CenterPoint 4Q 2018 Winter

CENTER P INT Winter 2018

Voice:

Moving Beyond The App

CLOSING THE

TECH GAP CUs Holding Their Own

Credit Union

DOUBLES FOOT TRAFFIC

Member loyalty is your credit union’s number one asset. To improve it, you need to measure it.

Over 1 million independent, unbiased reviews by your own members and your competitors’ members that can help you discover where you have a competitive advantage, and where you are vulnerable.

To learn more about our subscriptions or to get your Customer Experience Benchmark Report, visit cescx.com/benchmarks or email info@cescx.com.

WINTER 2018

CONTENTS COVER STORY: INNOVATION

Credit Union and DMV Team Up

Partnership doubles foot traffic at the branch

INNOVATION

15 How Credit Unions

10

Can Innovate Their Way To Resiliency A look at which tech trends can help credit unions prepare for the next recession STATISTICS

INNOVATION

4 Closing The Gap

17 In A Flash

Credit unions holding their own against big banks

Get in the tech race before your CU gets left behind

TECHNOLOGY

7 VOICE: The New ATM

Technology-obsessed society is changing the banking world – again

17

INNOVATION

20 To Become An Innovator,

Start By Reframing If you feel tremendous pressure these days to innovate, you are not alone

12

ECONOMY

12 Death, Taxes And Inversion A look at what’s coming up quickly

www.ambizmedia.com ©2018 American Business Media LLC All rights reserved. CenterPoint magazine is a trademark of American Business Media LLC. No part of this publication may be reproduced in any form or by any means, electronic

STAFF PUBLISHER & EDITOR-IN-CHIEF Vincent M. Valvo MANAGING EDITOR Kaitlyn Keegan ASSOCIATE PUBLISHER Barb Dimauro OPERATIONS MANAGER Kurt Schenher ONLINE CONTENT DIRECTOR Navindra Persaud CONTRIBUTING EDITOR Patrick Sanders GRAPHIC DESIGN MANAGER Stacy Murray GRAPHIC DESIGNER Scott Ellison

or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher.

Advertising, editorial and production inquiries should be directed to: American Business Media LLC, 345 North Main St., Suite 313 West Hartford, CT 06117

Interested in receiving additional copies of CenterPoint?

Call (860) 719-1991 or email kschenher@ambizmedia.com

Winter 2018 | CENTERPOINT | 3

STATISTICS

Closing The Tech Gap Credit Unions Holding Their Own

A

by Bruce Paul

ccording to the most recent Banking Benchmarks, the perceived technology gap is closing between big banks, community banks and credit unions.

Over 3.3 million ratings were collected from credit union members and bank customers across New England. When consumers were asked to rank banks they have not used, they were only slightly more likely to assume that the larger banks have better technology than smaller banks and credit unions.

DOES BIGGER EQUAL BETTER IN TECHNOLOGY?

This gap has been narrowing over the past five to six years as more and more consumers tell us that they assume all institutions have basically the same level of online and mobile services.

In fact, when we analyzed the latest Banking Benchmarks results for each individual town across Massachusetts, Connecticut, Rhode Island and New Hampshire, we found that in over 80% of the towns, there was at least one credit union or community bank ranked in the top three in technology by potential consumers.

When consumers and businesses are asked to rate their own credit union, it is a different story.

As you can see from the regional rankings listed here, credit unions are rated as high BRUCE PAUL or higher than the largest banks over 55% of the time. It also shows that some institutions are inconsistent in different areas of their footprint. Some credit unions are rated highly by members in one area but lower by members in other areas. This is usually due to inconsistent training (see case study on page 6 for two examples). This serves to remind all credit unions that while big banks might have an advantage in spending and image, credit unions can certainly hold their own.

DO BETTER TECHNOLOGY AND TOOLS REALLY HELP RETAIN MEMBERS?

Absolutely. The analysis of hundreds of thousands of interviews shows that consumers and businesses that use and like their credit union’s technology are 26% more likely to remain loyal and to increase their share of wallet with the credit union. On the flip side, bad, out-of-date technology increases the likelihood of a member leaving by 202%. Fortunately, only 17% of members think the technology at their credit union is subpar. (See the case study).

CONSUMERS RATE THEIR CREDIT UNIONS’ TECHNOLOGIES AS ...

