Discovery Conference Executive Summary
Transcription
Discovery Conference Executive Summary
WEDNESDAY / OCTOBER 21 / 2015 EXECUTIVE SUMMARY DESIGNED TO GIVE CREDIT UNION LEADERS A COMPETITIVE EDGE. Gain real insights to help you move forward with even more confidence. >> THE CONFERENCE IS AVAILABLE ON DEMAND, 24/7 THROUGH JUNE 2016 @cunamutual.com/ DiscoveryOnDemand Keep Discovering The conference is over, but the learning continues. This Discovery Conference Executive Summary has been prepared exclusively for October 21 Discovery Conference attendees. Consider this your post-conference trigger to revisit the conference, now on-demand, and gather all the big ideas you missed the first go-around. What’s inside? • Briefs of the closing keynote presentation “Beyond Disruption” and all eight breakout sessions. Review the highlights or watch the videos, now available on-demand through June 2016. • Product highlights and downloadable materials are available in the Solution Center on-demand. This tool is most useful when shared. Forward it, post-it, mail it. Just don’t “file it”! The CUNA Mutual Group Discovery Conference Team Table of Contents KEYNOTE PRESENTATION Beyond Disruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 STEVEN RICK Director and Chief Economist, CUNA Mutual Group BREAKOUT SESSIONS U.S. Economic Outlook & Its Impact on Credit Unions . . . . . . . . . . . . . . . . . . . . . . . STEVEN RICK 7 Director and Chief Economist, CUNA Mutual Group Strategies to Sustain Small Credit Union Growth – A Panel Discussion . . . . . . . . . . . . 15 BEN ROGERS, Moderator | Research Director, Filene Research Institute JON HERNANDEZ, Panelist | CEO, CalCom Federal Credit Union, Nikkei Credit Union, and Mattel Credit Union (CA) JED MEYER, Panelist | CEO, St. Cloud Federal Credit Union (MN) LINDA BODIE, Panelist | Chief + Innovator, Element Federal Credit Union (WV) Reaching the Subprime Auto Lending Market – Make It a True Win-Win! . . . . . . . . . . . . 19 STEVE HOKE Director, Loan Growth Products, CUNA Mutual Group What Matters Now™: Insights to Boost Membership with Middle-Income Americans . . . . 25 ANGIE FUHRKEN TruStage, Director Marketing Strategy & Commercialization, CUNA Mutual Group Payments (r)Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SAM MAULE Emerging Payments Practice Lead, Carlisle & Gallagher Consulting Group, Inc. Cybersecurity: Protect Your Credit Union’s and Members’ Data! . . . . . . . . . . . . . . . . 35 JAY ISAACSON, Moderator | Vice President, Business Protection, CUNA Mutual Group JOHN W. CARLSON, Panelist | Chief of Staff, FS-ISAC MARK GREISIGER, Panelist | President, Net Diligence CHRIS LACKE, Panelist | Director, Business Protection, CUNA Mutual Group New Frontiers for Large Credit Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 DAVID POLET CCUE, Director, Voice of Customer, CUNA Mutual Group Omni-Channel – What You Need to Know . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 MARK SIEVEWRIGHT President, Credit Union Solutions, Fiserv SESSION BRIEF KEYNOTE PRESENTATION Beyond Disruption STEVEN RICK Director and Chief Economist, CUNA Mutual Group OVERVIEW The financial services industry is becoming a breeding ground for disruption and incumbent players like credit unions face threats on two fronts: an ever-growing cast of financial technology (FinTech) startups, such as Lending Club and Venmo, and a new breed of leading-edge financial institutions. Steven Rick describes these developments and offers practical steps for moving beyond disruption. Discover how you can adopt some of the strategies of disruptive financial institutions to drive unprecedented growth and increase member relevance. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 1 CORP-1326807.1-1015-1117 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS Six signs that may indicate a credit union is being disrupted. If the CEO of the nation’s largest bank (Jamie Dimon of JP Morgan & Chase Co.) is concerned about this topic, then, of course, we should be very worried. These include: 1. 2. 3. 4. 5. 6. Membership decline Steady decrease of assets per branch Decline in percentage of members with draft accounts Drop in average number of products per member Decrease in the number of members under age 30 Members’ outbound ACH payees including disruptive financial services such as Lending Club, PayPal, etc. Disruption is growing outside the traditional financial services industry, but has yet to gain a lot of market share. In 2014 alone there was $12 billion invested in financial technology (FinTech; a three-fold jump from 2013) and a growing number of players have emerged across a broad spectrum of service offerings. The startling reality is that every product and service provided by a credit union or bank can now be provided by a technology player with strong and highly valued digital capabilities and few—if any—legacy costs. If you’re not growing, you’re dying. Slide 21 The biggest disruption is still coming from financial institutions. Although the growth rate of key players such as Lending Club—which has seen exponential growth in just four years and facilitated $1.9 billion in loans in Q2 2015 alone—has been phenomenal, the vast share of the market for consumer credit is still coming from traditional players. The nearer-term threat remains with disruptive financial institutions, retailers, platform players, telecoms, card companies, and non-bank competitors. 2 CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Slide 28 There are three categories of disruptive financial institutions and three factors that differentiate their business model. Slide 33 Disruption enablers: “Rent” out their charter to a disruptor and rely on this partnership for their income; have few, if any, members and may/may not have a branch. Challengers: Built as an Internet or mobile-only entity, offer deposit and credit products, use data analytics extensively, and use an open application programming interface (API) layer. This API layer allows these banks to securely share data with third-party FinTech companies in order to provide a wider array of services to their customers. CUNA Mutual Group ■ 2015 Discovery Conference 3 SESSION BRIEF Progressive incumbents: Existing innovative financial institutions that focus on an Omni-channel experience, deliver a convenient member experience, optimize branch networks, provide personalized financial management tools, leverage data analytics, experiment, and have strategic partnerships. WHAT SHOULD CREDIT UNIONS DO NOW? Credit unions need to strive to become disruptive in their own right. To do so, they should follow the lead of progressive incumbents: Become member-centric. Traditional credit unions tend to be product-centric financial institutions organized along product line. Disruptive credit unions’ highest priority is to understand and meet their members’ needs. Provide a robust, consistent Omni-channel experience. Become member-centric. Traditional credit unions tend to be product-centric financial institutions organized along product line. Disruptive credit unions’ highest priority is to understand and meet their members’ needs. Optimize branch networks. Branches are still valuable but must be delivered wisely. Disruptive credit unions are cutting branch size, moving into complementary locations (e.g., grocery stores), deploying interactive teller machines, and combining teller and member service representative roles into a universal employee position. Slide 57 4 CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Leverage data. Data can help credit unions uncover and address a huge range of issues. Support experimentation. The credit union system is fortunate to have organizations like Filene Research Institute and the Members Development Company that engage in research, development, and Support experimentation. The credit union system is fortunate to have organizations like Filene Research Institute and the Members Coop Financial Services Slide 63 Development Company that engage in research, development, and experimentation. Credit unions can support and learn from their efforts or find their own ways to support experimentation—a great example is Digital Credit Union, which has a financial services incubator. Be willing to take a chance