses. Through a partnership with Accel a financial counseling firm based in Farmington Hills Mi FCCU provides its members with free online services such as confidential credit counseling financial education housing counseling and optional debt management services. Community America Credit Union in Kansas City MO has a web page dedicated to assisting business owners with online advice on insurance assets liabilities and employee benefits. The web page also includes advice on 7 Ways to Keep Your Business on a Profitable Path . Woodland CA based Yolo Federal Credit Union offers free workshops year-round for small businesses and non-profits that feature guest speakers who are experts in their field and provide relevant information for business owners. Glacier Hills Credit Union of West Bend Wi hosts an annual Memberfest featuring workshops aimed specifically at managing small businesses and a business showcase providing an opportunity for local merchants to build their business network as well. Thinking like an entrepreneur is one of the keys drivers of small business success. To stimulate innovative thinking COOP Financial Services conducts an annual contest for credit union employees to see who can come up with the most creative solution to an issue or issues confronting their industry. This year s winner Christopher Whalen of Connex Credit Union in new Haven Connecticut was announced at the THinK 14 conference in new Orleans on May 19-22 and received a Promoting the entrepreneurial Spirit Another way to bolster small business is by honoring the entrepreneurial spirit through some form of peer recognition. Bethpage Federal Credit Union s Central islip branch supports the annual Hispanic Business Owner of the Year Award to help boost local Hispanic-owned businesses. The award program is an outgrowth of the Hispanic initiative established by the Stony Brook University Small Business Development Center that operates under the auspices of the new York State Small Business Development Center and the Organization of Latino entrepreneurs. The initiative s goal is to support and promote Latino business owners and entrepreneurship and for Bethpage FCU it is an effective and positive way to reach out to the Hispanic community as future members. Local credit unions have adapted to today s highly competitive slowly improving economy and have found creative ways to assist budding entrepreneurs and small businesses in their community in addition to loaning money. One such way is through an event called a cash mob which consists of community members gathering to help local merchants by purchasing goods and services from their shops to bolster sales. encouraged by the recent success of a statewide cash mob event dubbed CU Lunch Local more than 50 credit unions in Michigan have since used cash mobs to support small businesses according to Michigan Business Connection LLC a commercial lending CUSO and Michigan CU Capital an entity that provides channels for credit unions to serve their members small business lending needs. One example is the 92-million nuPath 30 Credit Union bUsIness September 2014 CU smALL bUsIness OUtreACh 10 000 cash prize sponsored by MasterCard. Credit unions and their affiliates have proven to be the perfect partners for helping entrepreneurs and every type of small business promote themselves and grow in their communities. Because credit unions have a well-established track record for helpful service they represent a higher level of trust and understanding within their local business community and the specialized lending advice and promotion services that credit unions offer are good business for everyone. Bill Prichard is Manager Public Relations and Corporate Communications CO-OP Financial Services ( org) a financial technology provider to credit unions based in Rancho Cucamonga Calif. The author can be reached at (800) 782-9042 ext. 3450 and bill.prichard 7 Ways to Keep Your Business on a Profitable Path Community America Credit Union in Kansas City Mo. has a web page dedicated to assisting small business owners with online advice that includes 7 Ways to Keep Your Business on a Profitable Path. The entire article can be found at https 7-ways-tokeep-your-business-on-a-profitable-path. The Seven Ways Recommended To Business Owners Include 1. Seek outside funding. 2. Hire cautiously. 3. Develop a public relations plan. 4. Consider a (personal) pay cut. 5. Pinch pennies. 6. encourage referrals 7. Take advantage of free or low-cost advice September 2014 Credit Union bUsIness 31 CU regULAtIOns What the regulatory exam Process Could be By Ryal Tayloe earlier this year Carrie Hunt nAFCU s senior vice president of government affairs and general counsel was recorded suggesting that the nCUA exam process would be more stringent on credit unions in 2014 than previously. An ongoing CUnA survey1 also found that four out of five respondents expressed that weightier regulatory and examination requirements had already put additional pressure on resources during 2013. Here is what the first quarter of 2014 revealed so far2 More than 3 200 new pages of regulatory requirements have been added The number of regulator enforcement actions has increased to 165 up from 134 in the previous quarter Per-institution compliance costs averaged 37 621 per quarter Clearly the financial downturn has changed financial institution regulatory landscape forever and most industry experts advise credit unions to learn to adapt because there will be no retreating. The new normal is increased legislation enhanced regulator expectation of credit union management cooperation and longer safety and soundness examination time frames which averaged more than nine days for credit unions last year. More examiners are on-site these days--as many as 30 examiners per exam in some instances--and they are requesting