54% AVERAGE

BETTER THAN

36% AVERAGE

BAD, OUT-OF-DATE TECHNOLOGY INCREASES THE LIKELIHOOD OF A MEMBER LEAVING A CREDIT UNION BY

202% WORSE THAN

10% AVERAGE

4 | CENTERPOINT | Winter 2018

NEW ENGLAND CREDIT UNIONS BEST TECHNOLOGY & TOOLS ACCORDING TO THEIR OWN MEMBERS 2018 *Data provided by Banking Benchmarks Rank

Rhode Island

Bristol, Kent, Newport, Providence, Washington

1 2 3 4 5

RETAIL Navigant Pawtucket Peoples Rhode Island Greenwood

Western Connecticut Fairfield, Litchfield,

New Haven Counties

1 2 3 4 5

Connex Wepawaug-Flagg Seasons Sikorsky Mutual Security

Central Connecticut Hartford and Middlesex

Counties

1 2 3 4 5

Achieve American Eagle 360 Nutmeg State Dutch Point

Eastern Connecticut New London, Windham,

Tolland Counties

1 2 3 4 5

Charter Oak American Eagle CorePlus Scient CSECU

Western Massachusetts

Hampden, Hampshire, Berkshire, Franklin Counties

1 2 3 4 5

UMassFive Greylock Polish National Freedom Pioneer Valley

Central Massachusetts

Worcester County

1 2 3 4 5

Central One DCU Workers Webster First IC

Greater Boston Norfolk, Suffolk, Middlesex

Counties

1 2 3 4 5

Hanscom Jeanne D’Arc DCU Tremont Workers

North Shore Essex County

1 2 3 4 5

Align NESC Merrimack Valley Metro St. Jean’s

South Shore Plymouth, Bristol, Barnstable,

Dukes, Nantucket Counties

1 2 3 4 5

Rockland Fall River First Citizens’ Southern Mass Bridgewater

GRAPHIC: CENTERPOINT

Area

Winter 2018 | CENTERPOINT | 5

CASE STUDY:

Two institutions recently updated their online banking services within a few months of one another in the middle of last year.

Both used the same core provider and upgraded to the same online platform. Before the transition, both of their respective member bases rated their technology very poorly and at both institutions the online and mobile usage was about 20% to 25% behind local competitors. The percentage of members at each institution that did not know how to use the tools was between 45% and 50%.

A year later, the outcomes have been very different.

For Institution A, there has been a 17% increase in the number of their members using the online tools. Those members now rate the institution’s tech 7% above average, and overall loyalty and cross-sell have started to increase. All of this while cost-to-serve has just started to drop. They got everything they hoped from such a big investment.

For Institution B, the transition has been tough — online usage has actually dropped 3% among members and loyalty has dropped slightly. And complaints have soared. So far, the net result of the transition has been negative.

So why such different outcomes despite moving to the same tools? Their members are very clear (we interviewed thousands of them as part of our Banking Benchmarks): the training they received was vastly different.

At Institution A, one year after the transition, 9% of the members say the tools are hard to use and 12% said they still needed training to use the new tools. At Institution B, member responses are 59% and 62%, respectively. Institution B leadership had assumed that the tools would be intuitive enough that their members would figure them out and did not have a structured training program for their members — or their staff. During our interviews, we heard comments like: “how am I supposed to be able to use the online banking if the staff at the branch don’t know how?” The clear lesson is that the training is as important as the tools.

DOES TECHNOLOGY REALLY ATTRACT NEW MEMBERS?

This answer is more complicated. Most consumers do say that technology is important in choosing a new credit union or bank. But what is less clear, in the minds of those same consumers, is which credit unions and banks have the best technology. The latest Banking Benchmarks results show that 72% think most credit unions and banks have about the same caliber technology and tools.

Out of the hundreds of institutions we cover in the region, the vast majority were rated average or above in technology by potential members. Only 32 banks and credit unions in New England were rated as subpar by non-members. While this is bad news for the largest banks that have spent tens of millions of dollars developing their tools and even more money marketing those tools, it is good news for many smaller institutions that are getting the benefit of the doubt from prospects.

THE TIMES ARE CHANGING.

New England credit unions have to ensure that they are ready for the continuing shift away from the branch toward technology. More than two-thirds of New England members say they will increase their usage of online and mobile banking tools this year. For high income earners (over $250,000 per year), that increases to 71%, and for Millennials, that goes up to 74%.

MILLENNIALS ARE CHANGING THE LANDSCAPE, NOT DEMOLISHING IT.

Many credit union leaders believe that the younger generation, the Millennials, are causing the branch to go the way of the dinosaur. Some leaders think the only reason to keep branches open is to accommodate wealthy, elderly members who just want to come in for a chat. In New England at least, both of these notions appear to be overblown. Across the region, less than half of Baby Boomers say they prefer using a branch or the phone over online and mobile. Among Millennials, about a quarter say they actually prefer the branch or phone versus online and mobile. This does vary quite a bit from area to area so it is very important to understand the dynamics in your particular trade area.

