The decline and demise of well-known retailers such as Blockbuster, Kodak and free-standing bookstores offers proof of just how rapidly industries are shifting to keep up with consumers’ needs and wants.
John Lass, senior vice president of strategy and business development for CUNA Mutual Group, shared his perspective on what the credit union of the future will look like during the company’s recent Online Discovery Conference, a free virtual event attended by more than 1,800 credit union and league staff.
Certainly, mobile and online banking will continue to be strong growth channels, but branches and call centers are still a mainstay, he said.
“The credit union system could be in the midst of a strategic inflection point due to rapid changes in the competitive landscape, digital technology and customer channel preferences,” Lass said. “A strategic inflection point is a period when we have to take a close look at the way we’ve been doing business for so many years.”
Outside of the credit union industry, Lass pointed to several examples of strategic inflection points, including within the movie, music and publishing industries. After Apple launched iTunes in 2003, for instance, the music industry rapidly evolved into the digital age and, since then, more than 2,700 record stores have closed, Lass said.
“iTunes is a vivid example of the music industry caught off guard by the digital movement and as a result, the CD and record industry has been hit with devastating losses,” Lass noted.
The demise of Blockbuster when Netflix entered the market aggressively and the closing of brick and mortar bookstores after Kindle took off, are other examples of major shifts in an industry’s competitive dynamic. Lass said Kodak’s decline was led in large part by the explosion of digital camera sales.
“The key point here is that digital, mobile technologies and channel shifts all played roles in these industry tipping points,” Lass suggested. “The credit union system now faces the challenges but also the opportunities of incorporating digital convenience into the cooperative model.”
Lass is optimistic for the credit union system because it has one very unique quality that sets it apart from other financial institutions.
“Our cooperative principals are the difference-maker for credit unions.” Lass said. “One member, one vote. Credit unions are the only financial institutions offering that kind of individual power and input.”
Unlike the music industry, the cooperative model provides credit unions with powerful competitive advantages, Lass said.
“There are some tremendously successful examples of credit unions embracing the do-it-yourself banking, and it’s paying off for their institutions and their members. The challenge for our industry is to adapt to the new competitive dynamic without sacrificing our powerful core values and attributes.”
Part of adhering to those traditions may include creating an emotional bond with members that will set credit unions apart from competitors in an increasing complex, fractured and commoditized financial services industry.
Alan Bergstrom, director of brand and creative services for CUNA Mutual, offered his take on establishing a sticky brand.
“A large percentage think it’s just a logo and a name, but a brand is so much more than that, and many don’t understand the full potential brands have to create affinities and cement lifelong relationships with customers,” Bergstrom said.
Brands create emotional connections and reduce the likelihood loyal customers will compare and evaluate competitive products, he said, adding they also generate equity and value which command higher prices and margins.
“Very simply, a brand is about making a promise and keeping that promise day-in and day-out,” Bergstrom said.
Some of the most successful creators of sticky, long-term brands include Disney, Coca-Cola, Harley-Davidson and Southwest Airlines, Bergstrom pointed out.
“The relationship customers have with Harley-Davidson is a great example. People have such a deep emotional connection with that brand that some not only buy their motorcycles, they have the company’s logo tattooed on their bodies.”
Still, most purchasing decisions are made subconsciously, which is why many people have trouble articulating their buying behavior.
“We can rationalize why we bought a Ford truck, for instance, by citing all the bells and whistles it has, but that buying decision may be due more to subconscious feelings and the strong relationship we have about the Ford brand,” Bergstrom said.
He advised developing a more meaningful relationship with members by creating a brand positioning statement that is authentic and stands apart from the competition.
“Identify the strongest connections between your credit union and its members. Your brand story will determine what your credit union offers that is relevant and motivating in comparison to your competitors’ offerings.”
He cautioned that people are more skeptical and jaded around advertising in today’s commoditized world and are more likely to switch products if a brand doesn’t deliver as promised.
“It’s a shift from even just 10 years ago. You must deliver your promise every day across everything you do–deliberately and consistently 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 Mutual Group’s Online Discovery Conference Oct. 9.
Credit union compliance staff can expect to spend most of 2013 on new, proposed and final rules issued by the CFPB, CUNA Mutual Group’s Lauren Calhoun and Bill Klewin said.
“This has been the most challenging regulatory environment we have ever had in my 30 years of experience with lending compliance. And it will continue to be one of the most challenging as we move forward,” said Klewin, director of regulatory compliance.
The complexity and depth of compliance changes will tax credit union staff, create additional expense and could have a negative impact on member service, he added.
“The CFPB has issued 3,365 pages of proposed rules in just one six-week period this summer. That is on top of the hundreds of pages of rules already issued this year. Some of the changes will be technical in nature, while others, such as the proposed mortgage rules, will require a complete overhaul of credit unions’ mortgage lending portfolio,” said Calhoun, regulatory compliance manager.
The CFPB has issued seven proposed mortgage rules, each with comment period closing dates in October or November. The CFPB will analyze comments and issue final rules in January 2013 and throughout the year dependent on the rule.
A more immediate rule that has been clarified for credit unions is the remittance transfer rules, which has a mandatory compliance date of Feb. 7, 2013. A credit union must comply with the new rules if it initiates more than 100 remittance transfers in a calendar year. The required disclosures–a prepayment disclosure and a receipt–are simple, the compliance experts said. However, the execution of completing the forms will be difficult. It will additionally require training new employees as well as developing new processes to be sure the new disclosures are distributed in a timely fashion, they added.
A key to managing all of the complex regulatory changes will be finding competent compliance staff and giving them the tools and resources 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 overall accountability and can report at an appropriate level to influence and coordinate across departments.
The real estate department will also be the focus of NCUA and state examiners next year because the impact real estate loans have on net worth has increased, consultant Tracy Ashfield told her conference audience later that day. The Ashfield and Associates principal not only consults with credit unions, she educates and trains NCUA and state examiners on real estate matters.
Despite credit unions selling approximately 50% of all first mortgages to the secondary market, Ashfield said the ratio of real estate loans to net worth has rising to more than 200% this year. And, real estate loans have increased from 39% of total loans to 55% in the last 10 years.
While credit unions may look at real estate loan numbers and feel 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 a colleague at the NCUA that shows credit unions have considerably more concentration risk in real estate than their peer bank competitors.
Examiners used to focus on loss mitigation, but new trends have them taking a closer look at credit risk, interest rate risk and concentration risk, she said. As such, credit unions should be prepared to answer questions about strategies to deal with rising interest rates and matching low-interest loans against a higher cost of funds.
Credit unions should also maintain solid risk management policies, board policies, concentration risk limits and third-party oversight. And, adequate internal controls that support accurate reporting and ensure appropriate segregations of duties for checks and balances are important to examiners, too, she said.