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T H E O N LY ALL- D I GI TAL ALL -BUSINESS RESOURCE FOR CREDIT UN IO NS THE MEMBER BUSINESS LENDING ISSUE APRIL 2016 VOLUME 11 ISSUE 4 Rich Helber TROPICAL FINANCIAL CREDIT UNION The Right CEO At Just The Right Time BY TIM O HARA Cyber Security BY ERIN O HERN Fraud Monitoring for Tomorrow Back to the Future BY AMANDA SMITH Mobile is Taking Payments Full Circle Introducing The Team Builder from CU Business Magazine Helping to strengthen credit unions and their communities. VIEW FROM THE CROW S NEST COMPLIANCE UPDATE LENDING SOLUTIONS MARKETING MATTERS CFO CURRENCY MEMBER BUSINESS LENDING CEO VELOCITY TECHNICALLY SPEAKING BRANCH BUSINESS BUILD YOUR TEAM Tim O Hara Publisher CU Business Dear Tim You know how much I enjoy reading your magazine which is always filled with helpful and timely articles Sign up at www.creditunionbusiness.com. Join hundreds of CUs across the country by sharpening the skill sets of your department heads by signing up to 10 team members to receive CU Business monthly eMagazine weekly eNewsletters and over 5 years of back issues on our website. We email each Team Member PDF versions of pertinent articles before they are published according to title CEO gets CEO Velocity and View from the Crow s Nest CFO receives CFO Currency Lending department gets Lending Solutions Marketing Executives receive Marketing Matters Compliance department gets Compliance Update Trainers receive CU Training Branch Supervisors get Branch BUSINESS. Cost is only 500 per year 20% of which is sent to Children s Miracle Network to be filtered to the CMN children s hospital nearest the CU s community. A Website Wall of Fame will credit each CU with the CMN donation citing CU name city asset base and CEO. With the new Team Builder program I ll be able to retain hard copies of your magazine and ensure that my colleagues receive helpful articles on a position-specific basis I also think supporting the Children s Miracle Network is a wonderful idea Thanks again and keep up the great work Best Walter Walter Merkle Executive Vice President Northwest Georgia Credit Union Signing up is simple Send a check for 500 ( 100 of which goes to CMN) along with a list of names titles and email addresses of up to 10 team members. Or pay just 46.60 per month on any major credit card www. creditunionbusiness.com register. PO Box 2223 Palm Beach Fl. 33480 Or call 561-282-6015 1 TABLE OF CONTENTS APRIL 2016 VOLUME 11 ISSUE 4 THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS 4 6 10 17 19 21 23 UP FRONT Teambuilder Tim O Hara CYBER SECURITY Matt Cullina CEO VELOCITY 26 29 33 35 38 41 44 1 CYBER SECURITY Derek Brown 2016 The Year Of The Cyber Exploit MEMBER BUSINESS LENDING Fraud Monitoring for Tomorrow How Member Portfolio Management Fits into Strategy and Operations Scott McClymonds COMPLIANCE UPDATE NCUA s Final MBL Rule What You Need to Know Ryal Tayloe MARKETING MATTERS Hispanic Small Business Owners Go Digital for Advice Miriam De Dios CFO CURRENCY Member Business Lending What to Know Now and What Can Wait Erin O Hern BRANCH BUSINESS Managing Your Mortgage Pipeline Guidelines for Success Alec Hollis LENDING Investing in the Branch Experience is More Important Now than Ever W. Michael Scott PAYMENTS Responding to CFPB Regulations Impacting Payday Lenders Ben Morales LENDING SOLUTIONS Back to the Future Mobile is Taking Payments Full Circle Amanda Smith MOBILE PAYMENTS The Importance of Internal Marketing Lessons from Launch Federal Credit Union Bill Hultstrand CU TRAINING Mobile Payments an Option for Members of North Carolina s State Employees Credit Union Sandra Jones YourBrand gmail.com Kenneth C. Bator MBA C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M TAB THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS PUBLISHING TEAM Tim O Hara Editor & Publisher tim cubusiness.com Ashok Kumar Associate Publisher ashok cubusiness.com Patti Manzone Designer UP FRONT Tim O Hara CYBER SECURITY Matt Cullino CEO VELOCITY Scott McClymonds COMPLIANCE UPDATE Erin O Hern BRANCH BUSINESS W. Michael Scott PAYMENTS Amanda Smith MOBILE PAYMENTS Sandra Jones CYBER SECURITY Derek Brown MEMBER BUSINESS LENDING Ryal Tayloe HISPANIC MARKETS Miriam De Dios CFO CURRENCY Alec Hollis LENDING Ben Morales LENDING SOLUTIONS Bill Hultstrand 2 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M THE O N LY AL L - DIG ITAL AL L - BUSIN ESS R ESO UR C E FO R C R EDIT UN IO N S THE MEMBER BUSINESS LENDING ISSUE APRIL 2016 VOLUME 11 ISSUE 4 Rich Helber TROPICAL FINANCIAL CREDIT UNION The Right CEO At Just The Right Time BY TIM O HARA Cyber Security BY ERIN O HERN Fraud Monitoring for Tomorrow Back to the Future BY AMANDA SMITH Mobile is Taking Payments Full Circle SUBSCRIPTIONS Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital membership is 75 yr x 3 ( 225). An online membership form is available at www.cubusiness.com register. SALES AND ADVERTISING Tim O Hara Publisher tim cubusiness.com or 561-282-6015 1 CONTACT INFORMATION Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim cubusiness.com cuso A community joined together for a common purpose. In what ways does collaboration benefit a credit union Can it expand reach and outpace the competition Provide greater services and prevent newer risks At PSCU we know that credit unions are stronger when they stick together. And we re proud to be a 30-year leader in credit union connectedness. When you join PSCU you re joining the ranks of more than 800 credit unions nationwide that leverage the power of our cooperative. pscu.com 888.918.7357 UP TAB FRONT BY TIM O HARA O Teambuilder a financial services job due to the great recession which was not only in full bloom but also creating havoc at Tropical FCU. Loan losses were dramatic and the trends were not in favor of the institution s continued success. But with 38 years of hard-earned C-Level experience under his belt from US Central (11 years) Central Corporate Credit Union Southfield Michigan (nine years) and the huge GTE Federal in Tampa (11 years) where he earned the Chief Financial Officer job Rich was more than prepared for the mission. Tropical s net worth ratio had declined into adequately capitalized status in early 2010 but the credit union returned to profitability and became well capitalized again. Bauer Financial upgraded its rating to four stars in the second quarter from three stars prior to that. I met with Rich over lunch recently and was extremely mpressed by the knowledge he possesses and the focus he displays. Obviously those traits were employed to turn the CU around and return it to health I am fortunate that I have a perspective other people don t have he said. I use all the credit union s services. I do that intentionally because I want to know how everything works to make sure the members are getting the best experience. I am also exposed to what everybody s doing he continued. So I m able to find out what the new trends are in terms of payment trends and technologies in order to bring those to the members to give them better service he said. How we see financial services isn t something our members think of every day but we do just that he said. That s why we ve been successful in meeting member expectations for 80 years. Rich is also very involved with the community in which he lives and works. Case in point he is currently Chairman of the Board of the American Red Cross of Broward County. Obviously Rich Helber believes in the credit union mantra People Helping People Thanks for reading. Tim 4 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M ver the past 11 years that I ve been writing this column I ve probably bragged about my membership in Tropical Financial Credit Union (TFCU) headquartered in Miramar Florida at least a few times. I ve been a member for more than 25 years and Credit Union BUSINESS Magazine Inc. has been a business member since its launch in 2005. Also worthy of mention CUB is the only credit union trade publication that is a CU business member doing 100 percent of its banking at a credit union. The phrase practice what you preach comes to mind. Branch BUSINESS (on page 19 of this issue) is our newest recurring editorial column and it celebrates the fact that we now have more than 1 000 branch supervisor and branch manager readers. That s about nine percent of our total readership and it s growing. Long live the credit union branch Mostly because of my chosen profession I ve spent a lot of time in the West Palm Beach branch of Tropical Financial to observe what goes on there as I do my personal and business banking. Although it is several miles away from my home and even further from my office I don t mind going out of my way to visit the branch. Rosemary Aguilar is the very friendly and efficient manager there. She is a consistent problem solver. On top of that her staff is harmonious. It s a busy place and the credit union seems to be doing a lot of new business loans and mortgages as well as every kind of consumer banking. The lines are often long but always smooth. TFCU is a 580 million (assets) credit union that serves 53 000 members throughout southern Florida. It was founded in 1935 and is currently celebrating its 80th anniversary. Richard W. ( Rich ) Helber has been the President & CEO of TFCU since 2010 when he was recruited to succeed long-time CEO Greg Blount following his retirement. The year 2010 was a terrible time to begin IF YOU RE LENDING YOU RE COLLECTING All lenders have to deal with the business of collections. Appropriate sta ng models TCPA UDAAP dialer technology e ective training and incentives and comprehensive reporting are just a few of the things needed to keep delinquencies low and your collection operation in tip-top shape. Is leveraging an outsourced service provider s resources a less expensive and more cost-e ective option Visit info.swbc.com outsource to download our free ebook and learn how outsourcing is often more cost-e ective less stressful and can complement your in-house collections e orts. 2016 SWBC. All rights reserved. 52440-1479 0316 CYBER SECURITY BY MATT CULLINA Fraud Monitoring for Tomorrow F Identity theft stemming from cyber fraud is showing no signs of shedding its reputation for being a top complaint amount consumers. Is your credit union doing all it can to maintain its status as a safeguarder of its membership These tips will help your CU secure its position as protectorate of financial assets. inancial institutions and the consumers they serve face an increasingly complex landscape when it comes to fraud and data breaches. From legitimate-looking phishing scams to well-educated hackers the threats to personal and banking information become more sophisticated every day. As the public struggles to foil thieves and protect their private data it s no surprise that identity theft continues to be one of the top three in the Federal Trade Commission s national ranking of consumer complaints for the 16th consecutive year. Consumers already look to the banking industry for the latest intelligence on where financial risks exist. Communicating about fraud and security and offering proactive identity protection and resolution tools are a perfect fit for credit unions whose mission is to safeguard their members. Offering members an effective way to protect their financial assets is a natural extension of a credit union s financial education program and one that can serve as a key differentiator among the competition. Incorporate the Latest Trends in Fraud Monitoring Fraud monitoring is nothing new within the financial sphere but credit unions are shifting focus in some areas and are adding a host of proactive strategies to work alongside the long-standing reactive tools that are already in place. A rise in e-commerce activity for example has created new opportunities for cyber thieves and has increased risks for members. With 6 C R E D I T U N I O N B U S I N E S S retailers transitioning to chip-enabled card readers it has been predicted that some criminals will likely move online where pilfering card numbers is often easy by comparison. Name address and CVC CVV matching are just a few of the risk mitigation strategies credit unions are leveraging to identify and shut down instances of fraud more quickly. Monitoring transactions for time- and locationspecific activity that is out of the ordinary is another effective tactic. Recurring activity in the middle of the night may be unusual for a small credit union whose members are within a limited geographic region for example. A rash of large purchases on a normally quiet account could also point to trouble. But individual fraud alerts aren t the only important datasets to 2 0 1 6 C U B U S I N E S S . C O M A P R I L 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 CYBER SECURITY review. Trends in the number of alerts or the type of fraud that is occurring could also provide credit unions with an early warning sign of a larger problem. Targeted fraud monitoring may then be employed to identify cyber threats with more granularity. A credit union s attentiveness to this level helps it protect members proactively and save them from becoming fraud victims. Protocols And Practices Crucial to Effective Monitoring The good news is that credit unions have significant control over the privacy and security practices they choose to implement in support of their fraud monitoring efforts. First a thorough audit of the institution s data assets is in order. This comprehensive appraisal will provide insight into the sensitive information that is being stored where it s located and which protective measures may already be in place. It will also enable the organization to address the human elements in its data security chain and minimize potential vulnerabilities associated with those people on the operational front as well as those on the member side of the equation. With its