and willing to fail—though, ideally, in small and low-risk ways. Be strategic about build/buy/partner decisions. Evaluate goals and resources and determine when it’s best to build in-house, buy outside services, partner with a CUSO, or collaborate to create a shared capability. What’s the payoff if your credit union takes steps to become progressive? There’s strong evidence to show that progressive credit unions, which we’ll define here as having more e-service offerings, have higher membership growth. CUNA Mutual Group ■ 2015 Discovery Conference 5 SESSION BRIEF So What’s the Pay-Off? Progressive Credit Unions Enjoy Higher Membership Growth 30% 20% 2011-2014 Membership Growth By e-Service Offerings e-Services: • Mobile banking • Electronic bill payment • e-Statements • Remote deposit capture 10% 3.7% 1.2% -3.7% -10% 15.0% < $100M $100M-$500M *Note: Small number of CUs in this category; N = 11 ≤2 e-Services 2010-14 Increased to 2+ by 2014 7.1% 6.9% 4.4% 0% 20.0% >2 e-Services 2010-14 0.5%* $500M-$5B Source: NCUA 5300 Call Report Data, CUNA Mutual Group analysis Slide 69 Embrace speed as you move your credit union beyond disrup-tion. Will your credit union become one of the disruptors and succeed in joining the ranks of the progressive incumbents? The answer de-pends on how quickly you take action. As Chinese military strategist Sun Tzu wrote in his book, The Art of War, “Quickness is the essence of the war.” Credit unions should take heed in today’s dynamic environment. 6 6 SESSION BRIEF Economic Outlook STEVEN RICK Director and Chief Economist, CUNA Mutual Group OVERVIEW Leaders must understand how the global economy, the overall financial sector and the Federal Reserve will affect the U.S. economy, U.S. interest rates and ultimately credit union balance sheet and earnings performance. Analyze and establish standards against which your credit union’s own performance can be measured. Learn trends of savings and loan activity, and weigh the influence of future economic events on growth patterns into 2016. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 7 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS No recession is anticipated through 2017. The current forecast is for the economy to grow at roughly 2.8% annually over the next two years, which is slightly better than the recent past. The four factors that tend to drive a recession—high inflation, excess product inventory, bubbles (house prices, stock market), or an external event (war, terrorist attack)—are largely seen as being under control, though of course, something like a war is nearly impossible to predict. The fact that 80% of the U.S. economy is service- rather than goods-based also makes it less likely a recession will occur. Good employment numbers, low commodity prices (especially Economic Growth Will be Above Trend in 2016-2017 Annual % Change in U.S. Economic Output (Real GDP - Chainweighted 2009$) 5% 4% 4.1% 3.8% 2.8% 3% 3.3% 2.7% 1.8% 2% 2.5% 1.8% 1.6% 2.8%2.8% 1.5% 1.0% 1% 2.4% 2.5% 2.2% 0% -0.3% -1% -2% -3% -2.8% -4% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Department of Commerce. Slide 6 There is a credit cycle in this country: a boom followed by a kaboom. By 2017 we’ll taper off mainly because we’re running out of liquidity. oil), pent-up demand, and low interest rates will drive strong loan growth across categories. With the U.S. economy rapidly approaching full employment (typically defined as an unemployment rate of 5%), huge drops in gas prices, pent-up demand across categories (mortgages, home equity, auto, and durable goods), and the government’s decision not to raise rates in September, credit unions should continue to see good loan growth in most areas over the next two years though the levels will be slightly lower than 2014/2015. Household financial assets are at record levels. A number of factors have contributed to this including the rise in the stock market (though it’s shown a high level of volatility in recent months, overall levels are still good), increasing home prices, and the decrease in household debt levels. It’s important to recognize that two-thirds of CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Loan Growth Will Decelerate Slightly in 2016-2017 Credit Union Loan Growth 12 (Annual Percent Growth) 10.8 11.0 10.9 10.7 11.0 10.0 10 8 7.0 10.0 7.8 7.5 8.0 7.6 7.3 6.7 6 4.8 4 2 0 1.2 00 01 02 03 04 05 06 07 08 09 1.2 10 11 12 13 14 15 16 17 -1.2 -2 Slide 16 debt disappeared because of bank and credit union charge-offs—rather than consumers paying off their debt—but economists believe the current debt-to-income ratio of 104% is a sustainable number. One key thing to keep in mind: income inequality. Although a growing number of members have stocks, retirement plans, and own a home, not all do. Those without these assets might struggle to weather changes in the economy. We’re currently at record levels of wealth…the numbers in 2007 included the artificially inflated housing bubble so we’re actually higher today. Household Net Worth Are at Record Levels Household Net Worth (As a Percent of Disposable Household Income) 700% 700% 680% 680% 660% 660% 640% 640% 620% 620% 600% 600% 580% 580% 560% 560% 540% 540% 520% 520% 500% 500% 480% 480% 460% 460% 440% 440% 420% 420% 400% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 400% Source: BEA & Federal Reserve. Slide 21 CUNA Mutual Group ■ 2015 Discovery Conference 9 SESSION BRIEF Delinquency and charge-off rates should hit record lows in 2016. Credit unions should see some of the lowest rates in history because the number of loans is growing quickly and the system should see drops in both delinquencies and charge-offs thanks to the improving economy. Credit unions are taking market share away from banks. Banks currently have loan growth of about 6% vs. credit unions’ 10% level—which indicates credit unions are stealing market share. Improved credit quality and a strong economy might entice credit unions to loosen their underwriting standards somewhat and this could contribute to additional loan growth. Interest rates are likely to rise as of December 2015, though more slowly than in the past. Although an expected September 2015 raise didn’t occur because of economic volatility, economists now believe the Federal Reserve will start to raise rates 1.25 percentage points annually beginning in December. The ten-year treasury interest rate is also expected to rise at low rates—likely to 3% by 2017 . The Federal Funds Interest Rate Will Reach 2.5% in 2017 Interest Rates and Recessions 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 00 01 02 03 04 05 Recession 06 07 Baa 08 09 10 Fed Funds 11 12 13 14 10-yr Treas 15 16 17 18 0 Forecast Slide 28 CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF The 10-Year Treasury Interest Rate Will Reach 3% in 2017 Nom inal Interest Rates, Real Interest Rates and Inflation Expectations 6.0 Inflation Expectations 5.5 10-yr Treas 6.0 TIPS (10-Yr) 5.5 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 07 08 09 10 11 12 13 14 15 16 17 -1.0 -0.5 -1.0 Slide 29 Changes in savings could squeeze net interest margins. Savings levels are forecast to drop as interest rates rise and this will also impact where members put their savings: there’s a strong correlation between interest rates and whether members keep their money in a regular share account or a certificate of deposit. Credit unions will have to raise rates to compete in these areas, which will cut net interest margins. Savings Growth Will Slow in 2016-2017 Credit Union Savings Growth (Annual Percent Growth) 16 15.0 14 12 11.3 10.6 10 8.4 8 6 6.9 6.2 6.1 5.0 4.1 4 5.2 4.8 4.4 4.4 5.0 4.0 3.6 3.0 3.0 2 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Slide 30 CUNA Mutual Group ■ 2015 Discovery Conference 11 SESSION BRIEF Savings Distribution Trends Will Reverse in 2016-2017 Savings Distribution U.S. Credit Unions 60 60 Certificates 55 55 Share Drafts 50 MMAs 50 45 IRAs 45 Regular Shares 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Slide 33 Large credit unions are doing better in every income and expense category. It’s no surprise to learn that the economies of scale (operational advantages driven by size) and scope (the ability to offer a wider array of products and services) mean larger credit unions are doing