6 | CENTERPOINT | Winter 2018

GENDER GAP

In a reversal of roles in years past, women in New England are now almost 20% more likely than men to prefer online/mobile to branch/ phone. Women are also going to increase their use of online and mobile faster, further widening this technological gender gap. This gender disparity is playing out in some interesting ways, with a few New England credit unions ranking much higher among women than men. With the financial and tech savvy of women compared to men, this could be a very lucrative approach for some institutions.

THE THREAT OF FINTECH

Many articles have proclaimed the banking industry as doomed in the face of a fintech revolution, with companies like Apple, Google, Amazon and others supposedly poised to relegate the hapless old credit union to the history books alongside the whip and buggy purveyors. In New England, non-banking technology has made some inroads, with 31% of customers currently using some non-banks/non-credit unions to handle their money. While that is not a surprise to many, what might be a surprise is that Millennials are the least likely to use non-credit unions and Baby Boomers are more likely to do so. The reason lies not in age, but in wealth. New England residents with incomes over $100,000 are much more likely to have diversified their financial partners than their less well-off counterparts.

Technology and tools really can make a difference in a member’s experience, and usually for the better. It is important to know how you compare to your local competition, both from your members’ perspective and your potential members’ perspective. First and foremost, you have to determine if your technology is a net positive or net negative. Then you can plan how to fix it and prevent attrition, or to leverage it to gain loyalty and new business. ___________________________________________________ Bruce Paul is president and CEO of Customer Experience Solutions, which produces the semiannual Massachusetts, Connecticut, Rhode Island and New Hampshire Banking Benchmarks. For information about subscriptions to the Benchmarks, or specific results for any banking institution or trade area, email info@cescx.com

TECHNOLOGY

VOICE

Is It The New ATM?

T

by Patrick Sanders

oday’s convenience-driven, technologyobsessed society is changing the banking world – again.

Banks, credit unions and investment services are exploring ways to give consumers powerful tools to access their accounts, pay bills, transfer money and buy and sell stock with the sound of their voice.

The new era of voice commerce - brought on by the proliferation of smartphones, mobile banking services and the rise of smart speaker technology is driving massive changes in the banking industry, experts said.

“I think that the biggest thing is understanding that your clients are going to want to experience the bank or credit union in their preference. Sometimes you’re going to have clients that want to have a digital experience at an ATM, in branch, or mobile, or voice,” said Mark Ranta, head of digital banking

solutions at ACI Worldwide. “Voice is just a single stop on this evolutionary trend. First it was desktop, then it was laptop, then it was mobile, then it was tablet, then it was bringing the multichannel from branch to ATM to online to digital to voice.”

“The next stop is probably virtual reality,” he said.

“And who knows where it goes from there.”

The growth of voice assistant programs – Amazon’s Alexa, Apple’s Siri and Google Assistant – are a major driver in expanding voice programs at banks and credit unions. U.S. Bank, American Express and Capital One are among those that are Alexa-enabled.

J.P. Morgan Chase is now allowing institutional customers to access analysts’ reports via Alexa.

In October, TD Ameritrade broke new ground by becoming the first bank to allow customers to make stock trades using voice commands.

“While the confluence of AI and machine learning and voice interfaces is a very powerful mix, it’s just

Winter 2018 | CENTERPOINT | 7

“Today the idea that you would have a bank account or a trading account or any relationship with a financial services company that isn’t mobile first is unfathomable.”

HELLO

in its infancy,” said Sunayna Tuteja, lead for digital strategy, experience and innovation for TD Ameritrade, a brokerage based in Nebraska. “Where we are today compared to where we’re going to be in five years – it’s going to be like the iPhone (growth) experience. Five years ago the whole idea of trading on a device that you use to play Angry Birds and Candy Crush, it was like, ‘What are you doing?’ It was a novelty. Today the idea that you would have a bank account or a trading account or any relationship with a financial services company that isn’t mobile first is unfathomable.”

“So we believe that these technologies, while maybe novel, become necessities,” she said. “The shift from novelty to necessity happens very quickly.”

It’s not a matter of if, but when.

Flush with mammoth research and development budgets, the nation’s big banks are well on their way to perfecting voice technology. But what about regional banks, smaller institutions and credit unions? When do these players – assisted by fintech partners – jump into the voice command pool?

A few have. New England Federal Credit Union has an Alexa skill that tells members branch hours and rates for auto loans, but the 8 | CENTERPOINT | Winter 2018

skill doesn’t allow you to make transactions.