data audit in hand the credit union can establish robust information security protocols that marry technology safeguards with users best practices. One highly effective approach is to limit access to members data to only those employees who require it to carry out their duties. It s a strategy that takes a bit more time on the front end additional network access levels may need to be created and each employee s level will need to be reviewed and modified if it doesn t fit the updated structure. But this step can result in a huge reduction in the potential for an unauthorized person gaining access either unintentionally or on purpose to sensitive records. It also provides the credit union with a framework to monitor network access logs for suspicious activity both internally as well as from any external source. Members too are an integral piece of the fraud prevention puzzle and most are eager to play an active role in keeping their financial data and their identities safe. Credit unions should craft an educational strategy to provide members with the information they need to avoid becoming victims of identity theft and to ensure their banking transactions remain secure. Threats such as phishing (email) vishing (phone) and SMiShing (text message) schemes along with ATM skimmers are well known within the financial community. However these may be foreign concepts to many consumers. An email or text message that purports to be from a credit union or credit card company and that warns of a compromised account for example will often trigger a near-immediate response from the consumer. To combat this phenomenon credit unions may consider sending regular communications either in the form of security alerts or as part of existing newsletters to raise members understanding of fraud and fraud prevention. Show them how to spot skimming devices. Remind them to be careful about clicking on potentially corrupted links they should instead be instructed to contact the credit union directly to discuss concerns or questions with a representative. Reassure them that the institution will never ask them to reveal personal information in an email. In essence these efforts turn members into partners on the bank s security team. Better Monitoring Improves Relationships with Members Financial institutions face heavy competition when it comes to attracting and retaining customers. Engaging 8 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M CYBER SECURITY members in the credit union s fraud-fighting efforts and demonstrating that the organization takes data security seriously can be valuable tools in this area. Prospective members will be keen to know more about protecting their identities and existing members will also gain peace of mind in knowing that their credit union is watching out for their financial well-being. By moving beyond the minimal services expected of an FI and instead transitioning into a leading authority on breach avoidance and identity theft protection credit union members can be assured that their data and their money are safe. Adopting an effective monitoring program provides another obvious benefit as well and that is the reduction in fraudulent charges the credit union and its members are likely to experience. This cutback reduces potential financial harm for everyone involved and also frees up operational resources within the organization that might otherwise be committed only to investigating and resolving a seemingly endless laundry list of fraud cases. Matt Cullina is CEO of IDT911 a leader in identity management and data risk services for the financial services industry. 9 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M CEO VELOCITY BY SCOTT MCCLYMONDS How Member Portfolio Management Fits into Strategy and Operations L How can your credit union integrate member portfolio management into your strategy and operations The answer to this question holds the key to serving members better and maximizing profitability. This case study will walk you through the process and help you reap all the MPM impacts. can build appropriate strategies for each member group. Just like your loan portfolio has different risks maturities and ALM concerns your members have different attrition risks profitability levels revenue mixes demographics levels of financial health preferences and life events. It is a commitment to deeply understand the very people you exist to serve and it takes your team s knowledge of your members to a whole new level while changing how you operate. With strong acknowledgement that I was speaking to a not-for-profit audience I argued the starting point for MPM is member profitability groups (PGs). Why Because without profitability you can t fulfill your mission to your members and community. PGs also let us understand who is and isn t receiving value from our credit union and they give us ideas on how we can ast month I spoke with you about Member Portfolio Management (MPM) and its ability to help you serve your members better while increasing your profitability. At the end of my column I promised this month s article would show how to integrate MPM into your strategy and operations and that s where we re headed today. We ll start with a recap of what MPM is then we ll bring it to life with a case study. MPM Recap I began my explanation of MPM by contrasting it with typical analytics which generally focus on crossselling more products. MPM is much more strategic far-reaching and longer term. It impacts the entire credit union so CEOs and their executive teams need to be deeply involved to formulate new strategies invest in technology and train employees. In short it completely changes the conversation in your credit union from the board and executive team to the front line. MPM divides the membership of your credit union into critical digestible parts so you IF YOU RE LENDING YOU RE COLLECTING. FREE EBOOK 10 2 0 1 6 2 0 1 6 C U B U S I N E S S . C O M C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S M A R C L A P R I H CFO VELOCITY TAB provide greater value to various member groups. In the context of PGs I pointed out that in credit unions it is quite common for about 10 percent of members to provide 90 percent of a CU s profits and I referred to this PG as the End Zone. In the following case study we ll use this End Zone PG as an example of how MPM impacts your entire credit union. Case Study Creating Value and Closing the Gap for End Zone Members Let s begin our case study by examining new accounts and balances over the last year. Figure 1 shows the number of new accounts opened during that time. It is broken into four distinct profit groups which we call End Zone Red Zone Mass Market and Lower Tier. Orange bars represent new accounts opened by pre-existing members and green bars represent activity from new ones. Similarly Figure 2 shows balances associated with the new accounts. Figure 1 Number of New Accounts Opened Last 12 Months These figures reveal something relatively staggering in that End Zone members opened 13 percent of new accounts and those accounts provided 89 percent of new balances. Reading it another way 87 percent of our new account efforts brought in 11 percent of the new balances. Since we re not for profit this effort is not wasted but let s consider further impacts. Financials You and your CFO need to know these numbers well because they are far and away the drivers of your CAMEL rating ROA net income and efficiency ratio. End Zone members are driving the growth of capital assets and income at your CU while the other three profit groups are creating most of the expense. From a financial standpoint the End Zone member will need to drive your budgeting in terms of assets 11 C R E D I T U N I O N B U S II N E S S B U S N E S S M A R CL A P R I H 2 0 1 6 2 0 1 6 C U B U S I N E S S . C O M CEO VELOCITY liquidity and profit growth. Meanwhile the other groups will drive your budgeting in terms of personnel and operations expenses. Of course your ALM will be closely associated with the behaviors of the End Zone group as well. Therefore your financial team members will need to closely inspect the maturities of their loans and deposits and use that information to help project ALM needs into the future. Figure 2 New Account Balances Last 12 Months Trouble in the End Zone Your most profitable members those in the End Zone group are not equal in their profitability or behavior within your credit union. In fact the next few figures draw out those differences and show that some serious issues must be addressed in two of the End Zone sub-groups. IF YOU RE LENDING YOU RE COLLECTING. DOWNLOAD OUR FREE EBOOK 12 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M CFO VELOCITY Figure 3 shows that the most profitable sub-group of End Zone members earns the CU about 36 000 per year while the less profitable sub-group earns about 21 000 annually. Those are healthy numbers in any case but they re certainly distinct. The main problem I have seen in credit unions is that these member groups are largely unknown and invisible with no plan in place to address their needs. Figure 3 Three End Zone Profit Groups Looking further into the End Zone sub-groups in Figure 4 reveals a serious issue. The most profitable sub-group End Zone 1 has an average of seven services which is fairly good. In contrast End Zones 2 and 3 average only about three services. I often call this hidden risk or the risk no one is aware of. That s because members with fewer services are more likely to result in attrition and three services is a low number for any household let alone an End Zone one. Financial matters aside consider the impact on your CU s ability to achieve its not-forprofit mission when someone earning you 30 000 annually leaves. Alarms should be sounding in the C-suite at this point. You your CFO Head of Retail Chief Lending Officer and CMO should be having a meeting at this moment to determine how to mitigate this risk. 13 CEO VELOCITY Figure 4 Services per Household End Zone Sub-Groups Fortunately we re able to dive more deeply into this risk of attrition to pinpoint these trouble spots. Figure 5 shows a little over half of End Zone 2 and End Zone 3 members have between three and five service with us with a little less than that holding one or two services. Since we know member profitability in each sub-group we can quantify the financial impact of attrition and contrast it with the associated risk. Members holding higher numbers of services are more likely to purchase additional ones than those with fewer services. Hence a relationship strategy geared toward End Zone 2 and 3 members with three to five services should yield greater results. However members with one or two services are more likely to result in attrition and are also harder to build relationships with. Since they are both highly profitable and at high risk we cannot ignore them and need to put our best minds to work to understand how we can create more value for them. 14 CFO VELOCITY TAB Figure 5 End Zone Attrition Risk Summary Fixing the End Zone Trouble Now that we re aware of our End Zone trouble spots we need to fix them. Our starting point is understanding who the End Zone 2 and 3 members are. From there we can use our insights to put together a corrective action plan. Figure 6 shows our End Zone 2 and 3 members can be broken into two main groups highly affluent people and those who are earlier in their careers. These are very different groups with distinct priorities preferences and values. Using the vast amount of data we have on these types of people we will create avatars for them that our brightest minds can use to build valuable solutions for such members. With the approval of the executive team and board we will operationalize the best ideas through a strategy defined goals and metrics and by empowering our employees assigned to these members. 