better than smaller ones. In some categories small credit unions are still seeing positive numbers—for instance, their loan growth is 2.9%, which is better than the previous year—but in other categories they’re struggling. For instance, small credit unions have a return on assets that’s less than 10 basis points while large credit unions are nearing 100 (which is traditionally seen as the target level). Return on Assets Correlated with Asset Size Credit Union Return on Assets (by Asset siz e) 120 2014 First Half 2015 First Half 100 99 98 80 Basis Points 80 74 65 65 60 45 40 25 20 8 32 52 53 39 7 0 < $20 mil $20-$50 $50-$100 $100$250 $250$500 $500-$1 bil >$1 bil Slide 35 CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF WHAT SHOULD CREDIT UNIONS DO NOW? Be prepared for economic and income instability. Although many indicators look good at present, your strategy should reflect less-thanrosy future scenarios too. Recognize that not all members are participating in the economic boom. Are there changes you should be making now to reflect this reality? Continue to position your credit union as a strong alternative to banks. Credit unions have seen stronger loan growth than banks in recent years. Keep the momentum going. CUNA Mutual Group ■ Discovery Conference ■ October 2015 13 SESSION BRIEF Strategies to Sustain Small Credit Union Growth A Panel Discussion BEN RODGERS Moderator | Research Director, Filene Research Institute JON HERNANDEZ, Panelist | CEO, CalCom FCU, Nikkei CU & Mattel CU (CA) JED MEYER, Panelist | CEO, St. Cloud FCU (MN) LINDA BODIE, Panelist | Chief + Innovator, Element FCU (WV) OVERVIEW What should small credit unions being doing now to ensure future success for their institution? Leaders from credit unions under $200 million in assets share their insights on member development, lending growth, channel management, risk, brand marketing, and more. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 15 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS Though this conversation was geared toward small credit unions, many of these insights could prove valuable regardless of asset size. A retail model can help grow business. In today’s highly competitive financial services world, credit unions can’t wait for members to come to them—they have to create opportunities to engage and learn through every channel available (including the SEG, website, focus groups, social media, contact centers, and more), then use this information to provide valued products, services, and offers. And, as every retailer knows, one-on-one connections are critical. “Don’t try to be everything to everyone—find your niche and design processes and programs specifically for them.” Linda Bodie “As a cooperative organization, we’re not afraid to lose those members who don’t contribute, and do more— like loyalty programs— for those who contribute more.” Jon Hernandez Consumers value the sharing economy and credit unions need to communicate they’re a part of it. The cooperative movement and the sharing economy are seeing a groundswell—think crowdsourcing, Uber, Air BnB, and the like. Credit unions must get the word out about their long-time presence in this space. Advance preparation helps small credit unions leverage their nimbleness. Agility has long been recognized as a small credit union strength, but that doesn’t mean it’s a given. At St. Cloud Federal Credit Union, senior staff goes through an intensive annual strategic planning process, looks at its activity report and balance sheet on a daily basis, partners with outside companies to stress test its balance sheet, and scrubs its internal loan portfolio on a quarterly basis. Although these might all fall into the category of “traditional” activities, doing them consistently and well helps the credit union understand who they are and what they’re good at, and allows them to adjust quickly in a changing marketplace. Meet members where they are. This applies across the board—in everything from product development and delivery to how the credit union communicates. Element Federal Credit Union is committed to uncovering and meeting member needs: its brand promise is to help members 100%. When Element discovered members tended to be relatively uneducated when it came to loans, the credit union focused on lending education. When Element learned members had bucket list and “midlife crisis” dreams, it developed loans to help achieve them. And when Element Federal Credit Union learned members wanted to communicate via text, Facetime, and Skype, they added those tools to their lineup. CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF The credit union, which is located in a mining area that’s often economically hard hit, makes it a point to reach out to members during economic downturns to work out payment arrangements and act as a true financial partner. Judicious choices, outsourcing, and collaboration can help small credit unions act more like big ones. Small credit unions can seldom take advantage of the economies of scale and scope that larger credit unions often take for granted. But that doesn’t mean they can’t compete. For instance, is the credit union making assumptions about its inability to meet member needs? St. Cloud connected with millennials and learned that although technology—especially mobile—was important to them, they wouldn’t choose a financial services partner simply because they had the most cutting edge mobile app. St. Cloud was able to deliver affordable digital channels without compromising member needs. “We’ve developed and researched a threepage list of ideas and plans that align with our defensive strategy that we can jump into quickly if the marketplace changes.” Jed Meyer Some credit unions have found outsourcing best meet their needs, while others found that collaboration does. The three credit unions that Hernandez leads (Mattel, Nikkei, and Calcom), have collaborated with other credit unions to vet a core processing system, provide back-office services, and get a better rate on health benefits; they’ve also been able to share employees. And St. Cloud has partnered with other credit unions to share training and meet disaster recovery needs. Innovation doesn’t depend on size. It’s easy to assume small credit unions can’t compete when it comes to innovation—especially in the realm of technology. But that’s not necessarily true. For instance, Element was the first financial institution in the country to deliver a remote deposit app! With membership all over West Virginia, the credit union knew it could be hard for members to get to a branch and wanted to provide more convenient deposit options. They started by allowing members to scan their checks, then graduated to pictures on their cell phone. The advent of the smart phone allowed Element to deliver remote deposit convenience and security. Appropriate risk management can help drive innovation. Examiners and lawyers tend to see innovation as a risky proposition. Small credit unions already pay a commensurately higher cost for compliance than larger ones do—can they afford to innovate? These credit unions say “yes.” “Sharing isn’t just about reducing costs, it also allows us to afford things—like marketing, business development, and compliance officers— that we couldn’t alone.” Jon Hernandez Hernandez breaks risk into two categories and develops strategies to CUNA Mutual Group ■ 2015 Discovery Conference 17 SESSION BRIEF “Innovation should occur because it’s what your members need and want and it flows from your strategy.” Linda Bodie address it: Reactive is for things they won’t have any control over (e.g., the potential FASMI ruling ) and proactive for things they do, such as how to become less reliant on fee income given the potential that the Consumer Financial Protection Bureau will reduce the fee structure for most credit unions. Bodie vets many new solutions herself—evaluating risk levels, working with collaborative partners for additional insights, and documenting the process. Actions become the credit union’s brand. A credit union’s brand is about more than its marketing: it’s about culture and relationships. What’s communicated internally has to match the message going out to the community and it’s critical to review, measure, and address what’s