more documentation reporting and access then ever before. So what should credit unions do For starters accept the situation but take all necessary steps to make the examination process less disruptive easier on your credit union and staff and as cost effective as you possibly can. it is possible for you to ease the examination headache and keep control of the process. emerging iT solutions provide the best vehicle credit unions can use to achieve these goals. if you maximize all available resources you can minimize the impact new regulations will have on day-to-day business improve efficiency and strengthen 1 financial results. iT s combination of real-time dashboard reporting standardized process management tools and digital filing systems creates a sound technological framework that credit unions can build on to offset heightened regulatory scrutiny from a safety soundness and compliance perspective while allowing you to simultaneously focus on member value. The ideal solution is installing a robust software system that is built on top of streamlined and standardized processes that are all linked to the credit union s core system. This configuration allows both management and regulators to review detailed reports before during and after the examination process. The end result is a better understanding of the loan portfolio a stronger awareness of its risks and greater capabilities to mitigate those risks. C.A.M.e.L. Credit unions must consider how to satisfy compliance objectives for each of the five primary exam assessments Capital Assets Management earnings and Liquidity (CAMeL). Just as the regulators use this system to evaluate institutional health credit unions can use it to evaluate how information technology can improve its ability to manage both the exam process and the results. 1. Capital Regulators have named capital one of the key indicators that predict how an institution might fare against losses. Using technology Per an ongoing CUNA survey. Results collected by CUNA and league affiliated credit unions that received an email from CUNA CEO Bill Cheney in December 2013 inviting them to complete an online survey about their most recent exam. 2 Continuity Control s Quarterly Regulatory Compliance Briefing. 32 Credit Union bUsIness September 2014 CU regULAtIOns credit unions can create custom reports that drastically change daily decision making for management and are appreciated by examiners. For instance looking at loan portfolios in real time yields direct insight into loan product concentrations relative to a credit union s capital level significant borrower or industry concentrations and risk within a niche market. The customizable reports can also eliminate the cumbersome task of assembling the pre-exam package and since these reports are available anytime they offer regulators quick and easy access to information--such as potential risk concentrations--for determining if capital is sufficient to support it. that standardizes the loan application underwriting and approval workflow processes. 2. Assets examiners look at all assets but they focus on loans and portfolio credit quality. A dashboard-like system allows portfolio managers and lenders to run exception and past-due reports share higherlevel metrics with management and offers the option to drill down by loan market or branch. Digital credit filing also simplifies the loan review and exam process by removing redundant paper freeing up physical space and instituting file consistency enterprise-wide. You save regulators time and establish invaluable rapport when you show them that these capabilities are in place and ready to use. 3. Managers Managers must know the balance sheet and loan portfolio thoroughly to maintain a healthy risk profile and avoid noncompliance. While automating paper-based processes can take consistency to a whole new level the greater reward is increased efficiency. An integrated funding pipeline improves funding decision-making and reduces costs which improve the credit union s efficiency ratio net interest margins return on assets and operating profits. By setting data permissions appropriately you will also simplify regulator interaction with the data they want and need to see. The exam team can view required reports and files instantly and conduct reviews without involving your employees. 4. Earnings earnings are part of the exam because of their role in fueling capital and growth. Software systems that streamline file processing storage and reporting increase efficiency lower overhead and improve spread management. And they help prevent noncompliance penalties. earnings can receive a major hit--as much as a full year s net income--when credit unions don t manage compliance risk properly. You can greatly reduce the chances of incurring such fines when you implement technology 5. Liquidity True liquidity management is about funding loans meeting payroll and managing interest rate spreads. Using customized reports you can stretch loan funding to weeks instead of days. By utilizing a powerful reporting system credit union managers will become more confident and skillful in forecasting deposit growth trends and cash accumulation from loan repayments and other sources resulting in smarter spread management and capital allocation. internal risk management can provide examiners access to review processes documentation and calculations. Over the normal course of a regulatory exam dozens of employees will have to disrupt their work to pull files run reports explain credits or defend analysis all of which can add up to hundreds of dollars per hour in lost productivity. Without an infrastructure in place to proactively manage the exam process credit unions risk lost productivity credibility and a poor exam report. And the risks of the exam scenario are not exclusively internal they