12 For 2012

Credit unions are entering 2012 with unprecedented momentum in member growth, lending, and core deposit balances.

It’s a new day for credit unions. It’s a new day for the American economy, too, and as the financial servicesindustry faces an era where consumer sentiment can wield as much influence as stockholders, CUSP highlights the trends, products, and mindsets that will make their mark in the year ahead.


1. A Solution For The Secondary Market

With a presidential election looming, legislative action concerning Fannie Mae or Freddie Mac is unlikely, but the two government-sponsored enterprises will grab headlines in 2012. Last year, the U.S. Treasury submitted a report recommending the wind-downof the GSEs, which culminated in several congressional bills proposing methods and timetables for their liquidation. There is concern among credit unions that without the GSEs as a source of liquidity, only the big four banks Bank of America,Citibank, Chase, and Wells Fargo will have sufficient economies of scale to access the secondary markets. And without a level playing field, the banks could price credit unions out of the market. The credit union industry is not waiting forothers to come up with solutions. Callahan Credit Union Financial Services Limited Partnership (CUFSLP) has formed a group to implement an online participation exchange. It is also partnering with investment banks and pension funds to conduct a study on the feasibility of a credit union-based secondary market. And CUNA Mutual has hosted a PricewaterhouseCoopers presentation on the possibility of securitizing credit union mortgages.

2. Consumer Spending. Consumer Lending

Unemployment is dropping, consumer confidence is on the rise, and housing starts are up. This is all good news for consumer spending. Consumers have been paying down debt during the economic downturn, but now might be the time to offer a credit card special or auto promotion. According to Reuters, credit inquiriesincreased 2.7% during fourth quarter 2011. Edmunds.com is projecting 13.6 million new vehicles will be sold in 2012; that’s a 6.3% increase over 2011’s forecast. So far, consumers are obliging. Ford’s U.S. sales increased14% over February 2011, Chrysler’s increased 40%, and GM’s increased 1.1%. Signs of the recovery are popping up all over.

3. Tap Into Refis

Credit unions have expanded their lending efforts over the past five years with recapture initiatives and innovative refinancing programs. Historically low interest rates have opened the door for creditunions to recapture loans from other financial institutions and make good use of their record liquidity. Seven Seventeen Credit Union ($776M, Warren, OH) alone refinanced morethan $25 million in loans from other financial institutions within the first six months of its recapture campaign, Simplify & Save. Credit unions’ focus on refinancing auto loans and creditcards contributed to the more than $152 billion in consumer financing credit unions posted in 2011. But credit unions are refinancing mortgages, too. Charter Oak’s ($702.1M,Groton, CT) diverse mortgage offerings include one with an 8- or 12-year amortization term specifically for refinancers. Changes to the Home Affordable Refinance Program (HARP) gives creditunions a renewed opportunity in 2012 to shore up refinances before the housing market recovers.


4. A New Role For It

The creation of virtual machines (VMs) has allowed credit unions to increase computational capacity and better manage data resources by running multiple virtualized versions of hardware or operating systems through each physical server. Thiscloud computing model goes beyond virtualization, however, and offers a way for institutions to move off their plate the hardware, operational tasks, and IT burdens associated with networks, servers, data storage, and applications. Some typesof cloud deployment, such as PaaS (Platform as a Service), make it easier for a credit union’s technology team to design, write, and deploy its own applicationsover the cloud, eliminating traditional admin and infrastructure requirements. These applications can even drive revenue for credit unions that decide to sell those programs to others.

5. Old-School Plastic Goes Hi-Tech

United Nations Federal Credit Union ($3.5B, Long Island, NY) and State Employees’ Credit Union ($23.7B, Raleigh, NC) are leading the pack in bringing the Europay MasterCard Visa (EMV) chip that has become the security standard overseas to the U.S. market. This upgradewill enhance adoption, security, and convenience for foreign visitors as well as members abroad. For MasterCard, the addition of a tiny digital screen is one step in its strategy to beef-upsecurity and usability in its credit card products. Currently in use at banks in Europe and East Asia,an embedded button on these cards generates a secure, one-time code that provides another level of authentication for online or phone purchases. Consumers using a Dynamics Inc. card, on the other hand, can touch one of several buttons on the frontof their card to rewrite the card’s magnetic strip on the fly, giving them access to multiple accounts or the ability to pay with rewards points.

6. Payments Without Borders

Built on the electronic payment legacy of companies such as PayPal, a number of card companies and third-party groups are integrating online purchases, peer payments, and real-worldphysical payments into a phone-based payment option called a mobile wallet. Google Wallet packs ones of the strongest payment punches so far. A powerful partnership amongMasterCard, Citi, and other hardware providers and retailers allows consumers to make payments using only a tap from an NFC-equipped smartphone, like the Galaxy Nexus. Other mobile wallet solutions from ISIS, Visa, Square, and others are here already or will be arriving soon, but these options often require additional hardware or add-ons, such as a SIM card, forphysical payments. With many horses in the race, a clear front runner among merchants and consumers will likely emerge soon.


