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Mobile Banking And Strategic Resource Allocation

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The Credit Union Times recently released an article titled Mobile Banking Report: Credit Unions Lagging Banks.  In the article, Mary Monahan of Javelin Strategy & Research cautions that institutions that lack mobile banking risk losing valuable customers to those that offer it.  She enforces that many credit unions still do not offer mobile banking apps and that is what users want with a particular emphasis on the younger generation.

There is certainly an argument to be made that the younger generation is faster (not necessarily more prone) to adopt new technologies.  Consider that 45% of those ages 64 to 72 use home banking, compared to 57% of those 18-32 according to a 2009 Pew study; the margin is pretty slim.  The “Silent Generation” may not have been the first to adopt home banking, but technology often catches up with all generations.  Beyond age, a number of other demographic and behavioral factors will play a role in usage and adoption rate within your credit union’s unique market.

The question remains, however, are most credit unions positioned to compete with the technology of the nation’s largest financial institutions? And the more important questions:  Is mobile banking necessary for your unique credit union right now?  If not, when?

A credit union will benefit tremendously by having a deep understanding of its business model (including target market(s), value propositions, core competencies and sources of profitability) when contemplating any new product or service.  In our strategic planning work with credit unions, we encourage credit union leaders to create Decision Filters focused on the credit union’s unique business model to help allocate finite resources.  Few if any businesses can afford to be all things to all people—and with margins that continue to be squeezed by sluggish loan demand and extended low interest rates—strategic allocation of resources is critical.

Source:  Mobile Banking Report:  Credit Unions Lagging Banks, CU Times, 2/7/12

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Do You Have A Clear Philosophy On Fees?

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With fee income under fire, it is becoming more important than ever for credit union boards and managements to be able to articulate their philosophies on fees.  Simply saying, “We don’t like to fee our members” is not enough.  Most credit unions are already considering, if not implementing, new fees and fee increases—not because they want to fee their membership, but because they feel that replacing lost fee income and/or offsetting increasing expenses is a financial necessity.

Consider the following when discussing fees and fee pricing:

  • Cover Costs—Fees can be implemented to put the burden on the party that is incurring the costs rather than making the entire membership carry the costs.  Take the example of check-cashers.  Check-cashers typically are not contributing members but use a lot of credit union resources.  One answer to this dilemma is to decide that it’s okay to cash checks as long as the costs are covered with a fee.  In this case, it must also be okay to have the check-cashers go elsewhere if they decide that they don’t want to pay the fee
  • Strategy—The fee structure and pricing must support the credit union’s strategy.  A credit union that is building its mortgage business may choose to charge mortgage fees that do not cover all costs.  The rationale could be that the costs will be covered with future interest income while charging more fees today could drive potential borrowers away.  The important thing is that the fees align, and are not in conflict, with the strategy
  • Member Behavior—Some fees are intended to change member behavior.  An example is paper statement fees.  The purpose of these fees is to encourage members to get statements online, enabling the credit union to reduce expenses directly attributable to paper statements.  In addition, the credit union may hope members will shift to using more electronic services, reducing branch and phone transactions
  • The Bottom Line—Fees are sometimes instituted to improve the bottom line, although this is often only part of the reason.  Improving the bottom line often goes hand-in-hand with covering costs and altering member behavior
  • What the Market Will Bear—As a practical matter, fees that most institutions charge are included on many credit unions’ fee schedules simply because the market expects to pay them.  This approach is also used in deciding fee pricing as opposed to pricing to cover costs.  However, it is important to understand the hard costs.  It should be a conscious decision to charge a fee that does not cover the cost

This is the perfect time to discuss and clarify the credit union’s fee income philosophy.  Having decision-makers on the same page will help align upcoming fee structure changes with the credit union’s philosophy and strategy.

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Proposed Interest Rate Risk Regulation

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Newly proposed regulations would require federally insured credit unions to not only have an effective interest rate risk management program, but also a written policy addressing interest rate risk management.  The NCUA has taken this step due to concerns about the level of interest rate risk being taken by many institutions, as material concentrations in long-term, fixed-rate assets continue to be booked in this historically low rate environment—funded largely by short-term deposits.

Most often, managements and boards establish limits at the category or portfolio level, not at the enterprise/aggregate level.  It is not uncommon to see a credit union within their individual category or portfolio levels, yet have a relatively high level of risk at the enterprise level.  In other words, the combination of the individual risks can create an undesirable, aggregate risk profile.  Therefore, agreeing on and managing to aggregate risk levels is a key component of an effective risk management process.  However, establishing aggregate risk limits that make sense from a business perspective, as well as from a safety and soundness perspective, requires in-depth discussions and critical thinking.

These limits can also be a critical driver of financial success both today and as rates change.  So take your time and think it through.

While we believe it is prudent for decision makers to establish enterprise/aggregate risk limits, it is not intended as an endorsement for the proposed regulation.  We will write more on the proposed regulation soon.

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Do Lower PLL Ratios Mean The Credit Crisis Is Over?

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On the surface, recent credit union provision for loan loss (PLL) trends seem encouraging; industry-wide through second quarter 2010, the ratio of PLL to average assets has declined by 31 basis points to an annualized ratio of 0.81%.  However, delinquencies and charge-offs as a percent of loans have only decreased by 11 basis points and 5 basis points respectively for the same period.
Of course every situation and institution is unique, but as we look toward 2011, credit unions might want to consider:

  • Is the improvement in PLL sustainable?  Or, could it be a function of allowance accounts being over-funded?  As noted above, recent delinquency and charge-off trends do not look as positive as the industry PLL trend
  • Do the unemployment outlook, real estate values and the trends in member credit scores support the assumption that PLL will continue to decrease through 2011?
  • What if many of our usually dependable borrowers lose their jobs and, at a certain point, run out of savings?
  • What if strategic defaults become more commonplace?  Consider that strategic defaults are currently blamed for as much as 25% of foreclosure activity
  • Could commercial real estate woes trickle down to further impact the economy and cause broader loan losses?

Is 2011 the year that we’ll see sustainable improvements in PLL?  Hopefully it is, but with all of the uncertainty out there, we may not want to count on it just yet.

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The New Word of Mouth: Revolutionizing How Younger Members Find You

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Nobody will argue that the way we search for information over the last 10 years has changed dramatically.  Gone are the days of bulky Yellow Pages and encyclopedias; if someone—especially the younger generation—wants information, they turn to search engines.  According to the Pew Internet & American Life Project (January 2009), 87% of Gen Y use the internet, 90% of which use search engines to find information.

A new spin on the way search engines provide relevant results is underway.  Bing.com, powered by Microsoft, has partnered with Facebook to let your circle of friends directly influence your search engine results.  If a Facebook friend finds a link that they “like,” it will appear at the top of your results.

What does this mean for credit unions?  Every day, sharing information and recommendations becomes easier and more efficient.  While the ramifications of this partnership are largely unknown, it is likely that the member experience and loyalty you create will become even more critical to attracting new, younger members.  What do you do that would motivate a member to “like” your site?