“I think that question is different for every bank or credit union. You need to take a step back and go, ‘OK, what is my DNA?’” said Chad Watkins, director of market intelligence at Informa Research Services. “Who am I? How big am I? I think there needs to be a lot of self-reflection before you can make that decision.”

“If you are Chase or Bank of America, it probably is extremely important that you are cutting edge and that you’re in the front,” Watkins said. “But if you’re a community bank that isn’t necessarily concerned with being the most technically savvy bank then it probably doesn’t hurt to wait and let that play out and let the vendors that you deal with figure it all out before you move forward.”

Outside of Alexa, TD Bank uses voiceprint technology to allow customers to access their accounts. TD VoicePrint uses a customer’s voice to confirm their identity.

The bank rolled out the service a year ago and it now has 2 million users.

“TD Bank’s authentication system makes account verification easier and more secure

for customers by using voice biometric technology to analyze the sound, pattern and rhythm of a caller’s voice to create a voiceprint and confirm their identity,” said Lindsay Sacknoff, head of U.S. contact centers for TD Bank. “A person’s voiceprint is as unique as their fingerprint – no two are exactly alike. Once a customer enrolls in TD VoicePrint, there’s no need for them to remember PINs or security questions – their voice is their password.”

One of the newest entrants in the field is TD Ameritrade, which partnered with Amazon to create a voice platform to allow customers to check stock prices and made trades using Alexa. The brokerage said it’s the first of its kind to manage stock transactions.

“Despite all the great technologies around us, finance still suffers from that perception - and a little bit of reality - that it’s complex and jargony and keeps people out rather than making it more inclusive,” TD Ameritrade’s Tuteja said. “We believe that with the power of these new interfaces and technologies, we can break down those barriers. And one of the ways to break down those barriers is to go where the consumers are.”

“In this case consumers are spending more and more of their time with smart speakers,”

she said. “How do we meet them in an ecosystem where they feel more comfortable?

We looked at the technology and the trendline around it and just the confluence of AI and machine learning and voice just in the last few years. People forget five or six years ago there was no such thing as an Alexa in your life. Today, there are over 15 million Alexa-powered devices in the United States and that number is projected to hit 100 million by 2020.”

“Just the pervasiveness of the technology, even though it’s nascent, how it’s becoming part and parcel of our daily lives is a trendline that we are watching,” Tuteja said.

SECURITY IS PARAMOUNT It’s one thing to tell Alexa to add bananas to your grocery order or asking Apple’s Siri if it’s going to rain today. But using voice commands to bank is another matter.

First, there’s the regulatory hurdle unique to financial institutions. And even if a small bank or credit union hires a fintech vendor to do the heavy lifting in rolling out a voice command application, the financial institution still maintains the regulatory requirement and is on the hook should the vendor suffer a data breach.

There’s also the matter of getting consumers comfortable with the idea of processing financial transactions without talking to someone face to face, using an ATM or seeing a confirmation on their smartphone or computer.

“Security is always a concern with the introduction of new functionality. Security methods, principles, and testing techniques have to be introduced in tandem. Instances where new technologies such as voice recognition have come into the spotlight has been when security testing and approach was not evolved along with the new technology,” said Lori Williams, vice president of fulfillment at Gigster.

“With that being said, you can have the top team of security experts in the world and it is still impossible to cover every base. Innovative new things inevitably bring even more innovative ways to break them,” she said. “Turn that innovative new thing into a medium that can be easily accessed by nearly 7.5 billion people and you’ll get very innovative ways to break it.”

“With this – like any new feature – security policies and methods have to be not only responsive but creative in order to adequately protect the platforms they serve

in order to ensure the safety and scalability of voice recognition in banking apps,” she said.

Tuteja said TD Ameritrade made security and privacy a priority when rolling out its product. “The bottom line of our business is that we’re in the trust business,” she said. “Whether you are trusting us with your money and executing a trade by coming in to one of our branches and talking to one of our financial consultants, or if you’re doing it online or through our mobile app or now through Alexa, we want to make sure the same degree of prudence is applied to all ecosystems.”

Watkins, who said he doesn’t see himself using voice services for banking himself, said widespread use of voice technology by banks and financial institutions is “inevitable.”

“Throughout history, usually the technology wins,” he said. “If there is a major event such as a data breach or something comes out very negative in relation to this technology, then maybe that will curb it and delay it.”

“Is the horizon two years? Five years or seven years?” he said. “I don’t know. I think those bumps in the road are going to dictate that, but it’s coming.”

Winter 2018 | CENTERPOINT | 9

INNOVATION

COMBINING FORCES CU & DMV TEAM UP

Credit union management shows off the new kiosk at Nutmeg Federal Credit Union.