potentially expose the credit union s brand to significant reputational risk. i have a vision of what an exam could be a non-disruptive transparent and easily managed process that enhances the credibility of both credit union and regulator. Technology can change the exam experience for everyone involved by allowing your credit union personnel to be better prepared without taking precious time and resources away from members. And examiners will appreciate the detail consistency and timeliness of all the reporting they receive during the examination process. They will also know that it reflects well on your daily standards of practice. Ryal Tayloe is credit union regional vice president for Wilmington N.C.based nCino. Through its flagship operating system nCino leverages the power of Salesforce to provide smallto mid-sized financial institutions with superior transparency and clarity into their existing loan production pipelines portfolios and operating efficiencies across all business lines resulting in increased member loyalty and growth productivity gains and regulatory compliance. For more information visit September 2014 Credit Union bUsIness 33 CU COntent Is your Web Content doing Its Job O By Laura Enock content. To begin you will need to define these three critical factors unique to your credit union 1. Your audience 2. The purpose your content serves 3. What to say and how to say it f course your credit union has a website. How could it not in today s world every organization needs to have a web presence. But is it enough to just have a piece of online real estate To post a website and forget about it for a year or more hoping it serves a purpose beyond simply being there Or should you expect more from your website in a world where social media conversations dominate the online space and your audience is accustomed to higher levels of engagement in fact what can you expect your web presence to accomplish And what about social media is your Facebook page simply a placeholder that you ll get to someday or do you expect it to actually produce results Can you use social media to set and achieve specific goals Your credit union s website and social media presence can help you reach young people and foster a sense of community involvement. in fact it s probably already doing that. However you can expect it to do even more by using the right content that s regularly updated. A dynamic online presence is one way to increase membership and educate members (and potential members) about the services you offer but that doesn t happen automatically. in the case of online marketing the axiom if you build it they will come is neither a realistic nor a sustainable strategy. While it sounds simple--after all social media is free --building and maintaining an effective digital profile is actually a daunting task. Filling a web or social media site with relevant and useful content posted on a daily basis can seem like a lot of work and it is. it is also work that will distract you and your team from other important demands. Without trying to minimize that work here is an approach that will turn that process into a science and help you curtail the amount of time you spend updating your web or social media Credit Union bUsIness 1. Your audience--Who are you talking to Understanding and reaching your members can be broken down into three phases Arouse Get their attention with something that s noteworthy shocking or surprising. Find a recent news article that is related to a service you provide Talk about seasonal events or changes Hit readers with an impressive opening statistic Connect identify needs that your members have and talk about them as pain points . Are they worried about financial security Are they uncertain about how to make the most of their investments Are they hopeful about the possibility of home ownership Gratify Recommend a product or service that can satisfy or fulfill that need. Will a consolidation loan provide them with greater financial security Will your iRA products give them assurance about their financial future Will a mortgage give them opportunity 34 September 2014 CU COntent The right message should be one that your audience finds informational and subtly persuasive. Remember they are real people leading complex lives with different needs and dreams. Understanding them is the first step to providing great content. Sell yourself. Tell your audience what makes your credit union unique but don t make that the focus of your content. Use the 80 20 rule no more than 20 percent of your content should be promotional. The rest should be educational informational and entertaining. While there s nothing wrong with fun human-interest features they shouldn t be your only marketing content. 2. Purpose--What is your goal The easiest answer of course is driving loan volume but the path to that answer is far more complicated. Member benefits no one cares that your mortgage rates Good content builds member relationships. it should are at an historic low after all aren t everyone s They connect with them one human mind to another. do care if their mortgage payments will be smaller that Good member relationships mean they ll choose your they can get local servicing and that the closing will be products and services to meet their financial services quicker and easier Provide relief for those common pain needs. points. Good content builds brand loyalty and trust. Today s members are suspicious of advertising but trust good Write about your community whether location advice. profession or public interest defines that community. Creating content costs money and or time but when People interested in savings are likely to be interested done correctly it will provide a far better return than in personal finance shopping financial security and paid print TV radio or internet