15 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S A AP PR RI IL L 2 20 01 16 6 C U B U S I N E S S . C O M CEO VELOCITY Figure 6 End Zone 2 and 3 Demographics Wrap Up Congratulations. You now know more about Member Portfolio Management (MPM) than almost all of your peers. This little case study has shown the benefits of utilizing MPM and the ramifications of ignoring it. Although we focused on End Zone members we could have just as easily created the same exercise for Lower Tier members just like some of your CEO peers have done. Far from the typical analytics or MCIF system sitting ina corner or being operated by a junior employee MPM is a strategic function that spreads member knowledge throughout your CU and lets you focus on key areas of performance. As we have seen MPM goes beyond Marketing into Finance Training Sales and Operations and deep into the values of your members. Integrating it with your CU s core values strategy and operations will strengthen the benefits you can provide your members and community. Scott McClymonds of CEO Velocity s coaching and consulting services specializes in helping credit unions acquire and retain profitable members. His unique approach to member portfolio management enables credit unions to better understand and serve their members while building profitability and brand strength. Subscribers to Credit Union BUSINESS can ask Scott questions about how getting to know their members better can generate greater returns. He can be reached at 479.263.0774 or scottm ceovelocity.com. Scott McClymonds and CEO Velocity help credit unions acquire and retain profitable members. Using member portfolio management and other advanced strategies CEO Velocity helps you improve profits while better serving the needs of your members and communities. Do you need more profitable members Does your profitability need to increase Do your have business units or branches that need to improve performance Do you need to better understand your market dynamics Email scottm ceovelocity.com to request a free paper on how to find and close earnings gaps in your credit union. I have worked with hundreds of clients on strategic marketing programs over the last 20 years and Scott McClymonds is at the top of the list. I would highly recommend Scott as a resource to anyone looking to improve their performance. ceovelocity.com 479.263.0774 16 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M - Tim Keith Partner and Chief Strategist Infusion Marketing Group COMPLIANCE UPDATE BY ERIN O HERN Member Business Lending What to Know Now and What Can Wait M Chances are your credit union is still getting used to NCUA s new member business loan rule. To help you get up to speed Credit Union BUSINESS s compliance expert offers a few tips. Keep these nuggets of information in mind as your CU gradually comes to terms with the new regulation s MBL impacts. requirement. But keep in mind that there are steps a credit union should take before issuing that next MBL without a personal guarantee. A first step for credit unions entering this brave new world of MBL flexibility is to determine (and document ) their own risk tolerance and parameters for requiring or not requiring a personal guarantee. The credit union should also check its internal policies and procedures to make sure they are updated to reflect the CU s new practice. I cannot emphasize this enough. Even after this rule is effective and does not require a personal guarantee an examiner will still document a problem in his or her report if the credit union violates its own policy. ore than 12 years have passed since the last significant change to the National Credit Union Administration s member business loan (MBL) regulation. Most in the movement view the new rule as a positive change. Whether you support or oppose it there is no denying the impact it will have on a credit union s MBL program. While the industry is digesting the full impact of the rule here are a few things to keep in mind. What to Know Now Only one piece of the rule is effective 60 days after publication in the Federal Register (May 13 2016). Every other change in the final rule will become effective January 1 2017. That said the change with an earlier effective date is an important one. Currently NCUA generally requires a credit union to obtain a personal guarantee from the principal or principals of the borrowing organization unless the CU obtains a waiver. Under the amended rule a credit union will not be required to obtain a personal guarantee or waiver. However any credit union choosing to forgo the personal guarantee must document strong mitigating factors it believes will offset its risk. A word of warning take advantage of this leniency with caution. A credit union knows its members best and therefore understands when a loyal creditworthy member should be exempt from a personal guarantee 17 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M COMPLIANCE UPDATE TAB What Can Wait Regulatory changes are coming fast and furious requiring every credit union to prioritize. If you have other issues that need your short-term attention the following can wait. What follows is a summary to give you the flavor of the final rule. Go ahead and wait to digest the entire rule so long as you don t forget to learn more about it soon. There are new or amended definitions included throughout the rule. For example the rule establishes a specific definition for commercial loans. It helps distinguish between loans that are MBLs by law (and must be counted toward the statutory MBL cap) and commercial loans (that have safety and soundness requirements but are not counted against the MBL cap). The rule also clarifies that non-member commercial loan participations are not considered MBLs. The rule generally changes the MBL regulations from prescriptive set requirements to principal-based rules. This switchover allows an individual credit union to establish its own limits based on its individual situation. For example the final rule replaces the current loan-to-value requirements and the unsecured lending limit with the requirement that the credit union takes individual responsibility for ensuring sufficient collateral is obtained in relation to risk. The rule also eliminates the required portfolio limit of 15 percent of net worth for construction and development loans. Just because the prescriptive requirements are removed doesn t mean examiners won t expect certain policy and procedural safeguards to be implemented on an individual basis by each credit union. With the removal of prescriptive requirements comes the expectation of a detailed policy approved by the board of directors as well as comprehensive procedures to be created and followed by credit union 18 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S A AP PR RI IL L staff. The credit union s revised policy and procedures must provide for the ongoing control measurement and management of the CU s commercial lending activities along with tracking any exceptions to the credit union s commercial lending policy. A credit union has the choice to combine or keep separate its MBL and commercial lending policy as well as its required credit risk rating system. The final rule emphasizes that the credit union s board of directors is ultimately responsible for the safety and soundness of the credit union s commercial lending activities. It requires board members to be adequately informed about the level of risk in the portfolio and to set the strategic direction of the credit union. There is an exception to certain commercial loan policy and board and management requirements for some smaller credit unions with limited commercial loan portfolios. The final rule clarifies that the MBL cap is expressed as a multiple of net worth not a percentage of assets. NCUA plans to issue further guidance providing additional information about how these principal-based requirements will be evaluated by examiners. Stay tuned for further interpretation from the Administration. In the meantime feel free to prioritize the most important aspects of the soon-to-be-published rule. Erin O Hern is director of league compliance services for PolicyWorks a national leader of credit union compliance solutions. She can be reached at erino policyworksllc.com. 2 20 01 16 6 C U B U S I N E S S . C O M BRANCH BUSINESS BY W. MICHAEL SCOTT Investing in the Branch Experience Is More Important Now than Ever M How does the state of the bookstore extend to the credit union branch As it turns out the in-person experience is alive and well with both book consumers and financial consumers. And that tendency makes a compelling case for continuing to invest in the CU branch. Keep reading for some tips. uch like the well-documented decline in transaction volume at the financial institution branch bookstores have experienced a sizable drop in traffic. With ubiquitous companies like Borders having completely disappeared from our national landscape the book consumers exodus to online retailers such as Amazon is causing many to predict the continuation of this trend. However the mega-successful digital company Amazon just opened its second retail store in Seattle Wash. with the possibility of other stores opening in the coming years. This puzzling development begs us all to ask the question what is the true value of a face-to-face interaction and why in some cases is it much more effective than online exchanges In bookstores and especially in retail financial locations many consumers desire competent and trustworthy employees to help them with their needs in person. Whether they re looking for the perfect adventure story for their grandchild or assistance on a car loan these individuals who prefer visiting the store over swiping their smartphone or clicking their mouse are more prevalent than you may think. Just last year the U.S. Census Bureau published activities that show us that despite decades of growth total e-commerce sales represent only 10 percent of all retail sales. Given those statistics credit unions should continue to heavily invest in their branch experience as part 19 C R E D I T U N I O N B U S I N E S S of their market strategy. Simultaneously they should leverage the right technology to maximize every visit. Two innovative branch software-as-a-service solutions that help accomplish this aim are digital appointment applications and lobby tracking systems (LTSs). Getting Accountholders to the Branch Digital appointment applications are helping accountholders use nearly any Internet-connected device to schedule branch appointments through their institution s website or mobile app. This capability modernizes how consumers engage with branches virtually eliminating both wait times once they arrive at the branch and the possibility of meeting with a A P R I L 2 0 1 6 C U B U S I N E S S . C O M BRANCH BUSINESS TAB representative who does not have the right skill set for a particular need. Providing better overall service is the obvious benefit from a digital appointment application but it also can provide valuable marketing information like knowing what type of appointments members seek most. Additionally from an operational perspective credit unions can more accurately align staffing levels with member demand particularly since the amount of space available in branches has become part of the branch transformation effort. Furthermore tracking branch-based activities and evaluating customers patterns of behavior become much easier with an appointment scheduling solution one that collects inbound data on the front end vs. relying on paper-based documentation that may (or may not) be accurately completed by branch staff after customer interactions have occurred. This inbound data can arm the financial institution with powerful performance insights that help them analyze branch trends in productivity sales and service. Improving the Accountholder Branch Experience A lobby tracking system is a computerized application that captures lobby performance information in real time once accountholders arrive at the branch. These solutions first collect information through self-service technology or greeters in the waiting area and then by lobby service representatives during the accountholder assistance process. The data is then processed and analyzed providing both initial benchmark reporting and ongoing updates. occurring thereby helping eliminate excessive wait times. Over time the system will continue collecting and reporting its metrics thereby enabling insight into whether changes are having the desired result. Having access to this timely trending lobby data empowers management to quickly analyze detailed performance which is typically very difficult to do without the power of automated analytics. When utilizing a manual tracking process performance issues can often go undiscovered and can have a real impact. For example underperforming individuals can often remain hidden amongst a group especially if that group has a couple of star performers who pull the branch scores up. The difference in average assist times (per lobby representative) might be imperceptible with a casual glance but over time the LTS will note and report on them. As a result management will be able to take action through targeted coaching. Due to its impact on the branch experience technology could be the difference between whether or not accountholders visit your locations. If your competitors down the street have the right branch technologies and you do not you could be leaving your institution vulnerable to losing their business. Branch experience improvement solutions like digital appointment applications and lobby tracking systems could be ideal fits for your institution. They can also help retain existing accountholders while likely drawing in new ones. W. Michael Scott is Founder CEO of FMSI based in Alpharetta Georgia. FMSI provides business intelligence and performance management systems that facilitate efficient staff scheduling and systematic lobby management of the branch. 