I

By Lisa Backus

n the rapidly changing market that followed a boom in mobile and desktop banking applications, Nutmeg State Financial Credit Union in Connecticut has developed an innovative way of bringing people back and sustaining its future viability.

In early June, the Milford branch of the 82-year-old credit union celebrated a unique partnership with the state Department of Motor Vehicles with the opening of a new DMV Express Center, allowing state residents to renew licenses, get identification and duplicates of driving paperwork.

The branch continues to offer banking services that include account transfers, loan payments, check and cash deposits and withdrawals, new or replacement debit or credit cards, loans and self-serve technology for banking needs.

But it also now has a steady stream of potential new customers who are using the DMV Express and the appointment scheduling system Nutmeg developed.

Since its opening on June 7, more than 10,000 people have walked into the Milford Nutmeg branch to do DMV transactions, said William Seymour with the Connecticut Office of the Commissioner of the DMV. Seymour noted that the area had a strong demand for service which made the credit union’s proposal appealing.

Perhaps a more important aspect of the deal, say some observers, is that by aligning itself with the state DMV – and thus effectively opening its doors to service every driver in the state of Connecticut

10 | CENTERPOINT | Winter 2018

– Nutmeg may also be positioning itself to argue that its “field of membership” should also now include all of the state.

Another attraction, Seymour said, was the software developed

by Nutmeg’s Credit Union Service Organization which gives consumers an appointment time and a notification when they are ready to be served.

“The appointment system has also received rave reviews and is being reviewed by other DMV partners,” he said. The average wait time is less than 15 minutes, transaction time averages about five minutes, he added.

In fact, Nutmeg’s Express Center averages just under 1,000 customers per week. An average Nutmeg branch was seeing foot traffic of about 80 people a day prior to the opening of the DMV Express, said Jeff Levesque, the CEO of Nutmeg’s Technology CUSO. Two to three percent of people who weren’t already Nutmeg customers have come on board.

The DMV is already planning on adding Express Centers at Nutmeg’s other branches, Seymour said.

JOHN HOLT NUTMEG PRESIDENT & CEO The bonuses of the partnership

and the innovation are obvious, said Nutmeg President and CEO John Holt. The Express Center saves consumers time and drives foot traffic back into the branch – allowing people to see what the credit union has to offer.

“With the decline in branch transactions at about 30 percent and that number expected to drop another 20 percent by 2022 with mobile and desktop banking, we still want to see people in the branch and talk to them,” Holt said.

But equally as important, Nutmeg, through its CUSO, a federally chartered entity that gives credit unions the opportunity to explore innovations in new products and services, was able to connect with the DMV to launch the software it developed that could allow other similar institutions to reap the same benefits.

“The scheduling software we created can be customized to any type of business that requires scheduling,” said Levesque.

With the technology, businesses can have customers schedule appointments through the same software that drives the DMV Express and then link customer payments back to a community credit union, providing a much needed boost in an industry that is continually competing with larger banks, he said.

It was a case of good timing on Nutmeg’s part to expand their technology department just as the need for DMV kiosk services was expanding.

The DMV previously had a contract with AAA Northeast to host license renewal centers throughout the southern region of the state.

The closing of the centers in New Haven and Fairfield counties left a hole in opportunities for residents to get their licenses renewed quickly without waiting in long lines.

At the same time, the credit union was feeling the effects of reduced foot traffic in their branches due to the explosion of mobile apps for banking and the introduction of competitors that weren’t true banking entities, Levesque said.

“The industry had a well-defined product line and very fixed competitors,” said Levesque. “All that changed at once. Credit unions provide a tremendous service to the community, but we have to be competitive and we need to remain relevant.”

Levesque’s first step was to modernize all the credit union’s technology resources and hardware. By 2015, Nutmeg formed a partnership with the consulting firm Deland Solutions to design and build an application that could change the way credit unions will be able to sustain business for decades to come.

The application allows credit unions to connect with businesses by offering a scheduling mechanism that gives customers the opportunity to sign up for appointment times, Levesque explained.

In 2017, the DMV put out a request for proposals to find thirdparty vendors to host the same services that had been offered in New Haven and Fairfield counties.

The credit union learned of the DMV project and submitted their proposal for an Express Center within a branch that would allow consumers to get the benefit of both entities in a state-of-the-art way.

The new Express Center at the Milford branch gives people the opportunity to sign up for specific times to get their DMV transactions processed in a timely fashion. That way, “you can go to mall, you can go grocery shopping, whatever you want to do,” Holt said.