advertising. investing. You can cover a wide range of topics from a People will choose your credit union over banks because unique perspective. they want a personal financial relationship. Build it into all of your messaging whether it s through web social or Coming up with those unique perspectives can be a timeother digital formats. consuming challenge. That s why credit unions tell us that even if they re-write an article they ve found on a third-party website if your members like your content they will come to you such as the fact that the research is done and whenever they need your services. it s that simple. suggestions are in place for how and where to promote CU services [you ll find them in red brackets just like this ] allows 3. Content--What will you say them to continually post fresh relevant content without being it s not enough that you simply start talking and say something abrasive or repetitive. new every day although that s certainly a start. What you say Do you think you can t take an informational article and include and how or when you say it can mean the difference between a little bit about your products and services while adding enough content your members tune out (ouch ) and content your information to show members that you have solutions but not members love (yes ). Here s what you ll want to keep in mind so much that your copy sounds promotional when looking for or creating content for your credit union s Hey i just did it. And i d love the opportunity to help you online communications. make it happen too. Speak personally. Your audience is made up of people talk to them like you would to any member visiting your branch or office. Online communications can have a friendlier more casual tone than print although even print has become less formal over the years. Laura Enock is Publisher of CUcontent which provides credit unions with fresh daily content (articles videos infographics etc.) and digital marketing tools. Get a free eBook called The Technology Your Credit Union s Marketing Department is Missing at September 2014 Credit Union bUsIness 35 CU CredIt CArds the pursuit of the Ultimate Credit Union Credit Card program The Great rate Debate By Ondine Irving P 36 NOTE This is the first in a 5-part series of articles that i am calling The Pursuit of The Ultimate Credit Union Credit Card Program . i am deliberately not calling it The Ultimate Credit Card Program . Although many in the industry think we should care about bank card program characteristics and performance as well as credit union credit card programs i do not. fee shenanigans run the gamut of fee assessment parameters. And what about reneging on an intro rate for exceeding a credit line What happens when cardholders make late payments How are consumers to know if either the cash advance or balance transfer fees is the greater of 3%-5% or 10 Is this the moment when we begin to realize that bankcards are continuing to manipulate consumers but within the guidelines of the CARD Act rior to the CARD Act implementation many credit unions rushed to offer members a variable rate card under the impression that fixed rate cards would become a greater financial risk. Really Fixed rate credit card programs had been the single key differentiator between credit unions and bankcard programs before the CARD Act and i see no reason why it cannot continue to be one of a CU s key differentiators. Airline Programs What We Are not it is unlikely that Credit Unions will ever get a cobranded credit card deal with American Airlines Delta Airlines Southwest Airlines United Airlines or any other carrier. nor is it likely that we ll be able to strike a deal with any airline for priority boarding free baggage checks priority seating upgrades or even a free drink. it just isn t going to happen. And we know that our management and board members most likely carry these robust cards because of the rewards and travel perks they offer not because of their rates. But these robust bank credit cards also have their downside variable rates higher cash advance and penalty APRs account opening balance transfer cash advance late and marked up foreign transaction fees and on and on. Bankcard Credit Union bUsIness Do not Analyze Portfolio Data in isolation it seems that just one facet of the credit card program always drives credit union executives or examiners over the edge so they use the CARD Act variable rate to protect themselves. Really Ask your staff if current cardholders are scored prior to reissue. Have charge offs increased if they have then it s time to pull in the reins on credit lines Has delinquency increased Let s increase late fees or impose a penalty rate to offset the risk. But stop and remember One single aspect of card program performance doesn t paint the whole picture. There are many other aspects at play. Time and time again too much emphasis is placed on charge offs credit lines and delinquency yet some of the most profitable credit union credit card programs have charge offs September 2014 CU CredIt CArds just under two percent and 60 day delinquency rates under one percent. That s a far cry from bank averages of five and eight percent respectively. Again we are not banks nor should we care too much about what they are doing. instead we should offer our members card programs to round out the products and services available to them keeping in mind that our credit card products are usually the highest yielding loan product we offer. Once you fully understand all the characteristics of portfolio performance it s really that simple. On the credit union side most credit card program revenue is derived from finance charge income--up to 70 percent-- and this is exactly what we want balances over interchange. CU credit lines--the current credit union credit card line average is 4 800--are not large enough