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Say Hasta La Vista to Your On-Prem Servers

By Amber Harsin, CEO, Prodigy

Over the past few years, credit unions have spent a lot of time and money making sure they remain attractive to today’s mobile consumer. Credit unions have replaced their archaic core processing systems, upgraded digital banking software and deployed new product sets, all to ensure that the needs of today’s bank anywhere/anytime consumer are met.

For better or worse, our work here isn’t done. Among the many lessons already heaved upon us by 2020, credit unions and their vendors both discovered that they also need to accommodate the anywhere/anytime employee, i.e., the remote employee. With shelter-in-place orders in effect, back-office employees either have to work from home or not work at all. Most all credit unions I know have employees working from home right now. The question is: How easy or hard was it to make that happen?

For credit unions that operate their entire IT infrastructure – including their core – in the cloud, I can tell you it was almost effortless. Let me use Prodigy as an example.

When it became clear that both our CUSO and our credit unions would need to shut down locations for the time being, it was largely a non-issue. Because we maintain all our IT infrastructure in our own private cloud, connecting our employees from the kitchen table is no different than connecting them from a cubicle. We were able to move to a fully remote workforce in the time it took employees to drive home. For our credit unions, connecting remote employees to their core and cloud-based ancillary servers to minimize service interruptions was just as easy. Anywhere access is one of the built-in benefits of a cloud deployment. So it only stands to reason that the more you deploy from the cloud, the better off you are.

When we first talk to credit unions about Infrastructure as a Service (IaaS), they can be very hesitant to give up their on-premise servers. It’s almost as if those servers represent some sort of security blanket. Never mind that this particular security blanket consumes ridiculous amounts of time and money that are better spent elsewhere.

What a lot of credit unions decide to do as a baby step is use Prodigy for Disaster Recovery as a Service (DRaaS). Using real-time replication of on-prem server data to the cloud, we’re able to offer an affordable solution that, in practical use, rivals much more expensive High Availability (HA) solutions. A number of our credit unions have yet to take the next step beyond DRaaS.

If ever there was a time to get serious about cloud infrastructure, this is it. We now live in a world where being ready for anything means really being ready for anything. The cloud makes that not only possible, but practical. Too bad dealing with murder hornets isn’t as easy as dealing with remote employees.

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Case Study: River Valley CU gives card portfolio a boost with Trellance CPGS

Giving members more

In 2018 when Vermont based River Valley Credit Union was looking for solutions to boost its card program, the team reached out to Trellance to implement the Card Portfolio Growth Solutions (CPGS). “We marketed our credit card in house for many years and consistently added approximately 10-20 new accounts per month, but we were interested in finding a way to market our cards to new membership and boosting usage to existing cardholders,” explained Laura Paice, AVP, Consumer Lending at River Valley CU. She confessed that existing cardholders’ spending power was very tight because although they increased approval amounts for unsecured loans, they had not looked at credit lines within their card portfolio for a long time.

Trellance’s data-driven, implementation-ready CPGS was just the strategy River Valley needed to boost its card portfolio. Ann Farrell, Director of Portfolio Growth at Trellance, noted that “The program has been averaging 19% year over year in revenue for participating credit unions since we started the solution in 2016. We now have 120 credit unions who are benefiting from our pay-for-performance model and having payments expertise guiding them through their growth strategies.”

River Valley took advantage of CPGS’ 12-month marketing calendar that incorporates a Credit Line Increase Program (CLIP); New Account Acquisition Program; Skip a Payment, and six fully designed and funded marketing promotions.  Credit unions also receive two Balance Transfer Promotions, two Usage Campaigns, and two Employee Incentive Promotions that are implemented strategically throughout the calendar year. “Using these campaign strategies showed our cardholders that we have a lot to offer them just like the larger banks do but in a better way and utilizing their local credit union’s card!” said Paice. “Plus, our card rate was and still is better than so many of the larger banks that our members use. We still amaze people with our low rate and easy to work with folks,” she added.