Nutmeg employees are trained in how to process both banking and DMV transactions. But most banking transactions can be done through self-service kiosks at the branch, saving money for the credit union while allowing it to retain employees, Levesque said.

“There are reduced operational costs because people do their own transactions,” he said.

“We had to look at, ‘how do we not close branches and grow our services?’” Levesque said. “This was a new business opportunity with a reduction in costs.”

Connecticut Governor Dannel Malloy, left, attended the launch of the Express Center last June.

Winter 2018 | CENTERPOINT | 11

ECONOMY

Prepping For Inversion

D

Mike Davis

by Mike Davis

eath, taxes and inversion.

Inversion isn’t that certain, but it seems more inevitable every day.

The spread between the 10- and 2-year Treasury yield stands at 27bps, just a couple Fed moves from negative. We are often asked when we think the curve will invert, when recession will occur and when rates will fall.

We do not have the proverbial crystal ball, but we can look at history to give potential guidance on the future.

See Chart I Below: Average Historical 10- and 2-Year Treasury Yields during Inversion Periods

A SIMPLE VIEW OF HISTORY

HOW TO POSITION THE BALANCE SHEET

A few observations: • With current curve spread at 27bps, we are historically 6 months away from inversion • From 6 months prior to inversion, short rates increased 96bps while long rates increased 41bps • Interest rates, both short and long, immediately fell once the curve inverted • Inversion lasted 9 months on average • Recession began 16 months after inversion and lasted 11 months

To keep this exercise simple, we take the average of the 10- and 2-year Treasury yields from the last three curve inversion periods of 1989, 2000 and 2006 and plot them below in Chart I. Point “0” on the x-axis is the first quarter of inversion. The negative and positive numbers indicate the months prior to and after the initial curve inversion, respectively.

Lessons from the past say that interest rates are likely to move higher from here. The Fed is certainly pointing to higher rates with a median Fed Funds rate of 3.375% by 2020 as indicated by the dot plot. Rate direction is less certain on the long end. The 10-year Treasury yield stands at 3.15%, down from its recent peak of 3.23%. This portion of the curve will be driven more by inflation and

Chart I: Average Historical 10- and 2-Year Treasury Yields during Inversion Periods Recession

7.50 7.00 We are here

6.50 6.00 5.50 5.00 4.50 4.00 -24

-21 -18

-15

-12

-9

Average 10-Year

12 | CENTERPOINT | Winter 2018

-6

-3

0

3

6

9

12

15

Average 2-Year

18

21

24

27

growth expectations. Incorporating history and adjusting for what we know today, we offer the following balance sheet suggestions.

LIQUIDITY Historically, liquidity becomes an issue for depositories at this point in the rate cycle. To offset margin compression, financial institutions typically grow the loan portfolio to add higher yielding assets. Additionally, deposits either migrate to CDs or move out of the banking system in search of higher returns, causing more reliance on wholesale funding. We hear anecdotally that these same patterns are reemerging in this cycle. We suggest that financial institutions focus on adequate asset side liquidity sources. We recommend keeping a minimum percentage of assets in securities that can be readily converted to cash and having a secondary loan trading program. Through secondary loan trades, financial institutions can sell non-core loans to fund loan growth instead of using bond portfolio cash flow to fund growth. Additionally, in the event of a liquidity crunch, financial institutions will look to the bond portfolio for quick access to cash.

INTEREST RATE RISK Managing interest rate risk can be tricky at this point in the rate cycle. Near-term, deposit betas are likely to increase with competition heating up, leading to margin compression. Long-term, the industry faces the inevitable decline in rates once the economy takes a downturn. We think the latter could have a more material impact to earnings. For our asset-liability clients, the down 100 scenario poses the most impact to earnings with a 4.89% decline in net interest income; under a bear flattener scenario, our client group gains 3.62% in net interest income. To manage, we suggest a modified barbell structure.

We like keeping a portion of assets short through floating-rate loans/securities or short cash flow investments. We like weighting some cash flow longer-term with call protection. Adding fixed-rate loans with prepayment penalties or investments with limited optionality should be the playbook. Any mix of float/fixed should be determined on an institution specific basis.

SBA pools are full faith and credit, tied to the Prime rate and reset monthly or quarterly with no interest rate caps. Additionally, these securities offer historically attractive relative value. Discount SBA floaters can be found at an effective spread of Prime -247 bps, which compares to a long term average of Prime -265. To add some duration to the portfolio, we suggest well-structured CMOs with loan balance collateral. This collateral offers call protection as smaller loan balance borrowers are less likely to prepay when rates fall. We also recommend agency CMBS product. FNMA DUS and Freddie K’s are good investments to pick up spread to Treasuries and offer good call protection through yield maintenance or defeasance.