to generate the volume necessary to make interchange a significant portion of card program revenue. Attracting balances must offset this weakness. interchange means everything to banks but credit unions tend to overemphasize its importance. The reality is because of our lower credit lines CU interchange fees represent just 15 to18 percent of total card program revenue. Banks can afford to take greater risks because they charge higher fees and interest rates. So again i ask the question why do credit unions care about the performance or competition of bankcards is a variable rate really going to attract higher balances A fixed rate program provides us with an opportunity to offer members a fair and ethical product while remaining fiscally responsible provided that we manage risk in other areas such as scoring reissues collection efforts underwriting guidelines etc. interest rates represent a relatively minor piece of a credit card program s overall profitability to issuers yet are key to attracting consumers. Scoring The Credit Card Portfolio At Reissue i am constantly thrown during my sessions of the School of Credit Card Program Management when i am reminded that over 50 percent of credit unions do not score cardholders at the time of reissue. Scoring a credit card portfolio at time of reissue is a much better risk management tool than automatically imposing a variable rate that few credit unions will ever adjust. Why doesn t the nCUA care about this it is far riskier to consistently give D or e credit cardholders the same rates they received 15 years ago when they might have earned an A credit rating. After all there is a reason credit cards have expiration dates consumer behavior changes economic climates change and market rates change. each change impacts an issuer s right to decide whether or not to continue offering the same rate they granted five to 10 years earlier. So score your portfolios and continue offering a fixed rate. Yes CARD Act regulations will still apply the 45-day notification period is required and the new rate can only apply to new purchases and balances. if you decide to offer a variable rate card carefully examine how many times you have actually changed the rate since the CARD Act was implemented. Interest rates represent a relatively minor piece of a credit card program s overall profitability to issuers yet are key to attracting consumers. Credit Union Fixed and Variable Rate Program The table below shows the revenue differential on two card programs--variable and fixed rate--for a billion dollar plus credit union. Of course this is just one example and there are many factors in play--average credit line usage rewards etc.--but this example clearly illustrates how the two different account types impact a CU s bottom line. Financial Models Banks vs. Credit Unions The financial model for bankcard programs is very different from credit union card programs in terms of finance charges interchange and fee income. Banks make the majority of their income from interchange and fee income--up to 50 percent of their card program revenue. Bankcard interchange income is robust and is driven by higher credit lines reward programs and usage. Therefore rates are almost irrelevant to banks. nevertheless credit unions have been following their lead by making the jump to variable rates without offering any of the perks such as airline card programs. 38 Credit Union bUsIness September 2014 CU CredIt CArds examine your credit card programs carefully to see how well they are performing. is your variable rate card bringing in enough bottom line revenue How does it compare to your fixed rate card program The bottom line is that we should never analyze portfolio data in isolation. Future editions Part1 TheGreatRate Debate Part2 EffectiveBalance Growth Strategies Part3 MostMisunderstood Theories of Card Program Management Part4 StatementofCredit Card Program Facts Part5 CreditUnionLoyalty Programs Ondine Irving founded Card Analysis Solutions (www. in November 2003 after a 12year career at Baxter Credit Union 5 years at Certegy Card Services (now FIS) a short time with Raddon Financial Group and in 2010 worked for Suze Orman. Ondine is the creator of the original School of Credit Card Program Management which debuted in 2008. These popular classes sell out 60 days in advance. Sessions are held 4 times annually throughout the country. Her focus is to teach credit unions in an objective manner the expense savings and income opportunities of the credit card portfolio and strongly believes credit unions should issue and manage their own card programs. In 2010 Ondine created www.CreditCardConnection. ORG--a tool for consumers to find fair and ethical credit union card programs. This is the largest aggregation of Credit Union Credit Cards on the Internet with over 1 100 fair and ethical credit union card program options for consumers. The total annual income per account is 274 for the fixed rate program and 56 for the variable rate card. The fixed rate program derives 83 percent of its revenue from finance charge income versus 69 percent on the variable rate program. You may argue that the interchange income is higher--23 percent vs. 15 percent--on the variable rate program yet the dollars speak for themselves. Bear in mind that credit card interchange averages between 1.68 and 1.72 percent of net sales versus the average credit union interest rate of between 9 and 12 percent which indicates that overall the variable rate program is actually losing money. Charge offs are higher on the fixed rate program at 1.8 percent (take note finance people and auditors) yet the overall net yield is still over 8 percent. The credit union s mission is to provide fair and ethical financial products and services to its members and the credit card is just one of the many products we