20 2 20 01 16 6 C U B U S I N E S S . C O M Analysis and Reporting The real power of an LTS lies in what goes on under the covers (i.e. analysis and reporting). Using realtime reports management should be able to not only determine when the credit union fails to meet its own sales and productivity goals but also identify potential costly member service mishaps and prevent them from C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S A AP PR RI IL L PAYMENTS BY AMANDA SMITH Back to the Future Mobile is Taking Payments Full Circle I Great Scott The mobile payments DeLorean has finally reached the future and it is landing with a resounding bang. In what is anticipated to be the breakout year for the technology these strategies will help your credit union streamline adoption of digital wallet and Buy button transactions. ndustry experts agree that after years of discussion and much speculation the mobile payments market is finally taking off. In fact according to eMarketer.com the U.S. market is expected to triple this year to 27.05 billion up from 8.71 billion in 2015. And the research firm reports that the number of people making proximity payments will increase by 61.8 percent to more than 37.5 million. Consider also a recent Gartner Inc. report predicting that by 2017 mobile commerce revenue in the U.S. will account for 50 percent of all U.S. digital commerce revenue. While consumers and merchants have been relatively slow to adopt mobile payments until now we are starting to see the numbers tick upward. So 2016 may just be a breakout year for the technology. cash payments. We are quite accustomed to using our cards instead of cash. As mobile payment technology becomes more readily available on smartphones and at merchant sites we expect consumers to embrace it. Legacy Systems Putting U.S. Behind To date the U.S. has lagged a bit behind some nations in terms of mobile payment adoption partly because of our economy s reliance on legacy systems that were put in place years before mobile even existed. Interestingly some of the fastest adopters of the technology have been regions such as Southeast Asia the Middle East and Africa. Because their emerging economies are not hindered by legacy systems they have been able to leapfrog into the future with infrastructure that is purpose-built for mobile. However the USA leads the world in terms of non21 C R E D I T U N I O N B U S I N E S S The Wow Factor When it comes to mobile payment adoption the experience delivered by the technology must entice customers in order for them to use it. Most of us within the financial industry are focused on speeding up payments. But when you consider how efficient cards are for the consumer you quickly realize that speed is not enough. Consumers are looking for 2 0 1 6 C U B U S I N E S S . C O M A P R I L PAYMENTS TAB IF YOU RE LENDING YOU RE COLLECTING. DOWNLOAD OUR FREE EBOOK flawless utility and an experience that wows them. In addition rewards may emerge as a key factor in furthering adoption of the technology. If consumers can receive special offers or points for switching to mobile payments such rewards may keep the technology top of wallet. Another factor that could drive mobile payment adoption overall is the increasing popularity of P2P payments a technology whose journey into the mainstream has taken its own twists and turns. Early on the vision for P2P payments was one of friends splitting the bill at lunch without having to divvy up cash. What we have found instead is that the average P2P transaction amount is much higher than that in the hundreds of dollars. This figure suggests that the technology is primarily used today for sharing larger purchases or dividing up household expenses. However smaller transactions are gaining ground and we expect this trend to continue. To support an increasingly mobile member base credit unions need to get behind the major digital wallet providers and ensure that their employees are well versed in everything mobile. CO-OP Financial Services (www.co-opfs.org) for instance offers support for all the Pays including Apple Pay Samsung Pay and Android Pay and encourages client credit unions to invest in these products. The company also supports the Buy buttons including Visa Checkout and MasterPass. These tools not only simplify mobile and online transactions for members but also provide them with a valuable layer of added security. As mobile technology advances the company intends to continue equipping credit unions 22 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S A AP PR RI IL L 2 20 01 16 6 C U B U S I N E S S . C O M with the solutions they need to keep pace with member requirements. Another trend sure to impact payments is the emerging Internet of Things (the network of physical objects devices vehicles etc. embedded with electronics that enables them to collect and exchange data). This amazing development is widely discussed in the press and promises to yield a whole new class of devices that are on 24 7 taking instructions and intuitively doing what they need to do. What is ironic about this dynamic is that the technology may actually restore a sense of simplicity that modern commerce lacks today. For example if you had lived in a small town back in the days of the Wild West your goods and services would all come from one general store and you would have a running tab there. Mobile devices of the future will likely serve as that running tab tallying our transactions as we go about our daily lives. That is where the technology is headed. Amanda Smith is strategic product architect for CO-OP Financial Services a provider of financial technology to credit unions based in Rancho Cucamonga Calif. (www.co-opfs.org). Smith can be reached at Amanda. smith co-opfs.org or (800) 782-9042 ext. 1222. MOBILE PAYMENTS BY SANDRA JONES Mobile Payments an Option for Members of North Carolina s State Employees Credit Union M Just how much in sales dollars is your credit union missing out on by not offering your members mobile payment options A North Carolinian credit union s recent launching of such services offers a compelling case study. Read on to find out how the CU fared and how yours might too. obile payments have been a hot topic for smartphone aficionados for quite a while but many financial institutions have been slow to jump on the bandwagon to allow the option despite pressure from would-be users. North Carolina-based State Employees Credit Union (SECU) chose not to jump quickly but after much research and preparation the CU recently announced to its more than two million members the availability of Apple PayTM Samsung PayTM Android PayTM and the online payment option VISA Checkout. In the first few weeks of offering mobile payments its credit union membership quickly responded. So how do mobile payments work Consumers with supported devices such as newer models of smartphones can use a mobile wallet application to add their credit or debit card. The actual card number is replaced with a secure 16-digit token. Once card enrollment is completed secure purchases can be made at any participating merchant with a simple click or tap of the mobile device. SECU noted nearly 14 000 active tokens for credit union cards with more than 54 000 transactions processed. That amounted to 344 000 in total sales in the CU s first weeks of offering the service. 23 C R E D I T U N I O N B U S I N E S S Mobile payments are not new to the financial industry but as a trusted financial services provider it was important for SECU to do our homework and feel confident in the safety and security of the service prior to launching it to our membership said Leanne Phelps SECU s Senior Vice President of Card Services. User feedback has been extremely positive and we are pleased that members are excited to have this payment option available. SECU member Adam Josey was happy to hear that his financial institution was on board with the service and appreciated knowing that the credit union did its due diligence prior to the launch. He uses Apple Pay and noted I enjoy using my SECU card with A P R I L 2 0 1 6 C U B U S I N E S S . C O M MOBILE PAYMENTS Apple Wallet. The enrollment process was easy and I appreciate the security verification feature with the credit union. I feel better knowing that measures are in place for me to securely add my card to the phone. State Employees Credit Union outlines the enrollment process for its members on the SECU website www.ncsecu.org. Detailed instructions are provided for all eligible devices along with instructions for Visa Checkout. A video tutorial was also created by SECU which provides an example of enrolling and using an iPhone to complete a transaction. The video is available on SECU s YouTube channel at http tinyurl.com zhnrb85 Sandra Jones began her career with State Employees Credit Union (SECU) in 1988 and during that time has served in both the branch and operations networks. Sandra is currently the Senior Vice President of SECU Member Communications a position she has held since 2013. 24 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M CYBER SECURITY BY DEREK BROWN 2016 The Year Of The Cyber Exploit Derek Brown VP Americas with Wynyard Group discusses the cyber trends we can expect to see in 2016. With weekly breaches becoming the industry norm he also offers his expert advice on how credit unions can best protect themselves against these emerging threats. Read on to find out how to wage battle against the year of the exploit. 2015 has been the year of the breach with almost weekly compromises of organizations becoming the norm. The National Association of Federal Credit Unions has warned that despite many credit unions implementation of sophisticated and effective data security safeguards cyber criminals seem often to be one step ahead of the security industry. To maintain this one-upsmanship they are using a growing arsenal of attack techniques to successfully breach networks. Targeted attacks aimed at compromising specific organizations and tailored to the unique characteristics of those organizations are becoming the new normal. New Vulnerabilities If 2015 has been the year of the breach then 2016 will be considered the year of the exploit. For instance we will see a shift to higher-impact cyber crime. Studies suggest that it can take many months an average of 256 days in the Ponemon Institute research before a company discovers it has been compromised. By that time in most cases hackers have already exfiltrated large amounts of sensitive information. This higher-consequence crime is currently on the rise with organized criminals and even nation states continuing to steal IP and other valuable information to gain economic advantages or to cause a negative economic impact in rival countries. Groups will become bolder in their hacking operations. They won t be content with just stealing data they ll also affect the functionality of systems or even destroy the stolen data so a company can no longer access it. Understand Your Network Every organization has a distinctive cyber threat profile depending on the nature of its business the digital information it holds and how valuable that data is to criminals. Cyber criminals could for example steal passwords and use them to gain access to every payment system and vendor that has a digital relationship with the credit union. That s according to NCUA Chairman Debbie Matz as reported in the Credit Union Times last year. Matz went on to say 26 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M CYBER SECURITY such a breach had already occurred at a mid-size credit union and hackers had used these passwords to then access a larger credit bureau. It is therefore important that credit union leaders understand the value of their data and place the highest priority on securing the most valuable data. In this instance customer data is a credit union s most valuable asset and requires the highest security efforts. It is also important for an organization to know its network better than anyone. By knowing the value of data who has access to it where it is located who is protecting it and how well it is protected companies can build a defender s advantage. sophisticated cyber criminals have rendered traditional perimeter defenses like proxies firewalls VPNs and antivirus and malware tools vulnerable. A priority for 2016 will be to quickly detect threats that have managed to get inside an organization s perimeter defenses to help prevent significant damage. One of the fastest-growing cybersecurity sectors is analytics technology which is able to identify the first seen attack with no known signature that has evaded the perimeter defenses. For cyber criminals the process of exploring a victim network leaves traces in network activity logs and these traces can be picked up with the right security analytics approach. Greater Scrutiny of Third-Party Suppliers Supplying Critical Services or Holding Sensitive Information Many financial organizations do not adequately assess the security practices of third-party partners and vendors despite findings that consistently point to breaches caused by third parties. While most organizations do now include security provisions in contract negotiations with external vendors and suppliers what needs to change is the level of focus and standard of security expected. Currently these standards are too low and organizations must hold themselves and others to higher levels of cybersecurity or risk a future breach. Invest in cyber-intelligence technologies that enable rapid detection and response Industry reports show that in 2014 credit unions spent on average 136 000 on data security measures and 226 000 on costs associated with merchant breaches. The question is are these funds being spent on the best security measures By 2020 60 percent of enterprises information security budgets will be allocated for rapid detection and response approaches up from less than 10 percent in 2012 according to Gartner. This upswing is because companies are beginning to understand that 27 C R E D I T U N I O N B U S I N E S S Let the Data Speak for Itself Advanced analytics software uses anomaly detection to identify unusual behavior and patterns. And it can rank-order threats ensuring that security analysts are always aware of the issues that require the most urgent follow-up and investigation. That s a major benefit to security teams that often struggle to keep up with the high volume of alerts and false positives. This type of analytics also makes it easier for security teams to identify the weaknesses and vulnerabilities used by hackers to breach the network security. A P R I L 2 0 1 6 C U B U S I N E S S . C O M CYBER SECURITY Educate Test Re-educate All the security measures in the world won t work unless an organization encourages an internal culture of cyber awareness. It is crucial to educate and test employees so that cyber security is front of mind in all instances and employees know how to guard against threats such as email phishing attacks and social engineering. Protocols for cyber breaches need to be clearly communicated to all employees and just as fire alarm drills test a company s ability to react to a fire organizations should carry out simulated cyber-attack scenarios. Since cyber threats are an unavoidable fact of life in today s world an organized focused response can be the difference between a minor cyber incident and a full-blown cyber-criminal emergency. Now is the time to act. Accepting that a company will at some point be hacked is the starting point to implementing a robust defense against future attacks. This type of effort combined with a culture of cyber awareness from the board level down to all areas of the organization can provide a strong defense against the threat of high-impact cyber attacks. Derek Brown is Wynyard s Vice President Americas. In this role he is responsible for driving the growth and success of Wynyard in the USA Canada and Central and South America. New Year s resolution Now is the time to act. Accepting that a company will at some point be hacked is the starting point to implementing a robust defense against future attacks. Credit unions should apply a layered approach to security. While no single security technology can protect against all never-before-seen threats the use of analytics can help uncover threats hidden within the network. Such usage can also allow organizations to act early in the threat timeline before extensive financial and reputational damage can occur. 