Febuary 3, 2012

Gary Easterling, CCE (left), and Thomas Struan talk during a break in the inaugural Credit Union Executive Dialogue presented by CUES and the League of Southeastern Credit Unions this week in Bonita Springs, Fla. Easterling is president/CEO of $1.3 billion United Federal Credit Union, St. Joseph, Mich. Struan is SVP/information services for $1 billion Army Aviation Center Federal Credit Union, Daleville, Ala.

Many years back, Sears got so diversified that people said the retailer offered everything from socks to stocks.

While Bill Handel didn’t recommend quite so much breadth for credit unions trying to make it in today’s economy, he did suggest diversification of non-interest income options as a key strategy for success.

VP/product development for CUES Supplier member Raddon Financial Group, Lombard, Ill., Handel spoke in Bonita Springs, Fla., yesterday at the inaugural Credit Union Executive Dialogue, a program offering the chance for discussion among senior executives of large credit unions. The event was offered jointly by CUES and the League of Southeastern Credit Unions, Tallahassee, Fla.

Non-interest income was just one of several key credit union challenges Handel described during his presentation.

“We do a lot of research on the economy and overall industry, and specific and detailed research work in the credit union space,” Handel said. “We are monitoring closely what’s happening. What are the critical issues we’re going to need to address? It’s a pretty wide range on the list.”

Here are the four challenges Handel outlined, with some commentary on each.

1. Economic conditions will present significant challenges to growth for the next five years.
Handle said the U.S. economy has now seen 10 months of consecutively positive gross domestic product reports at a 2.4 percent annual rate.

When the economy is coming “out of a recession, we typically get over 5 percent,” Handel said. “There remain some challenges.”

Handel said Raddon Financial Group isn’t expecting 2012 to be dramatically better, with maybe 1.5 percent growth in GDP.

In addition to the health of the U.S. economy, “the other issue to be aware of is the external factors,” he added, factors such as if a European country were to back out of using the Euro, China’s situation, and changes in the military scene, such as in Iran, which could all have a significant impact.

In all, he said he expected a continued recovery throughout 2012, but not rapid recovery.

How can CUs respond? Handel suggested there may be opportunity for credit unions to grow the share of wallet they own as big banks run away from the mass market. Threats also exist in this, as credit unions might find themselves adding low-balance checking relationships and putting pressure on their capital ratios as a result.

“How we take advantage of this opportunity is going to be a significant challenge,” Handel said. “Growth is going to be tough to get. A lot of your marketing and product design will address how to get back what the member has elsewhere.”

2. Re-regulation is gaining speed.
Handel expects regulation and the new Consumer Financial Protection Bureau to continue to reduce non-interest income opportunities and to increase compliance costs.

“This alone will be the death of many of the smallest institutions,” he said.

“We’ve already seen a rapid collapse in the number of institutions,” Handel noted. “We think that will continue because a small credit union and a small bank can simply not endure the cost of compliance. It’s a fixed cost in many ways, so it’s a much bigger cost for a smaller institution.”

Handel asked attendees to think about how little they had to change in their programs to respond to the CARD Act, and how much time they had to spend to make it happen.

To respond to this situation, Handel encouraged credit unions to get a bigger, louder voice in the regulatory process.

“We should in many ways be banding together to represent ourselves better,” he said. “Big banks are doing the best job. We need to figure out how to get more voice.”

Monitoring pricing and diversifying non-interest income sources will also be key to managing re-regulation, Handel said. For example, new rules have greatly affected income from overdraft protection and debit card programs.

Handel said having an investment program for members could be a place of opportunity in this sphere. According to data from Raddon, credit unions have only 4.3 percent member penetration in investment products. Yet 46 percent of credit union members have non-retirement investments.

“There’s a huge opportunity in this business and it relates to what we do,” Handel said. He suggested that credit unions ask themselves, “How do we do things that aren’t going to be fee based and subject to an agency like CFPB.”

3. The fundamental delivery channel is changing.
Handel noted that consumers and businesses are moving toward a self-service model and, as a result, employee capabilities need to be rethought.

“As we’re seeing revenue sources threatened, all these technologies cost us money,” he said. “What is the right time to deploy? What is the right time not to deploy?”

As new technologies are deployed, what happens to the existing underlying branch infrastructure that was built over the years? he asked.

“Are we going to close branches because they cost too much money as the technology takes over? A step deeper is what our people do at these branches. They’re transaction facilitators. The role of our people is changing and we have to give a lot of thought in how we facilitate and manage that change.”

Because delivery channels tend to be additive, not substitutive, it’s not surprising that about eight out of 10 households still come to a branch. Interestingly, about seven of 10 members of Gen Y want to go to branches, too.

“The relevance of the branch is something we have to continue to discuss,” Handel said. “How do we optimize our branch structure? How do we rationalize it?”

4. Viability and success will depend on a substantial business model transformation.
Margin income will be a challenge for several years, Handel said.

“All your assets are continually repricing down,” he added. “The business model in terms of margin is going to be severely challenged over the next several years. How do we get better in managing margins?

“Think strongly about relationship pricing to [reward] members who do a lot with us,” he suggested, noting that not treating members all equally can be a tough idea to sell to some credit unions.

“The real difference in this industry is the revenue side,” Handel said. “You can do more with deepening relationship/market share.”

Lisa Hochgraf is a CUES editor.