offer. The credit card program allows us to fulfill our mission and we should not look to banks as mentors. September 2014 Credit Union bUsIness 39 teChnICALLy speAKIng Biometrics helps Put a Finger on Members By Roy W. Urrico S Biometrics is not just about sci-fi movies anymore. Airports health facilities smart phones and increasingly Fis incorporate fingerprint facial vein voice and iris recognition on a regular basis. Some credit unions always ready to step out into technology s leading edge are installing biometrics for member identification and backend support. Grant s company based in Oklahoma City licenses BioTran software. They were looking for identification [as opposed to verification] of the member at the teller line so i tweaked the software i had to do that he says. They also wanted Grant to do a screen pop on the Symitar screen. Grant installed a small software development kit (SDK) on the credit union s workstations and the fingerprint scanners along with the customized programming to finally finish the project. He utilized DigitalPersona Pro enterprise software and U.are. U Fingerprint Readers to secure access to applications and customer information. There wasn t an initial large capital outlay for Service 1st FCU because they were able to employ existing hardware and the Symitar core processing solutions. Otherwise the credit union would have had to purchase a backend database server and a frontend application server. The implementation process went smoothly. During setup RG2 and the five-person credit union iT team installed software on each machine incorporating a biometrics scanner. each workstation uses Digital Persona fingerprint software and theSDKkitinstalledontheserverside. It sonaSQLserver database says Grant. We can piggyback on any SQL server holding their database. And there is another piece that is doing the biometric identification. This was accomplished via Windows group policy. Service First has a real good iT team states Grant All i did was install the database got the service up and running and in three days they were testing it. ervice 1st Federal Credit Union a 237 million financial institution headquartered in Danville Pa. is now offering 23 500 members at its eight branches biometric fingerprint scanning authentication developed by RG2 Solutions. The biometrics provides an advanced first step in privacy and security--particularly in a busy open lobby. This is not a new venture into biometrics for Service 1st. in 2008 the credit union partnered with U.S. Biometrics Corp. as its technology provider but two years later the biometrics company folded and Service 1st FCU found itself without support and no way to add new devices to its system. That is when they found RG2 Solutions to revive the project. i had a product that was out there being used recalls Roger Grant president of RG2 Solutions an independent consultant developer who has worked in the credit union industry for 33 years. Roger Grant president of RG2 Solutions 40 Credit Union bUsIness September 2014 teChnICALLy speAKIng with another account and so on said Grant. The roll out is fairly simple. The solution however isn t just for members. A majority of the employees at Service 1st FCU as well as many other credit unions that have installed biometrics use the technology to access their own company accounts at the backend. They utilize a finger scanner on their laptops for pre-boot authentication to support hard drive encryption. Grant admits that biometrics on the front end is only recently starting to fire up. At the backend level they have been chugging along pretty well. Digital Persona has been slowly capturing that market. That is the slow steady growth admits Grant the member side will be slower. From a member standpoint you can verify or authenticate that person. From a back-office situation it eliminates the need to remember passwords and the time associated with password resets. Biometrics eliminates the lockout and the need to have someone out there doing password maintenance suggests the RG2 president. This biometrics-based solution is ideal for credit unions that currently require password-based authentication to access financial information. People share store them on sticky notes and leave them in the open for others to misuse. Hackers increasingly steal passwords by breaking into systems and From start to finish the solution took roughly three months to implement which included beta testing some of the credit union s 81 employees to ensure the software was functioning as expected. To date Service 1st FCU adds approximately 133 member accounts to the biometrics system and averages just over 1 700 member swipes per month. Members using biometrics visit its branch offices three to four times per month. How Does it Work While members are encouraged to use the scanners participation is voluntary. Participating members have to preregister. To date over 4 350 member accounts are registered and use it for quick member identification. it takes roughly one minute per finger to scan and send the image to the server according to Grant. it then produces a screen pop which automatically displays all of the relevant member and account information on the teller screen. A member can assign each finger to an account as opposed to a person. This comes in handy if the member has multiple accounts or is a co-signer on an account. in some cases this means scanning six or seven fingerprints. So your left index finger is associated with one account and your right index finger September 2014 Credit Union bUsIness 41 teChnICALLy speAKIng offers a full suite of biometric security tools for the enterprise in addition to its BioTran member-verification system. We saw early on that biometric technology can greatly reduce identity fraud says Grant. i thought biometrics was a perfect fit for