28 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING BY RYAL TAYLOE NCUA s Final MBL Rule What You Need to Know E If your credit union is in the small business lending arena the National Credit Union Administration s final MBL rule could prove a goldmine of opportunities. What changes are part of this regulation and how will they affect your credit union s business lending program Read on to find out. arly last year Debbie Matz declared 2015 the Year of Regulatory Relief. Matz the Chairman of the National Credit Union Administration (NCUA) recently announced that she is stepping down from her post after nearly seven years at the helm. With the recent release of NCUA s final member business lending (MBL) rule Matz s ambitious agenda has begun to bear fruit. Despite strenuous objections from the banking lobby and recognition of the growth in credit union business lending over the past decade (Fig. 1) NCUA has enacted a far-reaching albeit long-overdue rule. The credit union industry has been largely supportive because the need for change was recognized by many business lending experts. I am encouraged to see that the agency took their mission seriously says Tony Lillie chief credit officer of CU Companies LLC a Minnesotabased credit union service organization (CUSO) by reinstating much of the flexibility that went away with RegFlex and introducing some discretion at the credit union level in areas such as loan-to-value ratios and construction and development limits. Indeed several of these changes most notably the removal of the personal guarantee requirement and loan-to-value limits will offer new opportunities for credit unions in the small business lending arena. These improvements should open the door for credit unions to compete more effectively in lending to operating companies thereby expanding the movement s reach beyond its traditional focus on commercial real estate deals. In this article I discuss the most important MBL rule changes and how they may affect your credit union s business lending program. I also share some recommendations on how to use recent advances in technology to best manage your portfolio. In the process I empower you to take full advantage of the flexibility of the new lending provisions. 29 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING TAB A Move toward Greater Self-Governance At a high level the key provisions of the final MBL rule include 1. Elimination of waiver process Nearly all of the one-size-fits-all loan limits and restrictions that previously required a waiver application have been eliminated. The section of Part 723 that speaks to the waiver process has therefore been removed because NCUA is now out of the waiver-granting business. Specifically the Administration did away with all loan-to-value (LTV) requirements unsecured lending limits the personal guarantee requirement and construction & development (C&D) lending limits. The single borrower (obligor) limit of 15 percent of net worth remains in place but credit unions now have the option to expand this limit up to 25 percent of net worth provided that loan balances above the 15 percent threshold are fully secured by readily marketable collateral. 2. Creation of a separate commercial loan policy NCUA has devised a creative way to ensure adherence to the statutory business lending limits contained in the Federal Credit Union Act while also ensuring that credit union boards and management focus their risk management activities primarily on loans that represent true commercial exposure. The agency did this by requiring credit unions to maintain both a member business lending policy and a commercial loan policy and by specifying which types of loans fall within each definition. For instance the rule defines business loans secured by a 1-4 family residence which is not the member s primary residence as MBLs but not commercial loans. Thus such loans would continue to count against a credit union s MBL cap limit but they no longer need to be monitored or treated as commercial loans. The same goes for an MBL secured by a vehicle manufactured for household 30 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S use (i.e. a sedan mini-van or pickup truck). (Note that in all cases the 50 000 minimum threshold for an MBL still applies.) On the other side of the coin business-purpose loans that are fully secured by a federal or state agency are now treated as commercial loans for safety and soundness purposes even though they fall outside the MBL cap. The same goes for nonmember participation loans. In a nod to smaller credit unions with minimal commercial loan exposure the rule exempts all credit unions with less than 250 million in assets and a commercial loan portfolio (including sold loans) totaling less than 15 percent of net worth from the commercial loan policy requirements. 3. Increased board and management responsibilities NCUA is replacing the current two-year commercial lending experience mandate with a requirement that credit unions have qualified personnel to manage the commercial risk and adequate reporting to understand the level of commercial risk. In addition the rule defines the distinct roles and responsibilities of boards senior management and commercial lending staff. It also demands strict oversight of any third-party firms that are involved in any commercial lending related activities. 4. Some relief from the MBL cap Among the hottest areas of discussion on both sides of the credit union bank divide has been if and how the new MBL rule will affect the statutory MBL cap. Although NCUA does not have the authority to modify the cap as defined in the Federal Credit Union Act (only Congress has such power) it did make two narrowly defined changes within its scope of authority offering some credit unions a measure of cap relief Removal of asset-based cap limit definition A AP PR RI IL L 2 20 01 16 6 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING TAB The current rule defines the statutory MBL cap as the lesser of 12.25 percent of a credit union s total assets or 1.75 times its net worth. The new rule eliminates the 12.25 percent of assets provision conforming more closely to the language contained in the 1998 Credit Union Membership Access Act (CUMAA). Specifically the new rule defines the MBL cap as the lesser of 1.75 times a credit union s actual net worth or 1.75 times the minimal net worth required for a credit union to be well capitalized. From a practical standpoint this change will allow credit unions that are at or above the new wellcapitalized net worth requirement as specified in the recently approved risk-based capital (RBC) rule to have a higher cap limit. Under RBC to be considered well-capitalized credit unions will need to maintain at least a 10 percent risk-based capital ratio which translates to an MBL cap equal to 17.5 percent of assets. For a well-capitalized billion-dollar credit union this change alone will translate to roughly 50 million in additional lending cap space. Note that this change won t be available until full implementation of the final RBC rule on January 1 2019. Exemption for non-member participation loans Credit unions that engage in non-member participation loan purchases will now be able to exclude such loans from their MBL cap limit. This provision was previously available as a waiver but will now be automatically available to all eligible credit unions as of January 1 2017. What You Must Do Now Most provisions of the new rule will be implemented January 1 2017. The exception is the elimination of the personal guarantee requirement which will be implemented just 60 days after the final rule is published in the Federal Register. The 1 Solution for Member Business Lending ncino.com 31 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S A AP PR RI IL L 2 20 01 16 6 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING If your credit union is currently engaged in member business lending or is considering entering the market in the near future you should begin taking these key steps now Determine your appetite for risk. Ideally your board and management have already decided on what types of members and loans you will target in your business lending program. But now with NCUA s removal of virtually all prescriptive limitations from the MBL rule credit unions can no longer simply cutand-paste the Administration s sometimes-arbitrary boilerplate parameters into their policies. Take your time hire a third-party CUSO or consultant to help analyze your chosen market and your members needs and decide how much risk you are willing to take in your portfolio. Revise and or develop your commercial loan policies. If you already have an MBL policy it needs to be updated with the new rule provisions and presented to your board of directors for approval prior to January 1 2017. In addition you will need to create a second boardapproved commercial loan policy. This policy must contain detailed underwriting standards minimal collateral values portfolio limits and defined roles and responsibilities for the board senior management and commercial lending staff in order to comply fully with the new rule. Select a technology solution to help with automated audit trail tracking and portfolio monitoring. This step is crucial. If you do not already have a robust technology system in place to house all loan documentation business member financial data and portfolio metrics you will be hard-pressed to meet NCUA s stringent requirements for portfolio monitoring. Now is the time to begin exploring an end-to-end cloudbased loan origination system. By having all of your loan information housed within one platform easily accessible via Internet-based executive dashboards and secure sign-in credentials your credit union will be well-positioned to access critical data points in real 32 C R E D I T U N I O N B U S I N E S S time. This capability will come in particularly handy during your safety and soundness examination and as you conduct your annual portfolio review. NCUA has enacted a well-considered and far-reaching business lending rule. Credit unions have most if not all of the regulatory tools necessary to enjoy even greater success in this lucrative and vibrant market. It is now up to your credit union to take the ball and run with it Fig. 1 Source NCUA Ryal Tayloe is vice president of credit unions for Wilmington N.C.-based nCino the leader in cloud-based operating solutions for the financial services industry. Through its flagship operating system nCino leverages the power of Salesforce. com to provide credit unions and other financial institutions with superior transparency and clarity into their existing loan production pipelines portfolios and operating efficiencies across all business lines resulting in increased profitability productivity gains and regulatory compliance. For more information visit www.ncino.com or connect with the company on LinkedIn and Twitter nCino. 22 00 11 66 C U B U S I N E S S . C O M M A R CL A P R I H MARKETING MATTERS BY MIRIAM DE DIOS Hispanic Small Business Owners Go Digital for Advice S Is your credit union overlooking a goldmine of a financial opportunity If you re not catering your strategies to attract Hispanic small business owners you very well might be. Read on to find out why there is so much growth and revenue potential for CUs in this particular Hispanic market segment. their businesses are growing at an incredible rate more than 15 times that of all U.S. firms. When designing an HSBO growth strategy it s important to consider that many of these business leaders are on their own without the benefit of boards of directors shareholders or even executive teams. Nearly 90 percent of Hispanic-owned businesses in fact are without paid employees. This tendency underscores the importance of leadership support and financial guidance for this critical segment of the everal credit unions have achieved marked success with their Hispanic growth strategies. To keep that momentum these cooperatives may need to evolve to target new and different segments within the Hispanic market including Hispanic small business owners (HSBOs). Hispanics own four million businesses and represent 22 percent of all business owners in the USA today. What kind of a financial opportunity do these figures represent A large one. In 2015 Hispanicowned businesses contributed more than 600 billion in revenue to the national economy. It s a deserving group packed with individuals who are hungry for financial and leadership assistance. That s because U.S. Hispanics are one of the most financially underserved segments of the American population and that disadvantage doesn t disappear simply because an individual opens a business. There are HSBOs of all types. Although the largest segment (at nearly 40 percent) was born in the USA and is English dominant 20 percent of HSBOs are Spanish preferring and immigrated to the United States retaining many of their Hispanic cultural practices. Notably however is the fact that Hispanic entrepreneurs are more youthful connected digitally and socially engaged than