happening when the credit union intersects with the member. WHAT SHOULD CREDIT UNIONS DO NOW? Connect with members. Resource efficiency is critical to small credit unions. Connecting with members helps ensure credit unions aren’t wasting resources on products and services members don’t value. Be prepared to leverage agility. Don’t assume small size automatically allows the credit union to “turn on a dime.” Reflect, strategize, and be ready to respond. Embrace manageable innovation. “My approach is to develop the solution first—based on member needs—and then worry about compliance. Otherwise, you’ll never do anything.” Linda Bodie 18 It’s easy to be intimidated by the cost and potential risk of innovation, but small credit unions should be on the lookout for affordable, riskappropriate ways to create change. Collaborate. Work with other credit unions, vendors, and even those outside the financial services sphere, to save money, uncover opportunities, and deliver products and services that smaller organizations can’t afford alone. SESSION BRIEF Reaching the Subprime Lending Market STEVE HOKE Director, Loan Growth Products, CUNA Mutual Group OVERVIEW The subprime auto market (FICO scores below 650) has been growing in value: Today $2 of every $10 in auto loans goes to this segment and up to 30% of the new vehicle loans made in Q2 2015 were to nonprime borrowers.1 But market strength isn’t the only reason credit unions should be interested in this target. Predatory lending is common and many subprime borrowers are forced to pay 16-25%2 on their auto loans--the equivalent of putting a car on a credit card. This session investigates current auto buying trends and how credit unions can better meet the needs of subprime borrowers without exposing themselves to unnecessary risk. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 19 LG-1312642.2-1115-1217 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS Car sales are booming. Since the recession, there’s been strong, steady expansion in auto loan portfolios and that’s expected to continue into 2016. Experian-Oliver Wyman Market Intelligence Reports Slide 18 Subprime loans are on the upswing. Subprime lending makes up an impressive share of auto loans: $129.5 million in the first 11 months of 2014, which is over 25% of all auto sales. 3 High vehicle prices are driving new purchasing trends. The average purchase price of a new vehicle was $34,500 in 20144 and the average monthly payment was $471.5 These price levels are driving longer loan periods—roughly a third of all auto loans are now 72 months or longer and 3% of loans are for 84 months—and more leases (26.5% of all new vehicles are now purchased through a lease).6 Although overall debt is shrinking, almost 40% of loans are going to subprime borrowers.7 In most of the U.S., over half of the population falls into the subprime segment8 and nearly four in ten auto loans, credit cards, and personal loans, went to this group in the first 11 months of 2014.9 One size doesn’t fit all when it comes to subprime. There are a variety of reasons why a consumer might fall into the subprime category (defined here as having a credit score of 550-619).10 Some are young and don’t have a credit history; others may have faced an expensive medical emergency or job layoff and gotten behind on their bills. Or a consumer might have a good income and simply do a poor CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Majorities of consumers in 37 states have subprime credit scores; Washington Post, February 27, 2014 job managing their finances. The Consumer Financial Protection Bureau defines financial well-being as having the following characteristics:11 control over day-to-day, month-to-month finances; capacity to absorb a financial shock; on track to meet financial goals; and having the financial freedom to make choices to enjoy life. Subprime consumers are missing at least one of these. Cars equal jobs. Credit unions sometimes believe they’re doing members a favor by not giving them an auto loan they “can’t afford.” But with 86% of the population commuting to work, a reliable car is a critical lifeline and so is an affordable loan.12 Credit unions’ share of subprime is shrinking. Over half of all credit union loan portfolios are in prime or super prime loans.13 Members who can’t get an affordable loan through their credit union are often forced to do the equivalent of putting their car on their credit card. This is a shame considering that credit unions offer lower interest rates for both new and used car loans (47% and 49% respectively)14 than traditional banks do, which makes their loans highly attractive to a subprime consumer. CUNA Mutual Group ■ 2015 Discovery Conference Slide 29 Studies show that a person’s financial wellbeing can increase by over 25% with access to reliable transportation.15 21 SESSION BRIEF Experian; State of the Automotive Finance Market First Quarter 2015; April 2015 Slide 35 CUNA Mutual Group Internal Report; October 2015 Slide 40 Subprime loans can provide a great income opportunity and attract new members. While subprime lending certainly adds risk, it can also be highly rewarding and subprime lenders might not be as risky as typically perceived. In addition, the subprime market offers good opportunities for non-interest income through credit insurance, debt protection, and mechanical repair coverage. Another benefit is that subprime loans allow the credit union to attract new target markets, including highly desirable Millennials who are just starting on their journey to finding a primary financial institution. CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF WHAT SHOULD CREDIT UNIONS DO NOW? Subprime lending programs can provide exceptional income and membership opportunities with the right safeguards and best practices in place. Hoke recommended the following: Stay close to subprime borrowers and reward good behavior. It’s important to maintain a closer-than-typical relationship with subprime borrowers to ensure their payments stay on track. And when they do, reward their good behavior. One way is through a lower interest rate. A good program to try: LIFT16 or Lower Interest Rate for Timeliness. This program was developed by Filene Research Institute and cuts the interest rate of subprime members at specific points throughout the loan to reward continuing timely loan payments. Consider insurance to mitigate risk. It’s impossible to remove all lending risk but insurance can help to lessen the blow if problems occur. Two options to consider: collateral protection insurance—which protects auto loans against damage in the event of an accident and is paid as part of the member’s loan—and an umbrella policy, which is covered by the credit union. Use proper underwriting and collections. Good policies and procedures help to lessen risk. Confirm identity and application data. It isn’t uncommon for applicants to falsify information and research shows that those who overstate their income by more than 15% on an auto loan application are three times more likely to be seriously delinquent.17 Technology tools—like face recognition software that verifies a person’s identity through social media—can help confirm the borrower’s identity and personal information. Use direct marketing to recapture existing loans. Missed a loan the first time? Screening tools can help uncover opportunities to offer members a better deal and recapture their loan. Most subprime borrowers that are paying those higher interest rates are good regular payers on their loans. Promote additional lending products. Subprime borrowers— especially those with a used vehicle or a longer-term loan—benefit greatly from additional protection products and 49%18 of these members indicate they’re interested in learning more about them. Leverage technology to increase direct loans. Don’t assume subprime borrowers aren’t using mobile: 71%19 of the U.S. population has a smartphone and sometimes it’s a subprime member’s only “computer.” As of August 2015, 32% of loan applications (tied to loanliner.com) came through a mobile device—that’s four times the rate of 201120. CUNA Mutual Group ■ 2015 Discovery Conference 23 SESSION BRIEF Consider joining a CUSO to access indirect loans and spread the risk. Don’t have ready