The decline and demise of well-known retailers such asBlockbuster, Kodak and free-standing bookstores offers proof ofjust how rapidly industries are shifting to keep up with consumers'needs and wants. 

John Lass, senior vice president of strategy and businessdevelopment for CUNA Mutual Group, shared his perspective on whatthe credit union of the future will look like during the company'srecent Online Discovery Conference, a free virtual event attendedby more than 1,800 credit union and league staff.

Certainly, mobile and online banking will continue to be strong growthchannels, but branches and call centers are still a mainstay, hesaid.

“The credit union system could be in the midst of a strategicinflection point due to rapid changes in the competitive landscape,digital technology and customer channel preferences,” Lasssaid.  “A strategic inflection point is a period when wehave to take a close look at the way we've been doing business forso many years.”

Outside of the credit union industry, Lass pointed to severalexamples of strategic inflection points, including within themovie, music and publishing industries. After Apple launched iTunesin 2003, for instance, the music industry rapidly evolved into thedigital age and, since then, more than 2,700 record stores haveclosed, Lass said. 

“iTunes is a vivid example of the music industry caught offguard by the digital movement and as a result, the CD and recordindustry has been hit with devastating losses,” Lass noted.

The demise of Blockbuster when Netflix entered the marketaggressively and the closing of brick and mortar bookstores afterKindle took off, are other examples of major shifts in anindustry's competitive dynamic. Lass said Kodak's decline was ledin large part by the explosion of digital camera sales. 

“The key point here is that digital, mobile technologies andchannel shifts all played roles in these industry tipping points,”Lass suggested. “The credit union system now faces the challengesbut also the opportunities of incorporating digital convenienceinto the cooperative model.”

Lass is optimistic for the credit union system because it hasone very unique quality that sets it apart from other financialinstitutions.

 “Our cooperative principals are the difference-makerfor credit unions.” Lass said. “One member, one vote. Credit unionsare the only financial institutions offering that kind ofindividual power and input.”

Unlike the music industry, the cooperative model provides creditunions with powerful competitive advantages, Lasssaid. 

“There are some tremendously successful examples of creditunions embracing the do-it-yourself banking, and it's paying offfor their institutions and their members. The challenge for ourindustry is to adapt to the new competitive dynamic withoutsacrificing our powerful core values and attributes.”

Part of adhering to those traditions may include creating anemotional bond with members that will set credit unions apart fromcompetitors in an increasing complex, fractured and commoditizedfinancial services industry.

Alan Bergstrom, director of brand and creative services for CUNAMutual, offered his take on establishing a sticky brand.

“A large percentage think it's just a logo and a name, but abrand is so much more than that, and many don't understand the fullpotential brands have to create affinities and cement lifelongrelationships with customers,” Bergstrom said.

Brands create emotional connections and reduce the likelihoodloyal customers will compare and evaluate competitive products, hesaid, adding they also generate equity and value which commandhigher prices and margins. 

“Very simply, a brand is about making a promise and keeping thatpromise day-in and day-out,” Bergstrom said. 

Some of the most successful creators of sticky, long-term brandsinclude Disney, Coca-Cola, Harley-Davidson and Southwest Airlines,Bergstrom pointed out. 

“The relationship customers have with Harley-Davidson is a greatexample. People have such a deep emotional connection with thatbrand that some not only buy their motorcycles, they have thecompany's logo tattooed on their bodies.”

Still, most purchasing decisions are made subconsciously, whichis why many people have trouble articulating their buyingbehavior.

“We can rationalize why we bought a Ford truck, for instance, byciting all the bells and whistles it has, but that buying decisionmay be due more to subconscious feelings and the strongrelationship we have about the Ford brand,” Bergstromsaid. 

He advised developing a more meaningful relationship withmembers by creating a brand positioning statement that is authenticand stands apart from the competition. 

“Identify the strongest connections between your credit unionand its members. Your brand story will determine what your creditunion offers that is relevant and motivating in comparison to yourcompetitors' offerings.”

He cautioned that people are more skeptical and jaded aroundadvertising in today's commoditized world and are more likely toswitch products if a brand doesn't deliver aspromised. 

“It's a shift from even just 10 years ago. You must deliver yourpromise every day across everything you do–deliberately andconsistently at every member touch point.” 

CFPB, Real Estate Exams at Forefront

New CFPB regulations, and a new approach to real estate exams,were subjects offered up to compliance officers during CUNA MutualGroup's Online Discovery Conference Oct. 9.

Credit union compliance staff can expect to spend most of 2013on new, proposed and final rules issued by the CFPB, CUNA Mutual Group's Lauren Calhoun and Bill Klewinsaid.

“This has been the most challenging regulatory environment wehave ever had in my 30 years of experience with lending compliance.And it will continue to be one of the most challenging as we moveforward,” said Klewin, director of regulatory compliance.

The complexity and depth of compliance changes will tax creditunion staff, create additional expense and could have a negativeimpact on member service, he added.

“The CFPB has issued 3,365 pages of proposed rules in just onesix-week period this summer. That is on top of the hundreds ofpages of rules already issued this year. Some of the changes willbe technical in nature, while others, such as the proposed mortgagerules, will require a complete overhaul of credit unions' mortgagelending portfolio,” said Calhoun, regulatory compliancemanager.

The CFPB has issued seven proposed mortgage rules, each with comment period closing dates inOctober or November. The CFPB will analyze comments and issue finalrules in January 2013 and throughout the year dependent on therule.

A more immediate rule that has been clarified for credit unionsis the remittance transfer rules, which has a mandatory compliancedate of Feb. 7, 2013. A credit union must comply with the new rulesif it initiates more than 100 remittance transfers in a calendaryear. The required disclosures–a prepayment disclosure and areceipt–are simple, the compliance experts said. However, theexecution of completing the forms will be difficult. It willadditionally require training new employees as well as developingnew processes to be sure the new disclosures are distributed in atimely fashion, they added.

A key to managing all of the complex regulatory changes will befinding competent compliance staff and giving them the tools andresources to upgrade their skills and influence, the two said.Although more than one department may be working on compliance,there needs to be one person on staff who has the overallaccountability and can report at an appropriate level to influenceand coordinate across departments.

The real estate department will also be the focus of NCUA andstate examiners next year because the impact real estate loans haveon net worth has increased, consultant Tracy Ashfield told her conference audience later that day. TheAshfield and Associates principal not only consults with creditunions, she educates and trains NCUA and state examiners on realestate matters.

Despite credit unions selling approximately 50% of all firstmortgages to the secondary market, Ashfield said the ratio of realestate loans to net worth has rising to more than 200% this year.And, real estate loans have increased from 39% of total loans to55% in the last 10 years.

While credit unions may look at real estate loan numbers andfeel pride in how the industry has captured more market share,regulators see increased risk instead, she said.

Ashfield shared a graph she said was given to her from acolleague at the NCUA that shows credit unions have considerablymore concentration risk in real estate than their peer bankcompetitors.

Examiners used to focus on loss mitigation, but new trends havethem taking a closer look at credit risk, interest rate risk andconcentration risk, she said. As such, credit unions should beprepared to answer questions about strategies to deal with risinginterest rates and matching low-interest loans against a highercost of funds.

Credit unions should also maintain solid risk managementpolicies, board policies, concentration risk limits and third-partyoversight. And, adequate internal controls that support accuratereporting and ensure appropriate segregations of duties for checksand balances are important to examiners, too, shesaid. 

—[email protected]