Originally posted on CUInsight.
By Randy Salser, President, NAFCU Services
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For a look at what lies ahead in 2014 for credit unions, we turned to the Preferred Partner experts:
Most credit unions are experiencing a rapid rise in expenses associated with employee benefits at the same time that margins are shrinking. That makes providing a competitive set of benefits essential to retaining key employees that much more challenging. We’re seeing more and more credit unions thinking outside the box and using their assets to offset benefit expenses (called Benefit Liability Management). In a nutshell, NCUA allows credit unions to invest a portion of their assets in what would otherwise be impermissible investments (NCUA regulatory guideline 701.19) to offset employee benefit expenses.
Doing it right takes a careful analysis of needs and assets, the current financial position of the credit union, as well as taking a conservative approach to adding alternative asset classes to a portfolio. But done right it can be a win-win-win for the credit union, its members, and employees.
As part of this process we’re also seeing credit unions implementing split dollar plans to retain and reward their key executives. Split dollar plans leverage investments in life insurance policies to provide appealing tax advantaged retirement income to executives and, if properly structured and administered, can ultimately return all money spent, plus interest, back to the credit union. As with Benefit Liability Management, the devil is in the details, and plans have to be structured carefully to provide maximum benefit and to avoid unanticipated tax liabilities for executives in future years.
It is important to keep BSA compliance away from the cloud (i.e., a third-party data center): Cyber-attacks are a major concern to regulators which have emphasized that the reliance of a financial institution on the cloud will make the financial institution more vulnerable to hackers. WikiLeaks and many hackers are very interested in hacking cloud databases which store concentrated SAR data from many financial institutions. In addition, the Edward Snowden case has taught us a lesson that an employee of the cloud vendor can easily steal the secret SAR data from a credit union. When SAR data is stolen and published on the Internet, there will be risk of retaliation from criminals reported in the SARs, severe reputational damage to the credit union, career damage to the Senior Managers, BSA Officer, Compliance Officer, Security Officer, and Internal Auditor, countless troubles with government agencies, and loss of members’ confidence in the credit union.
2014 will be the year leading-edge credit unions begin to transform their web portals from brochureware to E-commerce sites.
Credit unions generate millions of visitors to their websites every day, but their web portals are still just an expense item, a placeholder for brochureware and an entryway to their free online banking services. In 2014, leading-edge credit unions will begin a radical transformation of their web eco-systems to deliver online experiences like Overstock.com to their members. Referred to as Project E-Branch or E-Branch 2020, these revolutionary web portals will allow members to shop, compare, and buy financial products without ever having to make a call, visit a branch, or wait at a drive-up. A CU’s web ecosystem is the perfect delivery platform to replace third-party direct mail campaigns, statement stuffers, rack brochures, and other outdated ‘analog’ distribution models. This is the year where members will be able to buy products they want in a place they trust, where the products and services are delivered instantly, turning a web portal into a revenue generating machine.
I feel an increasing sense of expectation, accountability, and burgeoning opportunities as I converse with credit union executives and board members. Here are four trends noticed in year-end 2013 conversations:
Executive Coaching: In year-end executive coaching sessions, our clients are exploring how their development has aligned with the needs in their organization, and what the next level of leadership is for 2014. Credit unions are in an exciting place right now, and I observe a felt-sense of commitment and accountability from mid-level management and C Suite executives as they anticipate changes in credit unions. These changes range from an approximation of 20% of our CEOs transitioning out of their roles over the next five years, advancement of the next level of leaders to step in and up to the CEO office, and early career and mid-level managers taking note of their career paths over the next five years.
Board-CEO Interaction: We are impressed with the generative governance practices seen unfolding in credit unions. There are changes from the two dominant styles of governance: the hierarchical or traditional governance structure (Board tells CEO what to do) or the long time rubber stamp boards. Exciting is the increased number of Boards and Executive Teams co-designing a visionary and strategy leadership team within the credit union. Moving forward in 2014, I invite you to revisit the process of Board-CEO interaction and which process best aligns and serves your unique needs.