Simple strategies, big benefits

Credit unions often underestimate the impact that seemingly small add-ons have on getting members interested and engaged in their products. “Offering statement checks, low rate balance transfer options & skip-a-pays rewarded our members with extra benefits,” said Paice. “By utilizing the New Account Acquisition piece alone, we opened 68 new cards! Based on our average monthly numbers, without the help of that solution, it would have taken us almost four months to get that many new accounts,” she added. Also, during the first year, they increased their Total Oustandings Balances by $1.1M (a 44% increase) and increased their Total Revenue by $85,000 (a 28% increase).

“Other CU’s looking to boost their card program should give this solution a try. It was far too daunting of a task to take on these pieces without the help of Trellance. We all wear so many hats day to day at the Credit Union we didn’t have the time or manpower to implement these initiatives without Trellance’s guidance,” Paice stated.

“It did take us a little bit of time to wrap our heads around all the moving parts of the solution, but we did it, and it has certainly been worth our efforts. Now that it is up and running, this second year has been much easier for us on the operational side of things. It has proved very successful for us. We are looking forward to seeing even more growth,” Paice added.

On her part, Ann Farrell emphasized that the success of the program and the strategies employed rely on data that credit unions already have. “Using data to drive decisions about eligibility of members, accounts that qualify and when is the best time for implementing strategies is half the battle and result in better growth metrics,” she noted.

For more information on Card Portfolio Growth Solutions contact Ann Farrell at info@trellance.com or growth@trellance.com.

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HELP! I Need More Net Income!

As someone who has worked with CUSOs for the past thirty years, I am often asked by credit union CEO’s what are the “hot” services for CUSOs?   “I need more revenue streams and I need to contain my operating costs.   What works?”

Fee Income

Revenue streams come in two flavors, fee revenue and interest revenue.  Looking first at fee income, investment services can provide significant returns. After paying the financial advisors and costs, credit unions can earn between 30%- 45% of the commissions shared with the credit union which can be 80% to 92% of the total commissions. There are many credit unions that have affiliated broker/dealer relationships that generate over a million dollars per year in commission income (note that this model is direct with the credit union and not through a CUSO).  The amount of capital needed to start up and support an affiliated investment services program is a pittance comparted to the capital needed to source, underwrite, fund, service and reserve for loans. The key to success in investment services is to hire the expertise to actively manage and support the program. For those credit unions that cannot afford to hire the expertise individually, there are CUSOs that provide that service on a collaborative basis at affordable rates.

The net income generated through offering property and casualty insurance services takes longer to grow. Buying an existing insurance agency tends to be the best way to enter the market. If the credit union has its own insurance agency CUSO, it can take about five years to become profitable. It takes time for the book to mature to a point that the CUSO is receiving a portion of the premiums from the underwriters based on favorable loss rates. Think of property and casualty insurance services revenue as a reliable annuity and not a quick hitter.

Title insurance can be very lucrative if offered through a CUSO title agency.  Title insurance agencies tend to earn 85% to 90% of the premium with the balance going to the companies that provide the insurance. With a strong mortgage loan program supporting the title agency, especially in a re-fi market, the earnings can be substantial.  The members pay the same rates as they would to any other title agency. There are states that require a title agency to have access to a title plant. In those states, the cost of owning and maintaining a title plant renders the title agency option uneconomical.

Trust services have never been a revenue generator but some credit unions work with a CUSO to provide trust services as it is a service needed by members and it can be a good defensive move. If the children of a deceased member are forced to use a bank as a trustee, the children’s business may be lost to the credit union.

Interest Income

CUSOs enable credit unions to acquire the expertise to offer additional lending products and contain the costs of lending. By aggregating technology and expertise, scale and skill are created to reduce the costs of sourcing, underwriting, closing and servicing loans.  Credit unions retain more “profits” from the interest charged while remaining competitive on rates.    Mortgage lending is much more lucrative with greater scale. A real estate broker CUSO can source new mortgage loans.  The business lending expertise is much more affordable if the costs are shared among several credit unions.  Auto lending opportunities are more available if credit unions can source loans from car dealers and national loan aggregators.