access to subprime borrowers? Aren’t Subprime borrowers are just as invested in technology as the rest of the lending population. comfortable taking on the risk of subprime alone? Collaboration can help. One option to investigate: CU Lending Edge, a platform that gives credit unions access to indirect, subprime loans and allows them to spread risk among likeminded peers. Use GPS to turn off late loans. Although this is seen as a bit controversial, some credit unions are embedding GPS into vehicles so they can shut them down in the event of late payments. Be aware that there are privacy concerns with this and, also, that the credit union will have to decide how to deploy the GPS, who will pay for it, and if it will be recovered from the vehicle. Use flexible rates to retain members and protect against risk. These strategies are typically used with indirect loans. The credit union might offer one rate to get the subprime loan and immediately lower the rate to retain the new member; some credit unions will mark the rate up slightly and use the difference to create a reserve that covers the cost of collections and write-offs. 1 State of the Automotive Finance Market, Experian Automotive, 2015 2 7 Simple Steps to a Subprime Auto Loan, Edmunds.com, March 2, 2015; Buy Here, Pay Here” Abuses, Center for Responsible Lending 3 The Next Subprime Crisis Will Ride on Four Wheels-Unless the Government Stops It, NewRepublic.com, February 26, 2015 4 5 things we learned from Dec. and 2014 auto sales, USA TODAY, January 7, 2015 5 Americans borrowing record amount to buy cars, cnbc.com, March 4, 2014 6 More car loans exceed 6 years as prices rev, USA TODAY, March 12, 2014 7 Lenders Step Up Financing to Subprime Borrowers, The Wall Street Journal, Feb 18, 2015 8 The majority of consumers have subprime credit scores, report says, The Washington Post, January 29, 2015. 9 Lenders Step Up Financing to Subprime Borrowers, The Wall Street Journal, February 2015 Q2 State of the Automotive Finance Market 2Q 2014, Experian 10 11 24 Financial well being: The goal of financial education, Consumerfinance.gov, January 2015 12 Majority of Americans Drive to Work, But Less so for Urban Millennials, Commerce.gov, August 13, 2015 13 State of the Automotive Finance Market, Experian, 2015 14 WalletHub 2013 Study: Auto Loans & Lease, Wallethub.com, 2013 15 Credit Union Times; Piloting Service to Subprime Borrowers; May 2, 2014 16 Lower Interest for Timeliness (LIFT) Pilot: Final Report, Filene Research Institute, July 25, 2014 17 Subprime Auto Loans: A Second Chance at Economic Opportunity, Equifax, February 17, 2015 18 Loanliner.com Protection Interest Report, CUNA Mutual Group, July 2015 19 Mobile Millennials: Over 85% of Generation Y Owns Smartphones, www.nielsen.com, September 5, 2014 20 U.S. Smartphone Use in 2015, Pew Research Center, April 1, 2015 SESSION BRIEF What Matters Now™ Insights to Boost Membership with Middle-Income Americans ANGIE FUHRKEN TruStage, Director Marketing Strategy & Commercialization, CUNA Mutual Group OVERVIEW What will it take to attract more middle-income Americans to your credit union? While credit unions are currently serving 42% of middle-income Americans, there are over 50 million who are not members.1 Would they consider a credit union? Our What Matters Now™ research shows 64% of non-credit union members would consider joining a credit union. 2 The values of middle-income Americans closely align with credit union values, making them a strong target for you to grow membership. Gain new insights on strategies to bring them to credit unions. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 CUNA Mutual Group ■ 2015 Discovery Conference TSIP-1329269.2-1115-1217 © CUNA Mutual Group, 2015. All Rights Reserved. 25 SESSION BRIEF Middle-income Americans are a valuable credit union target. This target is defined by age 30-70 years and household income, $25,000- $100,000 annually. They add up to an impressive 36% of the U.S. population. 3 Consider that nearly half (43%) don’t have life insurance4 and the vast majority (80%) don’t belong to credit unions— but that nearly two-thirds (64%) would consider opening an account5— and the value of this demographic is even more apparent. Recognizing the importance of this target, CUNA Mutual Group conducted a three-part research study that looked at the differences between credit union members, bank customers and those who didn’t have any sort of relationship with a financial institution. This research included: • A longitudinal analysis of roughly 25,000 consumer encounters (this examined their attitudes, media use, and behaviors) • A photo journalism/social media program with 83 consumers that captured their insights about credit unions • Custom quantitative surveys with 5,000+ consumers to validate the themes uncovered in the qualitative research This market segment prioritizes family and financial stability. “When we focus on what (our community) cares about, the numbers show it. Last year our membership growth was 2% higher than our peers and we had a 46% increase in new loan applications.” Laura Eibin AVP of Awesomeness Mazuma Credit Union When asked to define success (in the CUNA Mutual Group research), middle-income Americans’ top three picks were: good kids (for most this was defined as having a good value system and strong morals); a great relationship with a partner/spouse; and financial stability (being able to provide for their families). Following close behind were good health and a strong spiritual relationship. What they did not care about included having a lot of money, broad life experiences, or advancing to the top of their profession.6 Financial worries are keeping them up at night—and sometimes every night. Nearly two-thirds (62%) of this target group worry about their finances every day.7 Many have an income that fluctuates from month to month and making ends meet is a true struggle. They’re heavily dependent on potentially undependable vehicles—many are dealing with older cars, longer car loans and upside-down car values—and have likely gone without some form of medical care because of cost. CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Middle-income Americans care about good service. Member service has long been a credit union strength and, good news for credit unions, 61% of middle-income Americans seek this out when they’re looking for a financial institution.8 Forty percent of middle-income American credit union promoters mentioned the word “service” when asked their primary reason for recommending credit unions.9 When it comes to finances, this segment listens to their friends and family—and are likely to know a credit union member. Middle-income Americans want to hear what their friends and family have to say about their financial institution and are likely to be influenced by their choices. Luckily, nearly half of them (46%) know someone who belongs to a credit union and these members are highly likely to recommend their credit union.10 Credit unions’ net promoter scores are aligned with perennial consumer favorite, Apple. Forty percent of credit union promoters mentioned the word “service” when asked their primary reason for recommending credit unions. This demographic has good things to say about credit unions—and some misperceptions. The good news first: even those who didn’t belong to a credit union believed they offered good, customer-focused service. The misperceptions: unfortunately, non-members tended to NET PROMOTER SCORE: CREDIT UNION VERSUS BANKS 70.00% 60.00% 50.00% 40.00% Credit Union Members 30.00% 20.00% Bankers 10.00% 0.00% 18-34 35-54 55+ 22 Source: Filene Research Institute, 2010, Next Generation Needs: Examining Credit Union Loyalty Among Young Adults Source: Filene Research Institute, 2010, Next Generation Needs: Examining Credit Union Loyalty Among Young Adults CUNA Mutual Group ■ 2015 Discovery Conference Slide 26 27 SESSION BRIEF The rate on a loan or a savings account or the fees charged were some of the key things that brought people to credit unions instead of banks. hold a number of misconceptions that could limit the likelihood they’d make a switch: namely, that credit unions were less likely to have conveniently located branches, ATM access or good online banking. Credit unions