High Performing Boards: Observable is the call to commitment and action from boards to be high performing, effectively develop board members, shift from tactical to strategic board meetings, and set and communicate clear expectations for board member performance. Organizations with high performing boards are unquestionably more successful!
CEO Selection: The traditional crises management of a CEO selection process is starting to evolve into a strategically oriented process. I think, as an industry, we have made some advancers in this domain, and yet still have further to go. I’d like to see CEO selection include an in-depth assessment of the credit union the new CEO is expected to lead. When a broad and in-depth organization assessment is integrated into the search process, it provides valuable decision making information to the board, above and beyond a job description.
At DDJ Myers, we have enjoyed introducing new tools in 2013 for credit unions to increase valued decision making about the structure, design, strategy, and people resource in their organization. We thank you for the opportunity to be part of this community, and to continue to serve you as a NAFCU Strategic Partner for Executive Search and Strategic Services.
Genworth expects the housing market to continue its recovery in 2014. That means more opportunity for credit unions to increase their mortgage origination business and capture a share of the profits available through mortgage origination. Members value being able to get a mortgage from a lender they trust, and credit unions are well-positioned to meet that demand. Credit unions should continue to educate their members about their product offerings and provide education that helps them understand how to choose the best mortgage for their needs.
For housing to continue to recover, credit policy guidelines should be prudent but not prohibitive. Mortgage loan products should not only focus on your members’ needs but also should be mortgages that are affordable on day one and throughout their years of homeownership, including 30-year fixed rate mortgages that are central to our housing finance system.
Credit unions should focus on embracing and understanding regulatory issues and how they apply to them. This may mean investing in new technology that can help support regulations or may mean ensuring that they have the right procedures in place; not just policies.
2014 will prove to be a bridge to housing recovery.
A purchase-money market. Borrowers with great expectations. Rising rates. Qualified mortgages. 2014 is shaping up to be a lending year unlike those of the recent past. Yet if this sounds dire, it shouldn’t. The U.S. mortgage market is poised to enter the longest-run purchase market since the 1950s. This is good news certainly. Better, and complimentary, news comes from the Joint Center for Housing Studies of Harvard University and its 2013 State of the Nation’s Housing Report. In its pages we learn that most people aged 45 and younger still plan on owning a home. The American Dream is alive and well. Market conditions are good, too, for those ready to realize their dream. Mortgage lending opportunities are abundant in 2014. The key is seeking, and realizing, the purchase-money opportunity.
Pentegra’s goal for 2014 is to help plan sponsors understand all of the available automatic plan design features that are available to them and to help them move in the direction of adopting an industry leading, state of the art, best practices, 401(k) plan design.
The 401(k) plan of the future will look dramatically different from today’s typical 401(k) plan. Looking three to five years into the future we’ll see wide spread utilization of progressive 401(k) plan design features which will better meet the needs of plan participants as well as plan sponsors. Participants will benefit as they experience higher levels of retirement success and retirement readiness. Plan sponsors will also benefit as participants become more engaged with their 401(k) plan since they will be better prepared for the long-term prospect of saving for retirement.
More and more plan sponsors rely on their 401(k) plan as their sole retirement plan. In order to achieve best of class results in terms of participant retirement readiness, plan sponsors will continue to add more “automatic” plan features. The majority of plan participants need and want help with their 401(k) plan. Studies consistently indicate that Gen X and Gen Y participants want help from their employer in terms of making their retirement plan more effective. While fewer baby boomers need or want this type of help, the advantage of adding automatic features to a 401(k) plan is that they enable participants who need and want help and guidance to take advantage of them, while participants who don’t need or want help can easily opt out of one or more of the automatic features. Progressive redesign of the 401(k) plan is a win-win for all participants as well as for their employers.