non-Hispanics overall. And 33 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M HISPANIC MARKETS Hispanic population. Digital products services and marketing will be critical to establishing your credit union s expertise and credibility. Inside a digital strategy talking with instead of at HSBOs is a key way to differentiate your expertise and brand from competitors. Because entrepreneurs use the Internet including their social accounts to supplement resources and expertise they don t yet (or never intend to) have they crave real fast smart answers to their problems. Yet The Sprout Social Index reports brands in the banking finance industry responded to only 14 percent of incoming messages in the second quarter of 2015. Avoiding conversation is a surefire way to tank any digital strategy aimed at this influential and busy group of Hispanic businessmen and women. What a good digital marketing strategy looks like... Every bit as complicated as a traditional marketing strategy a digital one can quickly snowball. Because there are so many different places to invest from Groupon to Pandora from Facebook to Snapchat marketers have to focus. When targeting HSBOs as a part of your credit union s overall Hispanic growth strategy your most important step is designing content customized to them. Ninety percent of consumers find custom content useful and nearly 80 percent believe organizations providing custom content are interested in building good relationships with them. What expertise or insight does your credit union have that will make the financial lives of the HSBOs in your community easier Only after you have this question answered should you begin to select the digital channels that will allow you to most effectively deliver that content. Marketing experts concur that 2016 will see those organizations already invested in the Hispanic marketplace increase their budgets while those that have so far waited on the sidelines will finally jump in. Yet to achieve real results credit unions will need to understand this is a multi-faceted group that values custom content and is prone to sharing its impressions far and wide among community members. Hispanic HSBOs are an increasingly high-value audience within the overall Hispanic consumer segment and one that can benefit greatly from the cooperative experience. By understanding the audience crafting custom content and selecting the right mix of digital channels the credit union difference can reach countless Hispanic business owners. Miriam De Dios is CEO of Coopera which partners with credit unions to help them grow by reaching and serving the Hispanic community. A native of Jalisco Mexico De Dios has significant experience in the financial services arena having worked with State Farm Insurance Companies and John Deere Credit. Witnessing her own parents struggles to navigate the U.S. financial system she is passionate about furthering Coopera s mission of connecting more Hispanics both immigrant and U.S. born with the financial mainstream. Credit unions she believes are the answer. 34 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M CFO CURRENCY BY ALEC HOLLIS R Managing Your Mortgage Pipeline Guidelines for Success Figure 1 Tenets of the Mortgage Banking Business Generate New Mortgage Business Service Loans (MSR) Pipeline Management isk management and profitability strategies have become a major area of concern for mortgage lenders today thanks to the current competitiveness in this market. As a result it s important for credit unions that offer home loans to have a strong focus on mortgage pipeline management. The pipeline is made up of mortgage loan commitments and when managed effectively it presents an opportunity to enhance return and profitability through risk reduction and cost savings. Because larger mortgage originators are more likely to have a significant portfolio of loan commitments (e.g. explicit agreements to lend money to a borrower) they may have significant exposure to a change in pricing between the times of initial commitment and when the loan is sold to the agencies. Generally mortgage loan commitments are viewed as firm for the banker but flexible for the borrower meaning the borrower is under no obligation and has the right to borrow from another lender. Good mortgage pipeline management is a core element of the mortgage banking business. As Figure 1 shows the mortgage banking process involves generating new business managing the commitment pipeline and potentially continuing to service loans. When a credit union originates a mortgage loan it creates two commodities a loan and the right to service that loan. Typically financial institutions use one of two strategies to manage their mortgage pipelines a forward sale commitment or hedging the pipeline in the securitized market. Forward Sale Commitment A forward sale commitment directly to an agency such as Fannie Mae requires either a mandatory or best-efforts future delivery of the mortgage loan. A mandatory commitment is an obligation to deliver the loan to the purchasing agent. If delivery can t be made the purchasing agency levies a pair-off fee against the originator. A best-efforts commitment allows more flexibility but at the cost of less favorable pricing of the loan to be sold. Unlike the mandatory method no fee is assessed if delivery can t be made. Figure 2 summarizes the characteristics of the two options. Ultimately both delivery methods provide the means to achieve the same goal. However for credit unions that have the ability opportunities exist to enhance profitability through internally hedging the pipeline. Figure 2 Mandatory versus Best Efforts Fannie Mae 35 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 Source www.fanniemae.com C U B U S I N E S S . C O M CFO CURRENCY Hedging the Pipeline As with most hedging programs mortgage pipeline hedging requires accurate and timely data retrieval as well as maintaining sophisticated and reliable models for trading and monitoring positions. Figure 3 on the next page demonstrates the basic process flow of hedging a mortgage pipeline. First the credit union must capture the loan-level mortgage pipeline data. It s critical in this step to have automated data recovery and integration with the models which improves timeliness and accuracy. Next it s important to establish pipeline stages and estimate pipeline fallout (the percentage of loan commitments that do not close). Ultimately fallout ratios are used to estimate pull-through ratios which effectively determine the probability that a loan commitment will be funded. The pull-through ratio is simply one minus the fallout ratio. As discussed it s important to remember that loan commitments ultimately may not close because a commitment doesn t obligate the borrower. Fallout rates vary over time due to changes in the level of interest rates and where the mortgage is in the pipeline stage. In general rising interest rates increase the borrower s financial incentive to close and consequently the percentage of loans that close and vice versa. Hedgers use these factors to model the expected fallout ratios. Using robust data management strategies that collect and utilize historical fallout data can add significant value to the hedging process. Figure 4 provides an example of pipelines stages and associated pullthrough ratios with the pipeline fallout decreasing as the pipeline progresses. Next compute the hedge dollar amount which requires measuring duration and convexity risks embedded in the mortgage assets and then adjusting for estimated fallout. The notional value of the hedge position is determined by adjusting the dollar duration of the mortgage pipeline by the expected fallout. The position used to hedge is short forward contracts on To Be Announced (TBA) mortgage-backed security (MBS). A forward contract obligates its buyer (seller) 36 C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S to buy (sell) an asset at a specified price and date agreed upon at initiation. Risk managers can use forward contracts to protect open positions from adverse price movements. Because the originator essentially has a long position in mortgages the short position protects the originator from a decline in pricing as the hedge position s value rises when MBS prices fall. Finally the credit union executes the hedge by selling short the appropriate amount of TBA MBS or by adjusting the existing hedge appropriately depending on the calculations in the previous step. Figure 3 Hedging Mortgage Pipeline Iteration Figure 4 Sample Pipeline Pull-Through Ratios by Interest Rate Scenario The goal of mortgage pipeline management is to reduce the price volatility of loans in the commitment phase. By assessing the overall mitigation of risk the credit union can evaluate its risk management performance. The total elimination of risk indicates perfect performance 2 20 01 16 6 2 0 1 6 C U B U S I N E S S . C O M M AP PR RI IL L AA R C H CFO CURRENCY CURRENCY CFO CFO CURRENCY CFO CURRENCY are calculated figures not assumptions. The have significant implication on the ALM conclusion. The of time. Credit will need to be assumptions used should be changed government bond inputs allow the user to model cash flows with an end maturitybenchmark if budget surpluses dry up thein progressive intervals become revieweddetermine Firstand the to and authorized even if an that are similar is generated from a hedge market. the output should be recalculatedjoined ALM the impact and They have already Alec Hollis standard for pricing and decay rateseconomic loss to amortizations. this can take in Financial Advisorsweeks.2012. position. Performance must be determined present valuemany corporate bonds. of a different assumption. Dividend and discount rates allow for the ex-post by if performs asset Mr. Hollis you are will allow attributing any underperformance interest rate scenario. Knowing where swap rates and spreads are uncertain as to calculations (premiums) in each modeled to its appropriate liability the many for financial of analyses requirements source (duration fallout estimates etc.). effective duration calculations can then mathematically bebetter hedging and investment execution. When investors need Conclusion applying and using derivatives institutions various what-if But price volatility shouldn t be the only performance compared to that of the institution s assets. in this case effectiveto gauge credit risk and market be viewed as aswap curve is Non-maturing deposits can sentiment the franchise value consider analyses budget forecasting metric. Risk managers also should be evaluated based becoming the more important curve to analyze.engaging an external duration is calculated by merely backing into the price change or benefits generated from loyalty of the membership when liquidityservice providerand help you forecasting to any on how well they manage costs. The costs of forward formula. For example if the liability present value is 100 in the deposits are retained when dividend rates are low in a higher through First Financial other with ALM requirement to committing to the agencies versus internally hedging Emily Hollis CFA is a partner modeling the steps. base 101 in the be 100 basis point scenario and 99 with down market environment. And the needs of ALM s clients. up determined and compared in the the fit vice versa A financial derivatives can easily Properly used institution Advisors LLC. 100 basis point scenario the effective duration isin internal As an Associate interest rate potential for superior performance present one percent that offers a non-maturity dividend rate higher Hollis srisk can offset Mr. than market (i.e. (101-99) 200). While internal hedging can produce additional hot money will decrease the economic withinofthe to attract responsibilities include the inherent valueof its hedging strategies. that is presentation liabilities. itindustry today.to senior these accountsas well is imperative This is vital because as competition model management for a more significant cost savings strategy is ultimately only as results union ALCOs and credit to client competencies the final requirements. The sensitivityits to meet is submittedIt s advisable second part asaccurate depictionfinancial analystunions members. more mentoring new of interest rate risk. team to compete good as Analysis implementation. to obtain and final application when all requirements are grows derivatives can allow credit The regulator strongly suggests sensitivity analyses aas a means effectively. Mr. Hollis holds a bachelor s degree in finance professional advice on the implementation of hedging completed including dealer contracts. Emily Mor Hollis CFA Notre Dame in South Financial to strategy. the effects of changing assumptions. sensitivity from the University of is a partner with ALM First Bend quantify setting up a line at a dealer is similar to becoming a Advisors analyses are essential because the core share evaluation may Indiana. LLC.CFA is a partner with ALM First Financial member of the FHLB--it can be laborious and takes a good deal Emily Hollis Advisors LLC. Exhibit 4 The outputs Some analysts view swaps as the most likely replacement for Treasury bonds as a financial benchmark if budget surpluses dry up the government bond market. 