BOND PORTFOLIO In the context of our barbell strategy, we recommend SBA pools on the short end.

Mike Davis is the managing director of strategies at SunTrust Robinson Humphrey.

Conclusion The markets are moving fast. We recommend having a plan to position once the rate cycle changes to protect income and margin. ___________________________________

Winter 2018 | CENTERPOINT | 13

LOAN & ACCOUNT ORIGINATION SYSTEM Lending 360 is a comprehensive loan and new account origination system that supports credit unions with consumer lending, online loan applications, and new account openings.

Core integration provides real-time account opening

Single sign-on and streamlined pre-approvals

Over 1,800 underwriting variables

Intuitive cross-sell capabilities

Powerful and customizable decision engine

Responsive design member tools

Scalable and easy to enhance

Custom rules on applications, workflows, and loan queues

Let's start the conversation at (877) 744-2835 or CUDIRECT.com/Lending360.

Start Building Stronger Business Relationships Today.

In Print. Online. In Person.

Whether it’s live, in-person meetings and conferences, online engagement webinars and newsletters, forums and social media connections, or industry magazines, we bring financial service professionals the resources and connections they need to flourish.

Live Events Across The Nation Headlines That Click With The Bottom Line DIgital Insights Association Services

www.ambizmedia.com To learn more about American Business Media or to customize a marketing program unique to your business needs, call 860-719-1991 or email bdimauro@ambizmedia.

14 | CENTERPOINT | Winter 2018

INNOVATION

How Credit Unions Can Innovate Their Way To Resiliency A LOOK AT WHICH TECH TRENDS CAN HELP CREDIT UNIONS PREPARE FOR THE NEXT RECESSION

A

nother recession seems to be imminent, with several indicators pointing toward a downturn. In fact, the National Association for Business Economists predicts that there will be a recession in 2020, with an economic decline beginning in 2019. The economists cite President Donald Trump’s current trade policies as a factor. The policies, which target imports from Mexico, Canada, Europe, and China, will likely lead to retaliatory tariffs and will put upward pressure on inflation. However, other economic signals are indicating that another recession is just around the corner. Both household and corporate debt are at record highs, with household debt reaching $13.2 billion in Q1 2018, and corporate debt climbing to 45% of GDP. More worrying, nearly 11% of student loans were seriously delinquent (90 days or more past due), while credit cards and auto

by Stephanie Pandolf loans in serious delinquency reached 8% and 4.3% respectively.

Although a recession may be inevitable, credit unions may be able to capitalize on the innovations the financial industry has seen over the past few years. These innovations can help credit unions reduce costs significantly, build member loyalty, and minimize risks, resulting in a more resilient and efficient business.

person trips. By providing core banking services such as mobile deposit, peer-topeer funds transfer, and electronic payments through an app, credit unions can create a frictionless user experience that caters to their busy members. Additionally, it may help credit unions significantly reduce overhead costs as they can downsize or eliminate some physical locations.

DIGITAL BANKING

Artificial Intelligence (AI) has huge potential in the banking industry. Essentially, it enables computers to autonomously learn from data, and make decisions from it. AI is great at analyzing vast amounts of data at lightning speed. Its applications have the potential to improve customer service, reduce costs, and increase operational efficiency.

Because artificial intelligence can rapidly analyze data, some of its most obvious functions would be in the data-reliant fraud

Providing a digital banking platform may help credit unions build a more robust retail banking channel. Moreover, giving members access to core banking services on digital channels can enhance member service, which may build a more loyal member base to help credit unions withstand economic lows.

Members crave transparency and increased access to their credit unions, without being limited to normal business hours and in-

ARTIFICIAL INTELLIGENCE

Winter 2018 | CENTERPOINT | 15

detection and regulatory compliance areas. For instance, MasterCard was able to reduce false declines — which results in losses about 13 times larger than legitimate credit card fraud — in cards by 80% by using artificial intelligence to analyze the context of the purchase. Additionally, it can be used to aid anti-money laundering (AML) transaction monitoring by allowing credit unions to review transactions in real time and improve the accuracy. Meanwhile, using AI to analyze member data has a multitude of functions, such as assisting with the credit scoring and loan approval processes. AI can review data from past loan applicants, for instance, to identify patterns for those who are fraudulent or likely to default, helping reduce losses.

AI can also help improve risk management processes, increasing a credit union’s resiliency. Because AI is able to process more data, a credit union can utilize more internal and market data to gain a comprehensive view of risk factors, allowing analysts to make better decisions. Investment models can also be significantly more detailed using AI and adjusted quickly to account for changing market factors like interest rates and inflation.