who want to reach out to this target must address these concerns. One piece of information that should help: research shows members give their credit union an impressive 90 out of 100 score on their satisfaction with their credit union’s online services.11 WHAT SHOULD CREDIT UNIONS DO NOW? Get the word out about products and services that meet the needs of middle-income Americans. This group needs the help that credit unions have to offer—especially things like affordable car loans and insurance coverage and good rates on savings. Credit unions that clearly articulate their value proposition and motivate staff with member success stories, instead of volume goals, have had good success. Explore ways to reach new members through their family and community. This target values family and friends and trusts them to recommend good resources. Credit unions that have successfully targeted this segment have had good results with direct mail and social media and by partnering with local organizations (in one case, a popular soccer team). Keep the focus on service. Credit unions have a sterling reputation for excellent services and this market heavily values it. Reinforce this critical message: We can help you create financial stability. These consumers worry about their finances on a daily basis. They need help managing their payments and their cash flow; they want to protect their families and their futures. Show them how credit unions can help. The rate on a loan or a savings account or the fees charged were some of the key things that brought people to credit unions instead of banks. For more on the What Matters Now™ research, visit www.cunamutual.com/whatmattersnow. GfK Mediamark Research & Intelligence, LLC, 2013 MRI Doublebase, as provided by Hiebing Group TruStage What Matters Now™ Consumer Survey, 2014 4 LIMRA, Facts of Life, 2012 11 CFI Group, 2014, Credit Union Satisfaction Index 1, 3, 8, 9 2, 5, 6, 7, 10 CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Payments (r)Evolution SAM MAULE Emerging Payments Practice Lead, Carlisle & Gallagher Consulting Group, Inc. OVERVIEW FinTech (financial technology) venture capital investment continues to be one of the hottest growth areas globally, and payments continue to be a central focus area for disruption of traditional financial institutions. This session focuses on the three key areas undergoing a significant revolutionary change: • Mobile Payments • P2P Payments • Cryptocurrency It also identifies the key trends and innovative companies driving consumer adoption and engagement in the ever-evolving payments space, and the priority channels credit unions should engage in now. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 29 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS The pace of financial services innovation is exploding. The vast majority of financial service innovation has happened in the last 15 years and it’s not likely to slow down any time soon. In the payments space alone, there’s been a jump from 910 payment company startups as of 2014 to 2,051 as of September 2015. And in the broader financial services marketplace, there were 8,300 companies focused on disrupting the industry—vs. 6,981 banks, the lowest number since the Great Depression. Slide 9 “Silicon Valley is good at getting rid of pain points. Banks are good at creating them.” Jamie Dimon CEO and Chairman JP Morgan Chase The most critical innovations focus on the consumer—not the credit union. Take a look at the many payment tools that are currently disrupting traditional financial service providers and it’s quickly apparent that they’re all about the consumer. Just as the ATM made it possible for consumers to go to a “bank” when and where they wanted to, the latest innovations are succeeding because they address a core consumer need and help remove transactional friction. Every service a credit union offers can (likely) be replaced by a nontraditional player with no legacy infrastructure. FinTech players can CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Slide 19 Slide 27 focus on a narrow, deep market niche with none of the attendant costs that a traditional bank or credit union needs to account for. Mobile wallets might be a “solution looking for a problem,” (according to Sucharita Mulpuru, at Forrester) but mobile payments are already happening. The launch of Apple Pay in 2014 caused many to think mobile wallet dominance was just around the corner, but to date they’re still not perceived as a “must have” by consumers. The two top reasons: security concerns and the ease of using a plastic card. CUNA Mutual Group ■ 2015 Discovery Conference 31 SESSION BRIEF That said, some players are succeeding in mobile payments. One is Starbucks, which can boast the following mind-boggling statistics: • 90% of the $1.6 billion in U.S. mobile payments in 2013 was through the Starbucks app • 13 million app users • 16% of all Starbucks transactions come through its mobile app • 7 million weekly transactions Another is PayPal, which has payment volume that’s approaching $50 billion a quarter. Slide 31 And Venmo, a person-to-person payment solution, has a daily volume that even beats Starbucks and, like Google, has become a verb: “Venmo me.”* * Venmo is growing 350% a year. And Paypal owns Venmo. Slide 40 CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF FinTech is a massive ecosystem built around Millennials. Though it would be foolish to over-generalize about the 80 million Millennials in the U.S. population, it is safe to say they’re changing the world of financial services. Most in this segment believe banking and payments are in the middle of massive change, are incredibly comfortable working with FinTech companies, and think innovation will come from outside the financial services industry. Cryptocurrencies are likely to change how financial institutions manage assets. Although it might be difficult to predict just how cryptocurrencies will change the future, the fact that the world’s nine largest banks have created a consortium to advance the technology underlying cryptocurrencies (known as a blockchain) is reason enough to think credit unions need to have it on their radar. WHAT SHOULD CREDIT UNIONS DO NOW? Be aware. Ignorance is not bliss. Credit union executives typically have little to no awareness of the start-ups who are slowly destroying their revenue streams. Assign a staff member—someone young who loves FinTech—to continually investigate the hottest technology in banking and provide a monthly summary. Focus. Understand your member base and act accordingly. Their needs and their preferences should drive strategy and investments. Partner well. The shelf life of FinTech solutions is incredibly short and it often doesn’t make sense for a credit union to invest in their own. Find out who’s dominating a space and determine if it makes sense to work together. CUNA Mutual Group ■ 2015 Discovery Conference 33 SESSION BRIEF Cybersecurity Protect Your Credit Union’s and Members’ Data JAY ISAACSON Moderator | Vice President, Business Protection, CUNA Mutual Group JOHN W. CARLSON, Panelist, Chief of Staff, FS-ISAC MARK GREISIGER, Panelist, President, Net Diligence CHRIS LACKE, Panelist, Director, Business Protection, CUNA Mutual Group OVERVIEW Panelists from FS-ISAC, Net Diligence, and CUNA Mutual Group discuss cyber risks and trends facing credit unions. Panelists provide actionable insights into how information sharing, insurance, and risk management practices can help you better protect credit union member data. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 35 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS Credit unions must familiarize themselves with best practice cybersecurity tools. The Cybersecurity Assessment Tool from the Federal Financial Institutions Examination Council (FFIEC) incorporates concepts and principles contained in the FFIEC IT Examination Handbook, the National Institute of Standards and Technology (NIST) Cybersecurity Framework, and industry-accepted cybersecurity practices. This tool was created specifically for financial institutions and, while it’s considered voluntary at this time, the NCUA has said its examiners will soon be using it when evaluating credit unions’ cybersecurity preparedness. “Don’t be afraid of cyber being a technical issue. It’s really fundamentally a risk management issue… Don’t shy away from it. Dig in…if you don’t understand something, ask.” John Carlson “How you respond…is now a CEO-level issue.” John Carlson Most credit unions will face some sort of data breach in the coming year. The experts have long agreed that organizations should assume that a breach event is “when, not if.” Common sources of data loss include leaks from open source mobile apps, hackers, malware, and lost laptops. Common recent frauds have involved fake emails and domain names and payment fraud through wire transfers. Data security is a moving target. The dynamic reality of technology—and the increasingly connectedness of society—means risk is changing constantly and must be evaluated and addressed on an ongoing basis. Timely information sharing is critical. Knowledge is power—and timely knowledge is even more powerful, as it’s vital to minimize the time between when a threat is identified and addressed. There are a number of listservs and organizations that share information both inand outside the financial services system. These are a valuable way to stay on top of attacks, learn the steps other organizations have taken to address threats, and share information. One thing to be aware of: the availability of automated information sharing. Credit unions can leverage standards created by the Department of Homeland Security and use “machine-to-machine” communication to identify a threat, rather than waiting for staff to wade through emails and alerts. Third-party vendor contracts tend to favor the vendor. Be aware that many vendor contracts create a high level of risk for credit union data. Common examples include claims that the vendor owns any data in their network, having no provisions for notifying the credit union in the event of a data breach, and not allowing a credit union to do a forensic evaluation in the event of a breach. CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Good communication is critical. Have a breach? Prompt, appropriate information sharing with members and media could have a huge impact on the credit union’s reputation and bottom line. WHAT SHOULD CREDIT UNIONS DO NOW? Check in with IT staff. Are data worries keeping them up at night? Do they feel the credit union is sufficiently staffed and prepared to address data-related threats? Are they aware of threats they need help to address? And do they feel like part of the larger team? Hear what IT has to say. And make sure they feel valued—it’s vital to have the right people in place and this skill set is in high demand and easily poached. “You do not want to be exchanging business cards (with law enforcement officials) at the event. You want to have had the relationship ahead of time.” John Carlson Do a baseline, enterprise-wide security analysis. This is a critical first step in understanding and addressing a credit union’s security risks. Use a data matrix that captures the variety of data collected throughout the organization—including personal and business data—and where it resides both within the credit union’s servers and on partners’ servers. Build and test the incidence response plan now. Every credit union should have a plan in place that spells out both what happens next and who’s in charge of handling each element in the event of an incident. Most organizations will rely on external experts to address an attack—key players typically include a legal team, and forensics and public relations experts. Improve due diligence on third-party vendors. The vast majority “One in three events is now caused by a thirdparty vendor.” Mark Geisinger of credit unions (80%) outsource some or all of their computing to third parties. This means due diligence is more critical than ever. Evaluate if a cyber liability policy is appropriate. It is impossible to completely eliminate data-related risks and a growing number of credit unions are opting to use insurance to limit their liability. Join information networks. These are a valuable way to share information on threats, attacks, incidences, and strategies. The one widely recognized as a “must join”: the Financial Services Information Sharing and Analysis Center (FS-ISAC). Collaborate. Work with other credit unions, vendors, and even those outside the financial services sphere, to save money, uncover opportunities, and access products and services that smaller organizations can’t afford on their own. CUNA Mutual Group ■ 2015 Discovery Conference 37 SESSION BRIEF New Frontiers for Large Credit Unions DAVID POLET, CCUE Director, Voice of Customer, CUNA Mutual Group OVERVIEW Although credit unions with more than $500 million in assets make up only 7% of the system by number, they hold nearly 75% of all loans. The growth of these credit unions (in assets, members, and loans) will continue to accelerate based on information gathered from multiple sources. This session digs into some of the opportunities and challenges that this group is likely to face over the next three to five years in the areas of lending portfolios, channel and technology strategies, and regulatory pressures. WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 39 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS Top challenges are shared across asset sizes Slide 14 This segment invests heavily in compliance. Anecdotal evidence suggests that up to 30% of credit union staff time is dedicated to dealing with compliance. Large credit unions have responded in a big way: 97% of this asset class has at least one internal person dedicated to compliance and 85% spend more than $10,000 on external compliance resources each year. Credit unions need to put the infrastructure in place to support an Omnichannel experience. Members want to engage at any point, through any channel, wherever they are in the journey, and find all their updated information. Loan growth is important—but less so than it is to lower asset segments. The lesser importance of loan growth is somewhat surprising as it remains the engine of growth for the segment: 67% of their income comes from lending and investments. These credit unions are focusing lending efforts on first mortgages, auto lending, and member business lending. A growing number of large credit unions have gained a low-income credit union designation (there were six in 2010 vs. 100+ in 2015), likely because it exempts them from the business-lending cap. The biggest areas of focus for business lending are real estate-secured loans. Lending is becoming more virtual. Digital lending is popular with this group—nearly half of all large credit unions (45%) transact less than half of their consumer lending face-to-face —and they’re committed to remote lending processes. CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Slide 34 Member channel preferences are driving strategy. In response to member demand for digital, large credit unions either have, or soon plan to, update their data processors and loan origination systems. They’ve also enhanced their mobile and online solutions—especially in the area of lending—and have reimagined the branch. Branches aren’t going away, but they are likely to be smaller, be in new locations (for instance, grocery stores), and leverage technology that optimizes resources, e.g., interactive teller machines. This segment is more likely to have staff universalists who can direct members to technology options for transactions and engage them for more complex needs. They rely heavily on non-interest income, know it’s under threat, and are utilizing CUSOs to address this. Large credit unions need their non-interest income: in fact, they’d have a negative return on assets without it. Unfortunately, this income is extremely vulnerable: the Consumer Financial Protection Bureau is taking a close look at NSF/courtesy pay; the cap on debit card interchange is affecting credit unions with over $10 billion in assets; mortgage-related fees could drop precipitously if the housing market collapses; and merchants are working to limit income from credit card interchange and fees. CUNA Mutual Group ■ 2015 Discovery Conference 41 SESSION BRIEF Slide 39 Slide 40 Slide 44 CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Reducing operating expenses is