37 www.cubusiness.com C R E D I T U N II O N U N O N B U S II N E S S B U S N E S S November 2014 A AP PR RI IL L 2 20 01 16 6 Credit Union BUSINESS C U B U S I N E S S . C O M 15 LENDING BY BEN MORALES T Responding to CFPB Regulations Impacting Payday Lenders impact). Recent Pew data showed that the average payday loan customer pays 520 in finance charges for every 375 in principal borrowed. Though the 375 loan is advertised for two weeks on average the borrower remains in debt to the payday lender for closer to five months (http www.pewtrusts.org en multimedia data-visualizations 2015 payday-loansand-tax-time ). These high fees are the cost many Americans must pay to gain necessary liquidity. Impact on Consumers Many payday lenders practices take advantage of their customers through interest rates that can be between 300-500 percent APR (http www.pewtrusts. org en about news-room opinion 2016 01 06 whycredit-unions-should-pay-attention-to-the-paydayloan-market-and-what-the-cfpb-does-about-it). Consumers want the current system to change but still want access to small dollar loans. When questioned about the need for payday loan reform and the creation of alternative access to small dollar loans more than 70 percent of Americans wanted stronger regulations on the payday loan market and lower-cost small loans options available through traditional financial he Consumer Finance Protection Bureau (CFPB) is currently considering regulations to limit the dispersal of payday loans and other high-cost small-dollar loans by requiring an underwriting process that can adequately assess a borrowers ability to repay the loan. The regulations would fundamentally change the nature of small-dollar loans in this country possibly even ending the services of many traditional payday lenders. The CFPB regulations are the result of repeated efforts to regulate predatory lending practices and minimize debt traps that have victimized many Americans. The issue has far reaching consequences beyond the scope of impacting payday lenders affecting banks credit unions and millions of underbanked Americans alike. The Underbanked Consumer Approximately 100 million people in the United States are either unbanked meaning they have no checking or savings account or underbanked meaning they have some interactions with traditional financial institutions but rely on the services of alternative financial service providers (http files.consumerfinance.gov f 201311_ cfpb_report_empowering-economically-vulnerableconsumers.pdf). Small-dollar loans are one of the most prominent financial services the underbanked use to access cash. The underbanked rely on lessregulated payday lenders because they lack financial alternatives that most people use. There are twelve million Americans who regularly use payday loan services. These consumers spend more than 7 billion on loan fees outside the initial capital borrowed (http www.pewtrusts.org en research-and-analysis fact-sheets 2016 01 payday-loan-facts-and-the-cfpbs38 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M LENDING institutions(http www.pewtrusts.org en about newsroom opinion 2016 01 07 regulators-should-letbanks-get-back-to-small-dollar-loans). CFPB Research indicated that should the new regulations be implemented there would be a 71.66 percent reduction in the number of loans offered by payday lenders (https www.nonprime101.com blog clarity-analysis-confirms-cfpb-simulation ). While the exact impact is hard to measure payday and title loan companies will have to innovate to survive under the new regulations. This also means that a large number of consumers will be left without an important financial service. Beyond reforming payday lenders it is hoped that the new CFPB regulations will eventually help consumers by encouraging better alternatives to payday loans. A major goal of the CFPB regulations is to encourage traditional financial institutions to offer alternative small-dollar loans with more manageable payments and increased safeguards for consumers. Consumers are faced with a dilemma as CFPB reforms draw closer. If no viable alternative service for smalldollar loans is created before new regulations are implemented the initial impact of proposed CFPB regulations limiting payday loans would leave unbanked and underbanked consumers without an important financial service (http www.pewtrusts.org en research-and-analysis collections 2016 01 federalrules-for-small-loans). With the implementation of CFPB regulations looming there is a growing responsibility for financial institutions to provide a viable alternative for small-dollar loans. Beyond reforming payday lenders it is hoped that the new CFPB regulations will eventually help consumers by encouraging better alternatives to payday loans. the open market. Specifically credit unions have an ideal opportunity to fill the gap in the market caused by payday loan regulations. Many of the underbanked in this country use credit unions to provide basic financial services but do not use them for small-dollar loans. The number of small-dollar loans issued by credit unions is less than 1 percent of the volume of payday loans issued in a year (http www.pewtrusts. org en about news-room opinion 2016 01 06 whycredit-unions-should-pay-attention-to-the-paydayloan-market-and-what-the-cfpb-does-about-it). By leveraging relationships and account histories credit unions will be able to offer better small-dollar products at lower rates to their members. Both credit unions and banks have traditionally shied away from small-dollar loans because three prevalent myths it isn t profitable to work with the underbanked compliance will be more challenging and it will hurt the reputation of the financial institution (https www.bai.org banking-strategies article-detail serving-the-underbanked-with-short-term-loans ). These assumptions are simply not true. Smalldollar loans should be viewed as a potential source of revenue like any other financial product. Automated systems are able to make offering small-dollar loans to the underbanked profitable and ensure that compliance standards are met. Now more than ever the idea that offering small-dollar loans would hurt a credit union s reputation is a myth. Lawmakers and regulators realize they need financial institutions to fill the gap in the market created by CFPB regulations on payday lenders and have repeatedly called for them to do so. Rather than hurting their reputation credit unions who step 39 Opportunity Knocks for Credit Unions If the new rules reduce the volume of loans issued from payday lenders by 70 percent there will be a significant gap in the market which needs to be addressed. Traditional financial institutions need to start preparing immediately in order to ensure that millions of Americans have access to loans but some financial institutions are better positioned to take advantage of C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M LENDING up to tackle the problem will be viewed as leaders and innovators. We Need Guidance Not Regulation In order for the transition from traditional payday lenders to credit unions to be successful the CFPB must ensure no additional regulations on credit unions are passed which may interfere with the ability for credit unions to provide small-dollar loans. Fair Lending standards Unfair Deceptive or Abusive Acts or Practices (UDAAP) regulations and the limits to interest rates on payday loans already ensure that CUs are well-regulated. Any extra reporting and verification requirements will hinder their ability to offer alternatives at an affordable rate to cover operational overhead. Overly-rigorous compliance standards will be a barrier for credit unions to offer better alternatives to payday loans to underbanked consumers. Financial institutions should not be discouraged from offering small-dollar loans because of additional red tape that delays the loan approval process. For instance the credit union or bank should not be required to report to or check any additional database outside its own records. Requiring any additional external verification or manual efforts to deliver these types of loans will increase costs and lower the probability of credit union adoption. The proposed limitations on small dollar loans may create unintended consequences and drive consumers to meet their financial needs in new yet to be defined ways that may be risker. The mission of a credit union is to offer services which meet members financial needs. The opportunity is there the need is established and it s up to financial institutions to take responsibility. advantage to enter the small-dollar loan market. Credit unions can leverage their relationships and history with credit union members to create a better alternative to payday lending now regardless of CFPB regulations. The mission of a credit union is to offer services which meet members financial needs. The opportunity is there the need is established and it s up to financial institutions to take responsibility. New Opportunity Means Greater Responsibility Whether or not the new regulations on payday lenders are implemented banks and credit unions have a responsibility to move towards offering small-dollar loans to consumers. With few financial institutions offering small-dollar loan services there is a growing need for a better alternative to traditional payday loans. Credit unions are particularly at a competitive Ben Morales is the CEO of Olympia Wash.-based QCash Financial. QCash Financial is a provider of an automated cloud-based mobile lending platform that enables financial institutions to provide shortterm loans quickly to the people they serve. For more information about QCash Financial visit its website at Q-Cash.com 40 C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS BY BILL HULTSTRAND The Importance of Internal Marketing What Is Internal Marketing There s been a lot of talk lately about Internal Marketing. But what is it and why is it important for credit unions Businessdictionary.com defines it as the Management philosophy of promoting the firm and its policies to employees as if they are the (internal) customers of the firm. I think that s a good start but credit unions must take internal marketing to a deeper level if they are going to succeed. I recently had the chance to discuss internal marketing with the management team at Launch Federal Credit Union (Merritt Island FL Assets 736M). Lorrie Candiotti (Senior VP COO) Gary LeVar (VP Consumer Lending) and Margie Mitchell (Senior VP Chief Lending Officer) were gracious enough to share some of their experiences. Q What are you doing in the realm of Internal Marketing Lorrie Gary sends out a daily email to the entire staff. The email provides everyone with an update on where we are at in relation to our monthly goals and provides specific data. The emails are positive motivating and always include a dose of fun. We also conduct a Triple L Call (Leaders Launching Loans) call every Wednesday morning with branch managers and lending personnel to review our progress and get feedback from team members. And we get a ton of feedback. Our employees are very open. Q Sometimes it s difficult to get people to share. How did you get people to open up Lorrie It all starts with the culture. After joining the credit union a few years ago our CEO knew Lessons from Launch Federal Credit Union that we needed to nurture a more accountable open and collaborative environment. We started asking for employee feedback and most importantly we listened and implemented our employees ideas. We recognize team members who submit ideas. That has led to further openness and collaboration and it s been a positive snowball effect ever since. Q You mentioned recognition. What types of reward or incentive programs do you offer Gary We offer incentives for selling items like GAP and other insurance products that can add up. We also recently started providing cash incentives for real estate loan referrals and that has made an immediate impact. Margie We also have twice a year strategic planning briefings where employees are recognized for ideas that they have submitted and or for goals reached. We also do some fun non-monetary things like jeans day when we hit certain goals. (Inside joke Their CEO (Joe Mirachi) is not a fan of wearing jeans in the workplace so the employees get a kick out of making him don the denim ). C R E D I T U N I O N B U S I N E S S A P R I L 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS Lorrie Launch operates under 5 core values Honesty Trust Respect Integrity Value. We have a Core Values Reward program where employees can nominate other employees for demonstrating one or more of our core values. The employee receives a core value card and a 10 gift card. Although we have not yet implemented an elaborate loan incentive program we quickly learned that lowcost no-cost recognition initiatives can generate lots of excitement. We provide monthly cash incentives for the individual with the most funded loans based on branch size and the individual with the highest number of funded applications. We provide a pizza lunch and jeans day for the department or branch with the highest percentage increase in funded loans over the previous month and day off for the teller member services call center representative with the most referred by and funded loans credit cards and credit line increases. All branches that meet their monthly goal receive a team lunch or dinner. In addition to Gary s daily emails we distribute a Monday thought for the week email. It s generally a very short but powerful message focused on teamwork leadership and or one of our core values. Our CEO distributes an email to all employees on a monthly basis detailing the winners of all of our incentive initiatives. Our CEO is also starting something called Joe s Journal where he will recognize various individuals departments and provide financial updates each quarter. 