Given that the average asset size of credit unions is increasing, while the total number of credit unions is decreasing, it is imperative that a credit union has sufficient internal controls and a risk management framework that meets the growing demands of auditors and regulatory bodies. In 2014, examiners will continue to focus on procedures and policies associated with vendor and contract management to ensure a credit union is properly managing the related risks that third-party vendor relationships bring. In addition, we have seen that having sound risk management and regulatory compliance processes in place is important and probably will become of even greater focus in the future. This can be seen in the NCUA’s November 2013 Supervisory Guidance on Enterprise Risk Management 13-CU-12 and Supervisory Letter that clarifies its expectations for a credit unions enterprise risk management processes.
As we enter 2014, you need to ask yourself, is each member of my credit union receiving the best member experience possible? How can I learn the unique needs of each member? How can I track a member’s activities across all my different data sources? How do I maximize my marketing campaigns?
In the blog post, Marketing Optimization: Five Lessons Learned at a Major U.S. Bank, Anne-Lindsey Beall explains how one U.S. bank set out to answer all of these questions using marketing optimization. The bank wanted to integrate their marketing communications, in real time, and provide the best customer experience with every interaction across channels.
Beall goes on to explain how they did it, and the five lessons they learned along the way.
Counting the cost: When they started their marketing optimization implementation, the team budgeted for the resources they knew they’d need, things like staff, technology and time. But there were a few surprises …
Regulations, Regulations, Regulations—as in, the RESPA-TILA integrated mortgage disclosures, effective August 1, 2015. Don’t wait until 2015 to address it. Because of this rule’s impact on operations, you cannot begin planning too soon. Rely on your forms vendors, mortgage partners, data processors, and legal counsel to keep you abreast of the rules and forms. CFPB will be issuing further guidance and answering questions as it receives them, so sign up for its e-mail notifications. Work backwards from August 1, 2015, to determine your timeline and game plan now.
Meanwhile, the CFPB has the luxury in 2014 to move on to topics other than mortgages, such as overdraft, prepaid cards, Reg CC disclosures, and debt collection. To keep track of all of it, take advantage of various resources out there—besides NAFCU, and the CFPB, many law firms have compliance blogs and news alerts you can subscribe to for free. Knowledge is power, so grab on!
Business lending will continue to be an opportunity for credit unions to serve even more of their members’ needs in 2014. Even so, this type of lending is fraught with numerous regulatory requirements and operational risks.
Credit unions need to ensure compliance with a growing number of state and federal requirements and more stringent regulatory oversight in the face of the Dodd-Frank Act. But they often do not have the needed compliance resources dedicated to this type of lending. Credit unions also need to increase operational efficiencies. As the economy slowly recovers, they often have fewer in-house resources overall.
So making the leap into member business lending in today’s world can be a rather risky one for those with limited to no knowledge or experience. But this is one instance where outside expertise combined with technology can help credit unions take advantage of a significant opportunity for them and their members.
Partnering with a provider can provide peace of mind to credit unions constrained with domain expertise. Solutions that offer straight through processing capabilities dramatically improve performance management for credit unions by defragmenting the lending process and enabling them to be more profitable, all while managing compliance risk.
NAFCU Services Preferred Partners represent a world-class roster of companies who are deeply committed to the NAFCU mission and credit union community. What makes the Preferred Partner status special and meaningful is that the status must be earned. Only after extensive research into the viability of the offering, an open request-for-proposal process, and three rounds of approval by credit union executives is the Partner status finally conferred. The credit union executives who review candidates and their solutions include the NAFCU Services Advisory Committee, the NAFCU Services Board of Directors and the NAFCU Board of Directors. These executives—your colleagues—come from a diverse range of credit unions across the country, representing different asset sizes and fields of membership. The extensive peer evaluation ensures that only the most talented companies may call themselves Preferred Partners. View our Preferred Partners at www.nafcu.org/Partners.