What is the advantage of having the CUSO make the loan?  Currently there four types of loans a CUSO may make: business, mortgage, credit card and student.   Mortgage loans are the most common type of loans CUSOs make. The challenge for CUSOs making loans is liquidity.   With the CUSO investment and lending limitation, CUSOs do not have the capacity to hold a large loan portfolio. However, this is not an issue where the mortgage  loans are closed and sold within a short period of time.  This is a model that exists in the commercial world and is facilitated by a highly structured secondary market. In this model, the credit union owners will usually provide a warehouse line of credit to the CUSO to fund the loans they refer to the CUSO.  Often the referring credit union will have the option to purchase the loans after closing.

Business loans are sometimes made by CUSOs.  It is not as easy to replicate the mortgage broker model for business loans. The sums are usually greater in business loans which puts more pressure on the liquidity factor and the secondary market is not as standardized and efficient. CUSOs are sometimes used to make loans to non-members and loans that do not meet the credit union’s lending criteria. Some credit union have a wholly owned CUSO that will buy foreclosed property from the credit union, some with environmental concerns.  A CUSO is used to reduce the legal risks to the credit union of holding a foreclosed property while the property is being marketed for resale. A CUSO is also used to shield the credit union from unwanted publicity in the foreclosure process.

Containing Operational Costs

Some credit unions have formed wholly owned CUSOs providing operational services on a fee basis. Some are successful but the majority of the CUSOs providing operational services are multi-owned and designed to use the scale of a larger owner/customer base to contain costs. The risk for these CUSOs is reduced by the fact that credit unions are already incurring operational costs in providing the specific services. Current operational funds are re-directed to a collaborative model to reduce or contain the costs. The collaborative model can save significant staff, vendor and technology costs while increasing the service expertise level. The hurdle to this type of CUSO is the time and effort to find the right partners and develop the collaborative model.

For those services that are not member-facing, there is a very compelling case for collaboration. Members do not care what happens behind the “curtain” if the services provided are effective. These non-member facing services include compliance, internal auditing, debit card processing, payroll processing, bill payment, disaster recovery, business continuity, service bureau for technology management, cyber security, and asset liability management.  While the following services are member facing, there are CUSOs that provide them more effectively and cheaper than the credit unions can do them individually:  collections, call center, and shared branching.

Technology Development

There are CUSOs that are developing technology for credit unions, such as a block chain system, app development,  connecting apps to the core, mobile loan decisioning and delivery platforms and sophisticated financial coaching. There are CUSOs that own their own core.   These technology CUSOs are less of a net income play than a means of control and influence.  There are great benefits to being able to influence the development of critical technology tools.  However, the CUSO investment limits and the conservative nature of credit unions tend to make credit unions make poor technology company owners. Technology companies require a constant infusion of capital. Prior to investing in a technology development CUSO, a credit union should realistically assess the capital needs of the CUSO and how they will be met.

Several long time vendors to the credit union industry are now forming CUSOs to take in credit union investment. The pitch is that credit unions will be given an opportunity to influence development decisions and when the vendor is sold, the credit unions can participate in the proceeds. This can be an attractive proposition but it is a long term income play.

Conclusion

Credit unions that look to CUSOs as quick fixes for their net income needs will be disappointed.  The benefits of CUSOs take some time to ripen and mature. The investment of time and funds to leverage the benefits of collaboration has proven time and time again to be worth the effort.

Every day the effort is postponed, is a day the realization of the benefits is postponed.

