A new white paper from the Filene Research Institute explores the sustainability of the credit union model, and offers credit unions ideas for maintaining sustainably "excellent" organizations.
"Credit Union Financial Sustainability: A Colloquium at Harvard University," is based on a series of presentations made at Harvard University earlier this year.
The report identifies four traits for sustainably excellent organizations. They include:
Have the stomach to be bad. The number-one obstacle to service excellence is actually an emotional obstacle. The paper cites a financial institution that became the fastest growing banking in the U.S. on deposits by bucking conventional wisdom. Conventional wisdom holds that the most attractive rates will attract members and customers. The bank offered the worst rates in every local market, but it differentiated itself by offering the best hours and offering the best customer interactions.
Avoid gratuitous service. Simply put, gratuitous service is giving members stuff for free. Unfortunately, service excellence is unsustainable if a financial institution offers too much gratuitous service. The paper advises credit unions to design reliable funding mechanisms into the service offerings. One example is offered by the financial institution with extended hours. But if members are asked to pay for services, it must be palatable. For example, charging for a teller is not palatable.
Design systems so the typical employee can be excellent. Most organizations try to set their best employees up for success-but they are the most difficult to retain. But sustained excellence comes from aiming at the middle of the pack, not at the top. Credit unions shouldn't optimize for their best employees because they can never have enough of them.
Teach customers to behave differently. When members are blocking a credit union's path to sustainability, they must be convinced to behave differently for the credit union to thrive. It's pretty easy to get members to behave differently and have them dislike you for it. But great organizations can get members to behave differently while simultaneously boosting satisfaction. Starbucks did it by training customers to order drinks "the cool way," which is also the way baristas prepare drinks most efficiently.
Reprinted with permission from the Credit Union Association of Rhode Island (www.cuassociationri.org)
The best path to improving your credit union's performance isn't to tell everyone how to do their jobs, author David Rock says. Instead, leaders must set goals and encourage employees to devise their own pathways toward that end.
In his book "Quiet Leadership," Rock states that advice should be kept to a minimum because it's often:
How can leaders break out of the trap of delivering too much advice? Focus on these objectives, says leadership coach and author Susan Cramm:
(Via E-Scan online)
The Office of the Comptroller of the Currency recently released updated guidance for national banks and federal savings associations for assessing and managing the risks associated with third-party relationships.
While this guidance does not directly apply to credit unions, credit unions may find the guidance useful as well.
Highlights of the guidance include:
A bank should adopt risk-management processes commensurate with the level of risk and complexity of its third-party relationships A bank should ensure comprehensive risk management and oversight of third-party relationships involving critical activities
Further, an effective risk-management process throughout the life cycle of the relationship includes:
Plans that outline the bank’s strategy, identify the inherent risks of the activity, and detail how the bank selects, assesses, and oversees the third party Proper due diligence in selecting a third party Written contracts that outline the rights and responsibilities of all parties Ongoing monitoring of the third party’s activities and performance Contingency plans for terminating the relationship in an effective manner Clear roles and responsibilities for overseeing and managing the relationship and risk-management process Documentation and reporting that facilitates oversight, accountability, monitoring, and risk management Independent reviews that allow bank management to determine that the bank’s process aligns with its strategy and effectively manages risks
Reprinted with permission from Anthem, the publication of the Northwest Credit Union Association (www.nwcua.org).
Here’s a summary of the most recent NCUA board meeting, courtesy of CUNA’s Regulatory Advocacy Department.
NCUA BOARD MEETING TODAY
November 21, 2013
Today, the NCUA Board approved a slightly revised CUSO final rule. In addition, the Board approved a 2014 operating budget that represents an increase of 6.7% from 2013, to $268.3 million.
The Board announced that it expects there to be no 2014 assessment for the Corporate Stabilization Fund and estimates the 2014 National Credit Union Share Insurance Fund premium will be from zero to five basis points.
Also, the Board approved an increase of the Overhead Transfer Rate to 69.2% for 2014. Lastly, the Board approved a decrease in the natural person federal credit union operating fee rate for 2014 by 18.4%.
NCUA Estimates 2014 NCUSIF Assessment of Zero to Five Basis Points & Expects No 2014 Assessment for the Corporate Stabilization Fund
NCUA will not charge a Temporary Corporate Credit Union Stabilization Fund assessment in 2014. Also, the agency estimates the National Credit Union Share Insurance Fund (NCUSIF) assessment for 2014 to be between zero and five basis points.
Credit unions have paid $4.8 billion in Stabilization Fund assessments since the fund was established. The projected net remaining assessments over the life of the Stabilization Fund, based on estimates from the second quarter of 2013, now range from -$0.2 billion to $1.6 billion. The NCUA also will receive $1.4 billion through a settlement with JP Morgan announced this week. The settlement funds “will greatly benefit credit unions” and “will enable NCUA to greatly reduce the assessments that all credit unions have to pay,” according to NCUA Chairman Debbie Matz.
CUNA Chief Economist Bill Hampel has noted that factoring the net proceeds from the JP Morgan settlement, the remaining assessment range falls to around minus $1 billion to plus $500 million.
Final Rule – Credit Union Service Organizations
The Board adopted a final CUSO rule today. Although there were some revisions from the proposed rule, we continue to have concerns about the authority for the rule and are reviewing the agency’s estimates of the regulatory burdens the rule will impose.
The final rule expands certain requirements that previously only applied to federally chartered credit unions to federally-insured state chartered credit unions (FISCUs). These requirements address accounting, financial statements, and audits. They also expand CUSO reporting requirements and limit the ability of “less than adequately capitalized” FISCUs to recapitalize their CUSOs. All CUSOs will be required to annually provide profile information to NCUA and, for FISCUs, the appropriate state regulator.
