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Has Your ALM Technology Emerged From the Dark Ages?

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In this wonderful world of amazing technological advances, member-facing technology provides convenience and ease of access that was unimaginable in the past.  Huge strides have also been made in supporting technologies, such as putting relevant data at employees’ fingertips for cross-selling, automated loan decisioning, and mining member data for marketing opportunities.  The same can be done for asset/liability management (ALM).

ALM modeling used to require hours to run on early computers and, before that, you can imagine how long it took to do the calculations using paper and pencil. Of course, those early methodologies had to be simple and it was impossible to render results quickly, so people got used to slow analyses that were already irrelevant by the time they were complete.  ALM was relegated to a dusty back room and offered to regulators to satisfy their check boxes.

Fast-forward to today – if ALM is not being used to make business decisions in real time, it may signal the need for a mindset change.  A vast array of decisions – from changing the loan portfolio to adding branches or reducing operating expense – can be tested for their impact on profitability and the risk profile.  Imagine sitting around a table discussing ideas and initiatives, and testing their potential profitability under numerous economic conditions.

ALM modeling has come a long way and deserves a place at that table, serving as one of the pillars good decision-making rests on.  This type of decision-making links strategy and desired financial performance for long-term success.

Now more than ever, it is important to view ALM as a powerful weapon to help remain relevant as competition and consumer preferences continue to change. Demand more from your ALM and start using it to help gain and maintain that competitive edge.

 

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A/LM Education and Anticipating What is Top of Mind

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We are looking forward to hosting 3 days of asset/liability management (A/LM) education next week. Often our education classes will have a similar foundation of how to use A/LM to make decisions, how to identify what environmental factors to watch, and how to see potential problems that might be hiding in the modeling—to name a few. Beyond the base topics, there are always new things happening that also become part of the discussion. These new topics are driven by the things at the top of decision-makers’ minds. As part of preparation for the A/LM education courses, we always work to anticipate what people are most worried and excited about.

Here are some of the things we think will be a focus of attendees during our upcoming classes.

Rates

How are rates changing and what it could mean about the economy? A great example of uncertainty has been happening in the past two short months of 2016.  Consider short-term rates, where the news has confidently expressed each of the following perspectives:

  • The Fed is going to increase rates at least four times in 2016 – Much of January
  • The Fed is not going to increase rates in 2016 – Much of February
  • The Fed is going to increase rates two times in 2016 – Currently

While the rate change amounts are small – from a big picture perspective – the larger concern for credit unions is often the reason for the change, since it represents different outlooks for the economy. The various paths that the economy can take may have an impact on members’ mindsets, and result in shifting behavior. The behavior can impact different areas of credit union growth. For example, which of the above paths could play a role in slowing the fast consumer loan growth the industry has been experiencing?

Of course, beyond short-term rates, there are also a lot of questions swirling around long-term rates.

Stock Market

Another area of uncertainty has been the stock market:

  • The market is falling quickly and could experience another 10% correction – Much of January
  • The market is rebounding and should stabilize – Early February
  • The market is dropping, and this time it could be sustained – Mid February
  • The market is climbing and making up most of the loss this year – Currently

Each of these paths also impacts the mindset of members. Which of these paths, if they were to continue, may lead to more deposit growth? Which could cause deposits to shrink? What could each of the paths do to lending?

Technology

What new technologies are being released and what are their potential impacts on how people will look to get things done in the future? Three days could be spent on this topic alone, but a prime example of this is Amazon Echo, which came out in 2015. So far this year, there are a lot of parties looking to interface with this product, so they can be part of the new generation of home automation, with the objective of making it easy for consumers to get things done. Currently, Amazon Echo is making it easy to get a lot of things answered or done – such as what the weather will be, if a team won, what the best Italian restaurant is in the area, adding events to your calendar, buying things from Amazon, or adding items to your shopping list.

As other parties are hooking up to the Echo, they are providing new conveniences like making it possible to change the temperature in your house from your car, or helping you locate your misplaced keys. What does this have to do with uncertainty for credit unions? Beyond the potential direct impact of even more routine shopping happening through Amazon (where hopefully your member set up your credit card for one-click payments), there are other potential impacts to depository institutions. Will people be asking their device where the best place is to get a loan, or which places will give the best rate? The same could be true for members looking to transfer money to a better money market rate, or finding the best rate on a 1-year CD. Will people be able to send instant payments just by vocalizing it as soon as the thought occurs? Adoption of technology is always a hard thing to predict, but the impact on a member’s mindset, and their desire for things to be even easier, is to be expected.

It is impossible in a blog to cover all of the things that will be on attendees’ minds in our 3 days of A/LM education, but these are a few of the things that we think will be brought up.

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Are Your Predictions Limiting Your Strategic Thinking?

I think there is a world market for maybe five computers.

— IBM president Thomas Watson, 1943.

Apple is already dead.

— Nathan Myhrvold, former CTO of Microsoft, 1997.

Neither RedBox nor Netflix are even on the radar screen in terms of competition. It’s more Wal-Mart and Apple.

— Blockbuster CEO Jim Keyes, 2008.

These Google guys, they want to be billionaires and rock stars and go to conferences and all that. Let us see if they still want to run the business in two to three years.