credit unions. not all financial institutions are convinced about biometrics and a battle is shaping up between financial institutions with doubters that biometrics--whether voice iris or finger scan-- will ever replace passwords on one side and an increasing numbers of executives as well as consumers who anguish about how undependable the username password has become on the other. Certainly there are members who are not interested in the service including members who believe that their entire fingerprint could be recreated from the data we collect. However Grant reassures everybody that the biometrics database does not contain any fingerprints. it is a stable technology and i m surprised it has not caught on quicker asserts Grant it s a viable technology and it works. Roy Urrico is a freelance ghostwriter and byline writer of books Web content including blogs articles newsletters guides case studies and white papers about financial institutions financial technology compliance information security credit and collections foreign exchange and many other 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 According to a press release WCU employees have recovered two to three percent of their time that used to be lost to remembering and keying in passwords. In turn the credit union s It help desk has gained two to three percent of its time back since they no longer have to contend with password resets. appropriating them. Also if an employee misplaces or forgets their password which commonly occurs since passwords must be long and changed frequently to meet industry security standards calls for password resets distract iT personnel from more critical business-driven activities. DigitalPersona Pro with U.are.U 4500 Fingerprint Readers solution has also been implemented to authenticate employee identities at Workers Credit Union (WCU). With 15 branches across north Central Massachusetts WCU s 240 employees now use DigitalPersona biometrics-based technology to confirm positive identity when accessing online applications and Web sites. According to a press release WCU employees have recovered two to three percent of their time that used to be lost to remembering and keying in passwords. in turn the credit union s iT help desk has gained two to three percent of its time back since they no longer have to contend with password resets. CEO SUBSCRIPTION WITH BENEFITS Benefit your cFO cOO cMO ccO clO ciO HrD With FREE Monthly e-newsletters Viable Technology Grant has followed biometrics since the early 21st century. i was intrigued by it says Grant who began his company in 2002 it was bleeding edge at the time. in 2005 RG2 Solutions announced the expansion of its biometric solution products and partnership with Digital Persona a leading provider of fingerprint-based authentication solutions. RG2 Solutions now Subscribe NOW register 42 Credit Union bUsIness September 2014 teChnICALLy speAKIng Verification Systems Biometrics is a technology that Verification systems are generally described as 1-to-1 helps identify individuals based on matching systems because the system attempts to match their physical or behavioral features. It the biometric presented by the individual against an exact biometric already on file. Verification systems look to answer involves identification and verification the question is this person who they say they are Under a of both physiological characteristics-- verification system an accountholder says they are a specific person. The system checks the biometric against an existing such as fingerprints face recognition biometric profile in the database connected to that person s file. DNA palm print hand geometry and iris recognition--and behavioral identification Systems identification systems are dissimilar from verification systems traits--such as keystroke patterns since an identification system seeks to recognize an unknown and speech pattern voice recognition. person or unknown biometric. The system tries to answer A biometrics system can be either a the questions Who is this person or Who generated this biometric and must confirm the biometric presented against verification system or an identification all others already in the database. identification systems are described as a 1-to-n matching system where n is the total system. number of biometrics in the database. September 2014 Credit Union bUsIness 43 75 x 3 225 99 x 3 297 250 000 Credit Union Employees 92 Million Members 100 Million Miracles Since 1996 Credit Unions for Kids has raised more than 100 million for Children s Miracle Network Hospitals giving hope and healing to kids in your local community. YOUR FUNDRAISING DOLLARS IN ACTION MILLION 10 2 1 iMRI machine and surgical suite 1 Cardiac X-ray machine 1 Ultrasound machine 1 Bone marrow transplant 1 Fully-equipped Giraffe OmiBed incubator MILLION THOUSAND 270 THOUSAND 250 THOUSAND 100 ViSiT The MArKeTPLACe PAGe AT WWW.CUBUSiNeSS.COM MARKETPLACE Card Processing Payment Solutions 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 Ready for more value from your ATM provider Open your doors to a new ATM provider For decades Cummins Allison has helped you make the most of your branch resources. Now we re excited to offer a complete line of highly reliable secure full-function ATMs to fit any branch configuration from drive-up to walk-up. And best of all our ATMs are backed by the responsive dependable local service you need and have come to expect. So open your doors and give us a try. When you re ready to replace add to or expand your ATM network let s talk. Visit letstalk 2014 Cummins Allison Inc. All rights reserved. CrOssWOrd Qualify to win an iPad Mini on October 1st To qualify 1. 2. 3. 4. Read Credit Union Business. Answer the questions. to enter register on Qualify to WiN an i-Pad Mini. 48 Credit Union bUsIness September 2014 800.268.1884