The final rule requires CUSOs that engage in what NCUA considers “complex or high-risk” activities to report more detailed information including audited financial statements and general customer information. The final rule also requires all subsidiary CUSOs to follow applicable laws and regulations and applies all of the regulation’s requirements to subsidiary CUSOs.
NCUA details what it considered complex or high risk activities along with special requirements that appear to apply to lending CUSOs.
Complex or high risk activities include:
Credit and lending: business loan origination; consumer mortgage loan origination; loan support services, including servicing; student loan origination; and credit card loan origination. Information technology: electronic transaction services; record retention, security, and disaster recovery services; and payroll processing services. Custody, safekeeping, and investment management services for credit unions.
The special requirements for a credit union investing in, lending to, or receiving services from the CUSO include:
Services provided to each credit union; The investment amount, loan amount, or level of activity of each credit union; and The CUSO’s most recent year-end audited financial statements.
In addition, CUSOs engaging in credit and lending services will be required to report the following activity by loan type:
The total dollar amount of loans outstanding; The total number of loans outstanding; The total dollar amount of loans granted year-to-date; and The total number of loans granted year-to-date.
NCUA acknowledged that all federally-insured credit unions with loans to or investments in CUSOs will be required under the final rule to make changes in the agreements they currently have with their CUSOs. Accordingly, the effective date of the final rule is June 30, 2014. Additionally, CUSOs will begin submitting reports to NCUA under new section 712.3(d)(4) when the agency’s reporting system is fully operational, which will be by December 31, 2015.
2014 Operating Budget
The NCUA Board approved a 2014 budget of $268,290,296, which is an increase of $16.9 million from the 2013 budget. The 6.7% increase in the 2014 budget exceeds the 6.1% budget increase from 2012 to 2013. The 2014 budget increase is attributable primarily to an $11 million, or 6%, increase in employee pay and benefits. Of the 6% increase, 4.1% relates to merit and locality pay increases associated primarily with NCUA’s current collective bargaining agreement. “With the federal pay freeze lifted in 2014, NCUA employees who have received no base salary increase for the past two or three years will receive an average merit increase of 4% based on performance,” as noted in the budget material.
While NCUA’s staffing level remains the same at 1,262.5 full time equivalents, the budget reflects the following:
It realigns NCUA’s regional supervision of FISCUs in nine states to balance workload and staffing, as well as respond to changes in the industry. This action creates more geographically compact regions designed to improve efficiency. It establishes the Office of Continuity and Security Management (OCSM). NCUA is creating this office to aggregate all security-related functions now being performed in disparate offices. The functions being consolidated include continuity of operations planning, physical security, and personnel security. In addition, a security function is added to the organization to address national security issues affecting the financial industry. It realigns the Equal Opportunity Programs office, currently in the Office of Executive Director (OED), to the Office of Minority and Women Inclusion.
The 2014 budget also reflects an increase in the agency’s contracted services of $3.1 million, or 14.8%, over the 2013 budget. The most significant increase relates to NCUA’s effort to strengthen cybersecurity, a high-priority effort to ensure the agency is in compliance with the Federal Information Systems Management Act. The new OCSM also accounts for growth in this line item, to improve agency security and comply with federal standards and regulations. Finally, funds are requested for continued contractor assistance as an alternative to new hires, to develop compliance guides that address 11 new financial services regulations issued by the CFPB and other federal regulators.
2014 Overhead Transfer Rate
The NCUA Board modified the Overhead Transfer Rate (OTR) from the current 59.1% to 69.2% for 2014. Under the Federal Credit Union Act, NCUA may transfer funds from the NCUSIF to fund its administrative and other expenses related to federal share insurance. NCUA uses the OTR to allocate those expenses.
According to the agency, the modification in the OTR is primarily due to the results of the Examination Time Survey for 2013. Examiners reported spending 88% of their examination and supervision time on insurance related procedures for the time survey ending in 2013, compared to 67% in the previous survey cycle.
We urge NCUA to continue to refine its methodology related to the OTR to provide additional clarity.
2014 Operating Fee Scale
The NCUA Board approved a decrease in the natural person federal credit union operating fee rate for 2014 by 18.4% and a 5.1% increase in the asset dividing point for the 2014 operating fee scale that the agency uses to determine the fee assessed to federal credit unions. In addition, federal credit unions with assets less than $1 million will not be assessed an operating fee for 2014. The operating fees for federal credit unions, which will be assessed based on assets as of December 31, 2013, will be due to NCUA no later than April 15, 2014.
According to NCUA, a number of factors resulted in the operating fee rate decrease, including the increased OTR, increased asset growth, as well as the July Board action to reduce the 2013-operating budget by $2.6 million.
We commend the decision for the operating fee to remain at no more than one month’s expenses of the agency.
Mary Dunn, CUNA Deputy General Counsel
Credit unions looking for ways to remain viable and competitive can no longer rely on conducting business as usual. As the opportunities to generate fees from traditional services are reduced, many are concerned with how to maintain a level of income that allows them to offer the services that keep them competitive. It’s a challenging balancing act at best: increase your bottom line while staying compliant and delivering the services and service levels your members demand.
According to industry experts, service charges on deposits have decreased substantially from levels reported just two years ago. And with ongoing regulatory pressures during that timeframe, the two products that produced the most non-interest income – debit card interchange fees and overdraft/NSF fees – have been greatly restricted.
What actions can credit unions take to offset the reductions in net non-interest income losses as a result of these pressures? By following these five strategies, your credit union can streamline your processes, increase your non-interest income and provide services that more accurately reflect what your members want and need:
John M. Floyd is chairman and CEO of John M. Floyd & Associates, a leader in profitability and performance improvement consulting. Reprinted with permission from Anthem, the publication of the Northwest Credit Union Association (www.nwcua.org).