— Bill Gates, founder of Microsoft, 2003.

Predictions are a tricky business.

Leaders assess how the world might or might not change. Whether it’s new non-traditional competition, cutting-edge technologies, evolving business models, or changing member behaviors, developing successful strategies today relies on decision-makers opening their minds to the possibilities and then choosing a path. Are you thinking creatively enough about how the world might change around you and how to ensure your credit union does not get left behind?

Consider the disruptions in financial services today. Like Blockbuster above, should strategy focus on behemoths like Wal-Mart and Apple, or are there greater threats in newer business models like M-Pesa, SoFi, and The Lending Club? Perhaps the greater threats and opportunities are evolving technologies. All of this is happening on top of traditional competition, regulation, and the economy.

Good strategy begins with careful consideration of possible threats and opportunities. Identifying the future you’re planning for is an important first step. With the future uncertain, even the best-laid plans are likely to run into unanticipated challenges. It can be useful, then, to ask, “What if the strategies we pursue are based on expectations that don’t come to pass?”

We recommend going through a process of test driving difficult and hard-to-imagine environments. Creating stories around such environments and discussing how the credit union could respond can be extremely valuable. Institutions are often amazed at the insight this can provide whether the environment actually occurs.

It’s not easy to foresee the future. We’ll leave you with some great historical examples, demonstrating that even the smartest people can misjudge the future.

 

The Americans have need of the telephone, but we do not. We have plenty of messenger boys.

— William Preece, British Post Office, 1876

This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication.

— William Orton, President of Western Union, 1876

Fooling around with alternating current is just a waste of time. Nobody will use it, ever.

— Thomas Edison, 1889

The horse is here to stay but the automobile is only a novelty – a fad.

— President of the Michigan Savings Bank advising Henry Ford’s lawyer, Horace Rackham, not to invest in the Ford Motor Company, 1903

Who the hell wants to hear actors talk?

— Harry M. Warner, co-founder of Warner Brothers, 1926

Stocks have reached what looks like a permanently high plateau.

— Irving Fisher, Professor of Economics, Yale University, 1929

There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will.

— Albert Einstein, 1932

Television won’t be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night.

— Darryl Zanuck, 20th Century Fox, 1946

If excessive smoking actually plays a role in the production of lung cancer, it seems to be a minor one.

— W.C. Heuper, National Cancer Institute, 1954

There is practically no chance communications space satellites will be used to provide better telephone, telegraph, television or radio service inside the United States.

— T.A.M. Craven, Federal Communications Commission commissioner, 1961

With over 50 foreign cars already on sale here, the Japanese auto industry isn’t likely to carve out a big slice of the U.S. market.

— Business Week, 1968

There is no reason for any individual to have a computer in their home.

— Ken Olsen, Chairman and Founder of Digital Equipment Corp., 1977

I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.

— Robert Metcalfe, founder of 3Com, 1995

Two years from now, spam will be solved.

— Bill Gates, 2004

There’s just not that many videos I want to watch.

— Steve Chen, CTO and co-founder of YouTube expressing concerns about his company’s long term viability, 2005

There’s no chance that the iPhone is going to get any significant market share.

— Steve Ballmer, Microsoft CEO, 2007

Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.

— Ben Bernanke, Federal Reserve Chairman, 2007

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IT Project Management

Looking back 20 years, most of us were content to sit and wait while our modems hissed and pinged to life. Now, the average person is unwilling to wait 10 seconds for a page to load or for the technology to work. The cliché is true—technology is constantly changing. And, if your credit union is like most, then your IT department has a full plate of projects keeping them busy.

Never mind the constant pressure of keeping member data confidential and protected from phishers—just staying on top of troubleshooting for both internal and external users, or siphoning through the usual list of updates and upgrades can be a demanding challenge. Add to that the list of “non-IT” projects that require IT support and your credit union could be looking at a serious resource challenge. If this is the case it might be time to re-evaluate your project management process and lighten the load for your IT department.

From a project management perspective, you might consider taking the following steps:

  • Catalog all projects currently in progress: It may seem like a painful place to start but don’t let that intimidate you. Without an accurate inventory, you will not be able to get your arms around of all the projects (no matter how small) that are pulling at IT resources
  • Analyze resource commitments: Take the catalog of projects in process and analyze it to determine how many hours of IT time will be wrapped into a project before it is complete. We have seen some credit unions do this, only to find that more than 100% of IT resources are booked solid for weeks. That means that if a “fire” suddenly pops up, the IT department is now in a potential position to fail
  • Decide if the existing commitments add value and are in line with strategy: For maxed IT departments, certain projects will need to be put on the backburner while more prominent projects are completed
  • Control the flow of projects: If the above steps show that the IT department is maxed out, it’s time to control the flow of new projects. Clear communication with the rest of the credit union is imperative to do this successfully. Moving forward, the IT department could outline a grading scale and ask that new projects be submitted with a grade based on importance

As projects get added to the roster, your IT staff might start to feel like they are order takers. Helping them implement a solid project management process can free up time for the innovation and strategic implementation they were hired to enact.

For more articles on project management, visit our c. notes page.

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