critical and scale matters. The financial services world is incredibly competitive, especially with the growth of non-traditional players, many of whom don’t have the same cost ratios as credit unions (Lending Club, for instance, has operating expenses that are one-third those of the average financial institution). Large credit unions are much better positioned to take advantage of scale in this area. Large credit unions can invest where needed and run their businesses more efficiently than smaller credit unions are able to do. It’s been the trend and will continue. WHAT SHOULD CREDIT UNIONS DO NOW? Because this conversation was directed to large credit unions, these next steps are too. Continue to focus on growing lending. It is the driver of the credit union system and opportunities still exist to create new value among members (e.g. member business lending). Invest in technology. Utilize your capital to help upgrade your infrastructure to allow your members to interact more easily with you and allow your operations to become more efficient in how those interactions are delivered. Develop a member data strategy. Through the vast amounts of member data you have access to, determine how best to utilize and analyze that data to support offering new products and services to your members and deepening the share of wallet. CUNA Mutual Group ■ 2015 Discovery Conference Large credit unions can invest where needed and run their businesses more efficiently than smaller credit unions are able to do. It’s been the trend and will continue. 43 SESSION BRIEF Omni-Channel What You Need to Know Now MARK SIEVEWRIGHT President, Credit Union Solutions, FiServ OVERVIEW Rapidly advancing technologies, evolving consumer expectations, and a changing regulatory landscape are catalysts to a new era of disruptive innovation in financial services. From big data to peer-to-peer lending, Main Street to Silicon Valley, FinTech innovations have captured the attention and imagination of consumers and businesses, and the current mainstream financial services providers who serve them. In the future, financial services firms will be expected to provide a truly integrated and seamless customer experience across all touch-points or channels. What are the implications for America’s credit unions and how can they remain vital in this rapidly changing financial ecosystem? WATCH THE VIDEO ON-DEMAND THRU JUNE 2016 45 © CUNA Mutual Group, 2015. All Rights Reserved. SESSION BRIEF KEY TAKEAWAYS Digital is putting intense pressure on the financial services business model. Credit unions have long had to deal with the impact of banks, regulations, and difficult economic environments, but digital has emerged as a new and increasingly disruptive challenge. Digital has changed both consumer expectations of how financial services should be delivered and the players themselves: technology companies of every size and type are inserting themselves into the financial services landscape. Payments and lending are two areas where these companies have seen great success. Slide 29 New players stand out for their ability to remove friction points between consumers and financial services (e.g., faster mortgage closings, loans to C and D paper, easier ways to move money overseas), their agility, their lack of baggage (ranging from regulations to brick and mortar facilities), and a fundamentally different business model. Technology companies have made huge investments in the financial sector and that’s likely to continue. Consumers are comfortable getting their financial services from non-financial companies. There is an increasing willingness to use technology companies for financial services. CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Slide 25 Slide 30 Mobile is critical. This is true for a number of reasons. One is increased popularity: by 2016, 50% of online banking will happen via mobile. A second reason is loyalty. Studies show consumers and small businesses that use mobile as their predominant channel for accessing financial services are less likely to leave. And, third, mobile users aren’t just more loyal; they also generate more revenue. A recent study by Raddon Financial Group showed the highest-value members had one critical thing in common: their likelihood to use mobile. CUNA Mutual Group ■ 2015 Discovery Conference You don’t want your member services representatives to be one step behind information that your member already knows. 47 SESSION BRIEF Slide 21 Average Fees Non-Dig 0-18 19-30 31-40 41-50 51-60 61-70 Over 70 Online Average Accounts Mobile $ 0.12 $ 1.07 $ 1.60 $ 2.71 $ 5.31 $ 8.53 $ 3.48 $ 7.47 $ 14.65 $ 3.69 $ 8.21 $ 15.77 $ 2.91 $ 6.88 $ 13.85 $ 1.83 $ 3.66 $ 8.62 $ 1.00 $ 2.25 $ 4.36 0-18 19-30 31-40 41-50 51-60 61-70 Over 70 Non-Dig Online 1.58 1.79 1.93 1.78 1.94 2.15 1.84 2.10 2.25 1.92 2.21 2.29 2.03 2.32 2.45 2.12 2.38 2.53 2.26 2.46 2.43 Average Transactions 0-18 19-30 31-40 41-50 51-60 61-70 Over 70 Non-Dig Online Mobile 1.27 12.46 27.44 11.99 29.66 52.87 13.63 35.50 63.76 13.83 35.81 60.35 12.40 30.57 52.21 10.87 25.33 43.62 8.60 20.94 34.48 Mobile Average Loans 0-18 19-30 31-40 41-50 51-60 61-70 Over 70 Non-Dig Online 0.26 0.34 Mobile 0.56 0.41 0.41 0.63 0.62 0.58 0.71 0.69 0.66 0.77 0.68 0.71 0.89 0.62 0.68 0.91 0.49 0.75 0.94 Slide 23 Consumers expect and demand a seamless, Omni-channel experience that puts them in control. Consumers want a degree of knowledge, control, and immediacy they never had before and expect to cross channels during a transaction with no interruption of service or process. Other industries already deliver this service experience—examples include flight updates via mobile, the Nest thermostat (which learns and responds to a consumer’s heating and cooling needs), and the Kindle Mayday customer service feature. CUNA Mutual Group ■ 2015 Discovery Conference SESSION BRIEF Millennials are different. This critical target has different expectations of its financial service providers and demands a digital service experience. That said, they value trust and there is evidence to suggest Millennials prefer to conduct some transactions with a traditional provider. The branch is being redefined. In the last 20 years, branches have seen a huge dip in transactions. This doesn’t mean it’s time to shutter facilities; it does mean it’s time to better understand how members use them. Top credit union innovators are striking a balance between high tech and high touch: using video technology to leverage staff expertise across locations, installing self-service equipment for simple transactions, and recognizing that members want personal assistance for some (e.g., mortgages and investments). The ability to move money and move it simply is going to become a differentiator for credit unions. Payment tools are becoming service channels. The U.S. is in the midst of a payments revolution. Today it’s chips embedded in plastic cards and electronic devices (ala Apple Pay); a wide array of other technology-driven payment options are being explored around the world. This disruption is virtually guaranteed to continue. WHAT SHOULD CREDIT UNIONS DO NOW? Embrace data. The credit union difference is built on its “people helping people” heritage. Credit unions have a wealth of data at their disposal and must use it to better understand their members. Deliver what members want. Respond to the member demands data uncovers. These are likely to include seamless, Omni-channel solutions that give members immediacy and control and tools that simplify the movement of money. Be responsive to the needs and perceptions of the vital Millennial segment. Create technology partnerships. Financial service leaders like JP Morgan Chase recognize it’s critical to partner with the “outsiders” of Silicon Valley and credit unions must too. These partnerships give credit unions an effective and affordable way to deliver valued services. Focus on security. In a world where nearly every day seems to bring a new story of a data hack, credit unions must focus on security and compliance. New channels and payment options won’t be viable unless the right security standards and controls are in place. CUNA Mutual Group ■ 2015 Discovery Conference 49 >> IT’S AVAILABLE ON DEMAND, 24/7 THROUGH JUNE 2016 @cunamutual.com/DiscoveryOnDemand