Let’s get the superficial stuff out of the way: The hotel (The Westgate Hotel www.westgatehotel.com) is lavishly appointed with brass fixtures and marble counters, spacious rooms, soft sheets and large windows. The food is perfectly prepared and served in bounty. The staff was courteous and proficient.
This all provides the prefect setting to be told the cold, hard reality: We’re facing unchartered, tough economic times. Some Credit Unions (CUs) won’t survive and those that do will face an economic and regulatory climate very different from the environment in which CUs operated before the economic downturn of 2008. So what do we do with that information? What can CUs do today, to position themselves most successfully to emerge from these challenging times? I guess it depends on who you ask.
The morning started off with Jim Blaine, CEO of State Employees’ Credit Union (www.ncsecu.org), sharing with us how he grew this CU into the second largest CU in the country (assets of $19B). Interestingly, this is a SEG based CU, the same SEG the CU started with in 1937 (state employees, teachers, and their families). He had a lot of interesting information to share with us. One thing I found striking was that he stated that his CU does no marketing and doesn’t believe in it. I think this works for them because they are SEG based and have 1.5 million members throughout the state. They don’t need to market; even if they did, it would probably be a waste of money. Jim’s justification was that this freed up money to return to the membership, but I don’t think for most CUs, especially those that are community chartered, they can survive without marketing. Specifically, Paul J. Lucas (www.pauljlucas.com), who has developed a niche in assisting CUs with their branding/marketing strategies, stated in his presentation that CUs need to spend (at a minimum) 0.25% of their assets (annually) on marketing.
Jim did cite studies that, time after time, rank members’ preferences when it comes to CUs and what members want: 45% stated that convenience was their top priority; 25% stated that consistency was their top priority; 15% cited price and the same percentage stated service! Jim poignantly stated that Wal-Mart was no accident! Jim wasn’t the only presenter who referenced Wal-Mart. Thomas Davis, of NACUSO (www.nacuso.org) used Wal-Mart as an example of how organizations need to undercut their competitors in providing a lower-quality service at a lower price (as compared to Sears and K-Mart). His thesis was that consumers’ needs plateau, and most service providers’ products surpass the needs of their consumers.
We then heard form Peter Duffy of Sandler, O’Neill & Partner (www.sandleroneill.com), who was a nice counter-point to Mr. Blaine. While I felt that a lot of what Peter had to say was rather abstract, much of his commentary was on point. It is fair to say that Peter is a capitalist. In fact, on more than one occasion, Peter stated that CUs need to be “ravenous pigs” when it comes to profit. Of course, we all know that CUs are not for profit, but I think Peter’s point was well taken: CUs need to survive to serve their members; CUs pass their profit on to their members through increased services, lower rates on loans, or increased dividends on deposits. While I think Peter’s phraseology was a little crude, no one can accuse me of being subtle, so I probably shouldn’t throw stones. Peter also pointed out that once you get past the “factory floors”, CUs realize that communities are not their supporters—a nice contrast to Jim’s success as a SEG based CU. Overall, I felt like Peter’s message was a little too much, “Chicken Little the sky is falling” for me. He posited that CUs are at a regulatory disadvantage to their “similarly situated” community banks. For that reason alone, he felt CUs faced large obstacles when it came to successfully exiting the economic crisis facing this nation. I was hoping for a little more optimism from Peter. Specifically, I was looking for encouraging signs, or a roadmap out of this quagmire. Unfortunately, Peter failed to deliver. Maybe it is hopeless, but I, for one, refuse to accept defeat in this era of challenge and ingenuity!
One thing that surprised me from both of these presenters, and after speaking to many of the attendees of the conference, was the sheer hostility toward courtesy pay and indirect lending. The presenters stated that both features separated CUs from their membership and would ultimately be eradicated by regulation. While I’ve never endorsed courtesy pay as a practice, I was slightly surprised by the number of attendees who do not offer this feature to their members. Needless to say, the opinion of both presenters was that by the end of the year, courtesy pay will be a relic of our past.
Reward programs for credit and debit cards was also a hot-button issue at the conference. Jim was of the opinion that reward features of a credit/debit card program was a race to the bottom (obviously, his CU doesn’t offer reward points), while Peter was of the opinion that CUs need to respond to the demands of the marketplace. Good or bad, your members want reward features…so you better provide them if you wish to remain viable. I have to admit that I side with Peter on this one.
Another presenter, Hal Tilbury of Bluepoint Solutions (www.bluepointsolutions.com), addressed attendees about the importance and efficiency of document management. His main complaint was that most CUs look to their data processors for document management. The downfall, in his opinion, is the dysfunctional document management system: they don’t save money, they don’t save time and they don’t function the way a document management system should. He provided us with his “10 Commandments” of document management—although he acknowledged he wasn’t Jesus, he suggested he might be Moses. Essentially, the 10 Commandments outlined what a document management system should result in: substantial cost reduction, improved employee productivity, and enhanced member service. He presented a compelling case of capturing electronic images at the time of presentment and the savings in cost. According to Hal, having his software, a scanner, and a shredder at every employees’ station only costs $0.15 per hour/per employee over a seven year period. You do the math
We also heard from Tom Chandler and Christopher Joy of PSCU Financial Services (www.pscufs.com) regarding the all-relevant Credit CARD Act of 2009. Through their analysis, this Act will cost CUs a net loss of 1.56% on their credit card portfolio. If you consider that, at best, CUs realized a 4% Return on Assets (ROA) on their credit card portfolios in 2008, which means that in 2010, CUs will realize, at best, a 2% ROA. They also provided several appropriate ways in which CUs can respond to this new regulation:
- Increase APR on entire portfolio
- Re-price high risk accounts
- Increase margin on variable rate products
- Convert fixed APR portfolios to variable rate
- Risk-base price new accounts
- Consider different rates for purchases and cash-advances
- Eliminate life-of-balance promotions (lower rate gets paid last)
- Run fixed duration promotions
- Prepare to set penalty/default pricing for existing balances at 3 cycles (60 days) with 45 day notification—squeeze out the revenue
- Lock-in low cost funding
- Increase late fee and trigger at cycle-end
- Consider adding cash advance fees and foreign transaction fees
- Review and reset balance transfer rates, fees and criteria
- Review returned check fees, minimum finance charges and other incidental fees
- Hold off instituting new annual fees—may be last line of defense against any modification to interchange fees pending in legislation
By implementing all of their strategies (all of which are not outlined above), Tom and Christopher submitted that CUs could reduce their net loss to less than 0.50% on their credit card portfolios.
Overall, I found the first day of this conference to be informative and instructive. I look forward to what tomorrow has in store…
John B. C. Porter, Esq.