Guy Messick, CUSO Guru – Messick Lauer & Smith PC – General Counsel to NACUSO – www.cusolaw.com

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Letting Go of Our Myths

The stories we tell ourselves frame how we view the world, our place in it and how we respond to it.   I call this internal viewpoint our myths, our prisms that interpret the world.  The myths we create for ourselves have a profound impact on our ability to recognize and respond to change.  The prism through which we see the world is formed for each of us, not surprisingly, during our formative years.   For example, the children of the depression in the 30’s were adults in the boom years of the 50’s but they never took prosperity for granted and made decisions based on that view.  The children of the depression could never have been the free spenders of the 80’s and 90’s.

Image result for myths

The myths of credit unions developed in the formative years of credit unions.  Credit unions were a movement then, not an industry.  Members were drawn to credit unions because credit unions met the financial needs of members who were underserved and overcharged by the banks.   Credit unions had better rates and intimate, customized service levels.  Member ownership and self-government gave members a sense of empowerment and independence from the factory owners and bankers who otherwise ruled their worlds.   The “goodness” of credit unions was self-evident and did not have to be marketed.   From those myths we tell ourselves that only credit unions really care about the members and know how to serve them.   Only we know what is best for our members.   These myths comfort credit unions with a false sense of security that the natural order of things will always contain credit unions and people will know through their DNA about the “goodness” of credit unions.

Continue reading Letting Go of Our Myths

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Why Credit Unions Will Be the New Leaders in Digital Banking

By Edward Chuang, Executive Vice President, Chief Information Officer, Logix Federal Credit Union

Think back ten short years ago. In 2009, USAA was first on the scene to introduce mobile check deposit. Consumers raved and said it was “like magic.” Today, that magic is a basic expectation for every financial institution. Financial institutions of all sizes are working to keep pace with ever-evolving consumer demand.

Once consumers have access to convenient, time-saving technology – regardless of which industry introduced it – that offering becomes the new floor for all industries and companies. So, for instance, when a retail giant makes a process or transaction easier, consumers get accustomed to that experience and expect it in all of their mobile apps. The way money and commerce are moving, it’s obvious that it’s all digital. For many years, transactions on digital banking channels have eclipsed transaction counts in all other channels combined. Without investing in digital, there is a very real risk of financial institutions being left behind, or worse, becoming extinct.

Until now, it has been the big banks driving innovation. They’ve been able to invest enough money and personnel at digital banking that they’ve established today’s set of norms expected by consumers. But, big budgets are only half of the innovation equation. Big banks and smaller credit unions alike have been constrained by the other half of the equation – the technology itself.

As technology develops more rapidly, credit unions stand to benefit by using a side door – third-party providers. The enormous strides forward in the use of APIs and middleware allows credit unions to integrate and transform legacy backend systems into flexible and dynamic digital experiences. Credit unions gain immediate access to their third party’s fleet of developers and can begin to compete head-to-head with large banks.

As the CIO of Logix Federal Credit Union, with over $6 billion in assets, 700 employees, and 15 branches in southern California, we have a digital persona today that would have been impossible to deliver only a few years ago. What once took hundreds of people, we can now do with an in-house team a fraction of that size and our third-party provider, Kony, Inc. It is no longer a stretch for regional credit unions to build world-class applications at an enterprise level.

Prior to joining Logix Federal Credit Union, I ran eDelivery Systems for Navy Federal Credit Union. We rebuilt both the online and mobile digital offerings from the ground up. The mobile app became a top ranked mobile app, compared alongside apps from large banks such as Chase. This wouldn’t have been possible without a massive investment of resources, but today’s technology itself is starting to erase the chasm between regional credit unions and the mega banks.

This matters because it means that credit unions can now return to what customers have loved all along – the community aspect and providing value that our members can’t get elsewhere. We can help our members thrive at an enterprise level, whereas it would have been impossible a few years ago.

The credit union philosophy is “People Helping People.” We do that by helping them manage their finances efficiently. Financial stability leads to so many other social impacts, we can’t underestimate the role we play in our communities. Now, with the added boost from third-party providers and their digital innovation, credit unions are poised to become the new leaders in digital banking.