7. A New Attitude Toward Gen Y

Credit unions across the country are recognizing that the financial needs of younger members are changing, especially when it comes to the elusive Gen Y. Gen Y members are more than young studentswho need a student loan or basic credit card. Gen Y is getting older. They’re buying their first cars. They’re taking out their first mortgages.Vantage Credit Union ($673.4M, Bridgeton, MO) is one institution that has hired a 25-year-old spokesperson specifically to market accounts geared toward the 30 and younger crowd. Othercredit unions have plenty of reasons to find innovative ways to reach Gen Y this year, too. This group’s annual spending is expected to be $2.45 million by 2015 as their affluence and financial appetites grow, according to Deloitte. See Gen Y’s Financial Needs Are Maturing to learn more about how credit unions are targeting Gen Y.

8. Hispanic Connections

A prepaid card specifically for Hispanics is among the latest financial products targeting the nation’s fastest growing demographic. The Coopera Prepaid Reloadable Visa Card fromCoopera Consulting and TMG provides the unbanked and underserved in the Hispanic community a safer way to carry cash and is easier to get than a credit card because the user doesn’t need a credit history. To date, four creditunions Amarillo Community FCU ($178M), Des Moines Metro ($43M), Greater Iowa ($284M), and KEE FCU ($11M) already offer the card and at least four others Beacon FCU ($121M), EECU ($1B), Guardian CU ($233M) , and United Services ($56M) will offer it in 2012. The U.S. Hispanicpopulation topped 50 million in 2011 and now comprises more than 16% of the total population, according to the U.S. Census Bureau. More credit unions are now tailoring financial products such as mortgages and small business loans to meet the needsof Hispanics, nearly 50% of which are underbanked or underserved.

9. Increasing Wallet Share

Credit unions are positioned to increase wallet share in 2012, riding a wave of anti-bank consumer sentiment that to date has encouraged hundreds of thousands of bank account holders totransfer their primary accounts to a community bank or credit union. Credit unions netted 440,000 new members in the fourth quarter alone, and by the end of 2011 the system had 93.1 million credit union members in the United States. To keep themomentum going and to deepen those relationships, credit unions are rolling out new payment technologies, offering student business loans, and tailoring mortgages to member needs. Comprehensive onboarding, sticky services such as bill pay, and cross-selling new members will help credit unions encourage more robust economic participation from members in 2012.


10. Buy Local. Lend Local.

As America rebounds from the recession, service industries such as healthcare, education, and leisure are shaping a new economy. At the center of this transformation is access to financing. Each dollar of local financing leads to local spending and increasedeconomic activity, and credit unions are especially strong, and occasionally dominant, in mid-size and smaller communities where they might be the largest locally controlled financial institution. In these communities where competition foroutside investment is fierce credit unions are actively participating in the redesign of their local economic landscape. Some credit unions are partnering withlocal community colleges to provide funding for training in local industries. It’s this ever-changing dynamic that creates local jobs, stimulates the nationalmarket, and sustains America’s role in the global economy.

11. Municipal Deposits On The Move

Political action and news coverage in 2011 indicates credit unions are a growing popular choice for municipal funds, and evidence suggests this trend will continue in 2012. In the past 12 months, two state leagues Washington and New Jersey have successfully lobbied their legislatures to allow municipalities and political subdivisions to deposit funds into credit unions. Washington even increased its originaldeposit threshold from $100,000 to $250,000. So far this year, credit union leagues in Ohio, Florida, Alabama, and New York have joined the fight to allow municipalities todeposit funds in credit unions. Adding to this legislative momentum, many cities are joining the bank transfer movement and pledging to deposit public funds into local financial institutions with the hopes the money will go to area businesses and families. That’s an opportunity to spur economic development without spending taxpayer money.Be on the lookout for this hyper-local trend to continue.

12. Networked Operating Models

Credit unions across the country are looking at new ways to create shared efficiencies. Turns out, they can do that without formally >merging.One long-running example of credit union cooperation is that of North Carolina-based State Employees Credit Union ($23.7B) and Local Government Federal Credit Union ($1B). LGFCU relies on SECU’s branches, ATM network,call center,and data processor for allmember transactions. In return, LGFCU pays SECU a percentage of revenue. Each credit union maintains its own identity, strategy,board,and management team. Out in California, three credit unions Calcom FCU ($56M), City of Downey FCU ($8M),Mattel FCU ($26M) share one CEO, Jon Hernandez. In Ohio, $11-million Presidents FCU just outsourced its executive leadership position to Emery Financial Services, a whollyowned CUSO of Emery Federal Credit Union ($141M, Cincinnati, OH). And as headlines show, concepts in shared branching are becoming a way of life. In some instances credit unions conduct member transactions for one another; in other cases multiple credit unions share a single building but retain separate spaces and signage. When merging is the way to go, manycredit unions choose to preserve their individual identities as is the case with Affinity Group in Michigan and 66 and Tigers in Oklahoma while others run multiple brands to distinguish between a SEG-focused strategy anda community-based one as Anheuser Busch and American Eagle do. Watch for more strategies like these to take shape in 2012.

May 27, 2014

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