42 C R E D I T U N I O N B U S I N E S S Q What s the most important thing or what have you learned about Internal Marketing Lorrie It s all about walking the talk. Employees need to believe that you (management) are going to do what you say you are going to do. When our people submit ideas they need to know that we are going to listen take action and to the extent possible implement their suggestions. Communicate communicate communicate. Enforce being all in. And keep everyone informed not just the people making loans. Gary We implemented some friendly competition between branches and we try to incorporate some fun in everything we do. As Lorrie stated earlier we ve worked together to change the culture and that has made all the difference. Q What pitfalls should credit unions watch out for Lorrie One of the biggest pitfalls is to not address those employees who are unwilling or unable to make the transition to the desired culture. Unfortunately some people were unable to make this transition and management had to make some tough decisions. Another pitfall is under-communicating. Don t be afraid of over-communicating and definitely don t exclude anyone. Also of paramount importance is to make training opportunities available to everyone not just senior management or the lending team. We give everyone - from management personnel to loan officers to tellers - the opportunity to attend industry training sessions and conferences. And our employees love it. Anyone who attends external training (including senior management) is expected to come back with at least one solid action item that we can implement at the credit union. Q Would you be willing to share some of the results you ve achieved recently Lorrie Absolutely. Our goal for 2016 is 11 million per month in consumer loan production. To give you an idea of what a difference a year can make during quarter 1 2015 our consumer loan production was 19.6M. Our consumer loan production for quarter 1 A P R I L 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS 2016 is close to 34M Year-to-date we are tracking ahead of goal. Margie Loan growth has been on the increase for the last 6 months. We hit our goal in January missed it by a hair in February but we are crushing it in March. In addition to the financial boost and positive loan growth we ve noticed a huge lift in employee morale since we initiated the culture change. Gary Our net loan yield is on the rise and we ve been able to serve more members while keeping charge-offs in check. We ve recently started offering incentives on real estate loans as well and the results have already been very positive. Q Any final thoughts Lorrie I would encourage my counterparts at other credit unions to focus on investing in your human capital and identifying solutions for your members. If you can get your employees to focus on serving your members and providing solutions you end up creating real value for both your members and employees. Thank you to Launch FCU for the great insight. As a recap here are four essential steps to succeed with your internal marketing program. Steps to Succeed with Internal Marketing 1. Culture It all starts with establishing the right culture and most importantly building and supporting that culture with every action you take. Many companies talk about culture but it s rare to find those that actually back it up with tangible action items on a daily basis. Establishing culture is not done on a whim. It takes careful proactive planning and a long-term commitment to execution of those plans. 1. Education Training employees is a huge part of internal marketing. If employees aren t experts on your products and services they can t adequately discuss them with members or have success crossselling. Educating your employees on the benefits of your services and how they can help your members is essential. 43 C R E D I T U N I O N B U S I N E S S 1. Communication Most marketers excel at external communications. But surprisingly many are deficient when it comes to communicating within the organization. Good internal communication like everything else takes commitment and a well-thought-out approach. For credit unions employees should be well-informed of all upcoming promotions. But beyond that they should understand the why behind the what. Getting employee buy-in is critical if you want them to successfully sell your latest promotion. If you can get them to truly see the benefits of the respective offer to your members they will be passionate about discussing and selling it. And passion makes all the difference in the world. 1. Incentives Create reachable goals and tangible incentive programs for all employees. Recognize employees that reach goals and go above and beyond. In the end internal marketing enables credit unions to deliver superior member service and creates an environment where employees have a vested interest in the success of the organization. And as Launch Federal Credit Union can attest successful internal marketing fosters a culture of collaboration and a focus on solutions. Bill Hultstrand is Director of Business Development for Lending Solutions Consultants. A P R I L 2 0 1 6 C U B U S I N E S S . C O M CU TRAINING BY KENNETH C. BATOR MBA YourBrand gmail.com H What is your email address saying about your credit union A lot more than you might think if you re still using a freebie account like gmail. Your .com speaks to the seriousness of your CU s branding. Learn how to stop treating your marketing efforts as an afterthought and how to make them consistent across all channels including email. ave you had this type of experience before You re at a networking function. Maybe it s a league convention. Maybe it s a chamber of commerce meeting. Heck maybe it s a Save-the-Meerkat charity function. Whatever the event may be you wind up in an actual interesting and enjoyable conversation with a professional you just met. You talk for about 15 minutes or so. You think this is someone you would like to network with again. If it is a vendor or possible supplier you think I may need the services this guy or gal offers. I should get a business card. You ask for one. You take a look at it and the email address is mybusiness gmail.com. I m not sure what your reaction might be but mine is always the same. I get a Jerry Seinfeld like voice in my head that says something like Really Are you just trying this business thing out for size for a while Is this kinda like a test drive You re not really serious about this business are you In these situations I usually ask How long have you been in business The response many times is something like A few years. So in a few years you didn t feel strongly enough about the operation to plunk down a few bucks to get a website and email account package so you could brand yourself as Donnie.lipschitz proctologistforyou.com I do a fair amount of networking and the scenario described above happens way too often. Fortunately it happens much less during credit union events than small business functions. However I don t have enough fingers and toes to count how many times over the 44 C R E D I T U N I O N B U S I N E S S last 15 years I have seen a clowncollegecreditunion hotmail.com or something to that effect. And no I haven t had any amputations. It always makes me wonder how much of an afterthought is branding And it isn t just the email address. It s the entire marketing mix. There s no consistency. There s no cohesion. You look at the website a brochure an ad and despite the same logo on A P R I L 2 0 1 6 C U B U S I N E S S . C O M CU TRAINING each they look like they are promoting three different credit unions. This is what happens when we aren t taking an active approach to promoting our unique brand. It usually goes something like this. A provider of insurance offers a generic brochure. So we smack our logo on it and put it in the lobby. Another provider offers three basic templates for a website that comes with another service. So we pick template B. Less than a week later we have a credit union website with some vanilla wording that could be from any financial institution. We re about to roll out a new product and need to send a letter to our members. So the vendor slaps the CEO s signature on a form letter and mails it out to the membership. Organizations that actively brand their business never leave their communications up to an outside source especially one that isn t a seasoned marketing firm. There are many credit unions that do actively brand their institutions and they do so very well. Fortunately more and more I see that what I call proactive branding is becoming the norm within the financial services arena. However there are still many cooperatives that struggle with this proactivity. Maybe it s the progression in which we have been taught to think in the credit union industry Earlier this year I implored Think small business not small credit union. The reason is such a mindset forces us to think differently. In so-called smallbusiness consultant school and yes I actually went 45 C R E D I T U N I O N B U S I N E S S to one of those they teach everyone that there are only three functions to any business whether it is a church a restaurant a financial institution a theatre a marijuana dispensary or any other operation. Those three functions are in order SALES - OPERATIONS - FINANCE Or in other words 1) How do we get business 2) How do we do business 3) How do we get paid That s it ... in that very order. It s possible that through all of those safety and soundness conversations and how we need to safeguard our members money that credit unions have erroneously turned the progression upside down to FINANCE - OPERATIONS - SALES As Stephen Covey might say you can t go against natural laws. Or as I definitely often say you re not going to get too far up the road by putting the cart before the horse. It amazes me to this day that there are still a number of credit unions that have the equivalent of a CFO and COO yet their marketing is literally an afterthought well down the list on a job description for A P R I L 2 0 1 6 C U B U S I N E S S . C O M CU TRAINING some other position on the organizational chart. I know someone is going to tell me that it just isn t reality with the budget of a 20 million credit union or maybe even a 120 million credit union to hire a full-time marketing professional much less an entire department to be the keeper of the brand. There are many more small businesses that also can t afford to do that. So here are a few small business ideas that may help 1) Hire an intern(s) but actually listen I find so many institutions that want to attract Millennial members. Then I ask What s the average age of your management and board One credit union even responded with The youngest person among our staff management and board is 49. Uggh I m in my late 40s myself but when I am the youngest person in the room I start to wonder in practically any business setting. If you don t have the budget to hire another full-time employee under the age of 30 look into hiring an intern or two at the local college. These folks need to gain some practical experience other than asking Do you want fries with that But if you re going to hire an intern have him or her do more than get coffee and arrange store-bought cookies in the shape of two hands for International Credit Union Day. Actually ask your intern s opinion on your strategy and marketing tactics. Who better to market to Millennials than a Millennial 2) Share a marketing professional. I ve seen this strategy in action before where two or more credit unions actually utilize one marketing professional. Sometimes it is an actual employee where salary and benefits are split. Other times it is a freelancer with multiple marketing skills who is strategically utilized by a group of local credit unions. Regardless of how the logistics are arranged it works well for all parties for the credit unions because it lowers costs and for the marketing professionals because they stay on their A games by working on many different projects. 46 C R E D I T U N I O N B U S I N E S S 3) Employ a multitude of freelance options but with focus. There are plenty of economical options out there whether they are Fiverr Elance 99Designs or several other sources that small businesses use for their marketing. The key is making sure all your marketing materials work in unison. Remember at least one full-time employee at the credit union has to take the responsibility for brand consistency. It doesn t have to be expensive but it does need to be consistent unless you re just waiting around for that call on a merger offer. Then shuttinitdowncreditunion gmail.com will do just fine. Ken has more than 20 years of experience in helping organizations make money save money and survive internal challenges and tough economic conditions. As a facilitator for training and strategic planning sessions and an expert in brand concept culture building and management Ken has helped hundreds of organizations since 2001. In addition to his career of working with CEOs CFOs and COOs he has also served as an executive of three different financial institutions throughout the country and has assisted many small- to medium-sized businesses to reach new levels of effectiveness. Ken is also a co-founder of the Police Officers Credit Union Association and author of The Formula for Business Success B C S The Pocket Guide to Strategic Planning The 90-Day Quick Fix for the Business Owner or Manager and The Strategic Planning Workbook and Guide for Financial Institutions. His articles have appeared in many trade publications including Lifestyle Entrepreneur Magazine The Credit Union Journal and ABA Bank Marketing. Born and raised in Chicago he earned a Bachelor of Science in Finance and an MBA in Entrepreneurship from DePaul University as well as a Certificate in Integrated Marketing from the University of Chicago. A P R I L 2 0 1 6 C U B U S I N E S S . C O M THEY SAY... TIME is We give you more of both. Cummins Allison branch automation technologies have helped thousands of FIs become more efficient. Our reliable cash coin check and ATM solutions move low-value deposit and cash handling transactions away from your tellers reducing operating costs and improving staff performance. Your branches are more productive and profitable and your customers get a better experience. 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