As I sit upon the cold mountaintop (a requirement for Guru’s) contemplating whether 2018 was a good year for credit unions, I look to the Conference Barometer. Forget member growth and income growth, the Conference Barometer never fails. Remember in 2008 when AIG was lambasted when they had held conferences at resort sites after the financial crisis? Even NCUA felt it had to justify its offsite training meetings. Credit union conferences were limited to motels off of the Interstate. Having just returned from the CUES Director Conference on Hawaii, I am able to report a very favorable reading on the 2018 Conference Barometer. If credit unions can hold conferences in Hawaii without objection, all is well.
However, there are changes coming in 2019. If you listen to the “prevailing consensus”, the expectations are that 2019 will have a rising interest rate environment and an economic slow-down. Normally, that means less lending activity. The income tax law changes could exacerbate the situation. The higher standard deduction and limitations on mortgage interest deduction reduces the government’s subsidy of the housing market. Mortgage loans are now more expensive. The domino effect could be lower housing values and an adverse effect on the industries supporting the housing industry. As the benefit of the mortgage interest deduction is reduced or eliminated for members, will this lead to some members paying off their existing mortgage loans?
A rising interest environment on the one hand means more interest income on the loans that are made but on the other hand members will demand more yield on savings and checking. And operating costs continue to rise. Technology savvy competitors continue to change the service expectation of members. Thank you very much. When borrowers have a lending need, the tech savvy lenders are top of mind, having anticipated the need through data collection and analysis. With excellent data they are able to price the loans more competitively. Data is where it is at grasshopper.
The icing on the techie’s cake is that their credit decisions and loan distributions are made in nano-seconds. Well it seems like nano-seconds to the old school lending folks. And don’t forget that block chain and artificial intelligence are just around the corner. Both will be costly but necessary to compete.
In 2019, we will see more attention given to CUSOs. When the number of financial institutions a regulator examines decreases, the regulator either decreases the number of examiners or finds something else for them to do. While the FDIC has chosen to reduce the number of its bank examiners, NCUA has chosen the alternate path. CUSOs come in handy for examiners finding something else to do. Sometimes that means NCUA is innovative on the issues raised in CUSO examinations. If you are in the problem solving business, you need problems to solve.
The battlefield for CUSOs in 2019 is to block vendor authority. NCUA wants vendor authority. NACUSO, CUNA and NAFCU oppose it. In the past, NCUA tried to sell vendor authority to Congress as necessary to protect against rogue CUSOs causing business loan losses. When that proved to be overplaying their hand, the reason changed to “every other financial institution regulator has it, why can’t we? “ Now it is to protect against cyber-security threats. While cyber-security is a huge risk, does NCUA think it will do a better job than our military and national security organizations that seem to be hacked on a regular basis?
NCUA has asked for authority over all vendors. How much of a threat is the credit union’s landscaper? Credit unions on average have over 200 vendor relationships. If NCUA has authority over all the vendors in every credit union, think of the size of that examiner crew. Time to expand headquarters.
I saw that BECU is trying to create a cooperative bank charter in Washington State. It will have a credit union one member one vote structure but will eliminate the field of membership limitations, permit interstate branching and facilitate access to debt markets. While this new charter has been talked about, this is a serious attempt to make it happen. Keep an eye on this as it could help overcome growth limitations in the credit union charter.
The coming year could be an inflection point. Since the financial crisis, credit unions have been steadily growing in an expanding economy. Yes, we complained about excessive regulation and that is very costly but not a game changer. Whether we have big changes in 2019 or just the beginning of some big changes, change is coming. What is your credit union and CUSO going to do when there is less demand for loans, when delinquencies rise, and when operating costs spike? How are you going to compete against Amazon Bank in a block chain, AI world? The time to make changes and leverage the power of collaboration is now before the dramatic changes occur.
Be wise grasshopper*, plan for change now. Even your CUSO Guru is planning for change. Through artificial intelligence, I will be creating a hologram CUSO Guru to sit on this freezing mountaintop in the winter so I can go to Florida. Not all change is bad. The advice might even be better.
*For you young folks who don’t understand the “grasshopper” reference, ask someone with gray hair.