ROBOTICS PROCESS AUTOMATION

Robotics Process Automation (RPA) has numerous applications for enhancing a credit union’s operational efficiencies. RPA is the automation of repetitive processes by robots executing preprogrammed rules. This differs from AI in that it directly copies human behavior, while AI can learn and become more efficient.

Although this comparison may make RPA seem limited, it is vasty beneficial when applied to repetitive processes, such as creating invoices. Automation using RPA provides a more efficient, consistent, and cost-effective way for these processes to be completed.

RPA can perform tasks like creating a PDF and emailing it to someone, processing invoices, and generating and reviewing internal reports. Although this technology isn’t completely new — insurance firms have been using RPA to process claims for some time — many credit unions haven’t taken advantage of this tech yet. For example, one bank used it to migrate member accounts to its system after it completed an acquisition, as well as other one-off projects. However, if RPA was applied to ongoing tasks like processing on-boarding documents, it could help credit unions minimize member acquisition costs as they grow, making it easier to scale business operations.

It can also help credit unions more CHATBOTS PROVIDE CONSUMERS WITH 24/7 CUSTOMER efficiently assess their ability to withstand a SERVICE, ALLOWING CREDIT UNIONS TO SERVICE recession, while reducing the cost of regulatory compliance. RPA can run Comprehensive POTENTIAL MEMBERS WHO WANT TO INQUIRE ABOUT Capital Analysis Review (CCAR) models and a report based on the results. It can also THE CREDIT UNION’S PRODUCTS AND SERVICES AT ANY output review risk data to find and explain changes in TIME WITHOUT THE RESTRICTIONS OF BRANCH HOURS. risk exposure, allowing credit unions to more efficiently monitor risk. Using RPA, credit unions can create risk reports more quickly, allowing them to be more agile and adjust quickly to changes in the Lastly, AI powers roboadvisors and chatbots, which can help market. credit unions create a better member experience. Chatbots provide The benefits of these technology trends are far reaching — from consumers with 24/7 customer service, allowing credit unions to increasing member loyalty to improved risk management — and each service potential members who want to inquire about the credit have the potential to fortify credit unions for a coming recession. union’s products and services at any time. Meanwhile, roboadvisers Credit unions should take advantage of them immediately, to ensure can help reduce the cost of investing, making it more accessible to a systems are in place before the economy decelerates. Less resourcebroader market, which in turn can increase a credit union’s member rich credit unions can still benefit by evaluating the technology that base. The bottom line is, bots can help increase the services provided would make the largest impact at the lowest cost, such as applying to members, which is likely to increase a credit union’s member RPA to risk monitoring, or adding a chatbot to their site. satisfaction and loyalty.

16 | CENTERPOINT | Winter 2018

INNOVATION

In A Flash IT’S TIME FOR YOUR CREDIT UNION TO GET INTO THE TECH RACE

T

by Patrick Sanders

he world is moving far quicker than it did during the days where brick-and-mortar community banks and credit unions were the only game in town. By all indications society will continue to pick up speed.

A recent Goldman Sachs report shows that 90 percent of data in the world was produced just in the last two years, and the speed of that data generation is increasing faster than we can keep track of. Even now, only 2% of worldwide data is being analyzed.

Credit union members are walking around carrying

smartphones with more data processing power than the computers that powered early spacecraft. Financial institutions are scrambling – sometimes unsuccessfully – to reimagine their businesses to meet the demands of members whose needs are changing faster than ever.

“The challenge is that the velocity of new technology and changes in technology is more than it was 10 years ago,” said Chad Watkins, director of market intelligence at Informa Research Services. “The integration across different technologies has always been a challenge for companies, but the velocity of changes is making it much more challenging.

Winter 2018 | CENTERPOINT | 17

The velocity of change is at a pace that we’ve never seen before, so that’s what’s causing the burden to financial institutions.”

In a 2017 Digital Banking Report, respondents overwhelmingly pointed to systems integration and challenges with legacy technology as the two biggest obstacles to innovation. In short, how can credit unions with yesterday’s technology meet members’ needs today, all the while preparing for the unknown challenges of tomorrow?

JUST CREATING THE APP OR PARTNERING WITH A FINTECH PROVIDER DOESN’T MEAN YOU’RE THROUGH. VENDOR MANAGEMENT WITH YOUR FINTECH PARTNER IS A LONG-TERM COMMITMENT, AND THE MORE PARTNERS YOU HAVE, THE MORE RISK A CREDIT UNION ASSUMES.

FIRST THINGS FIRST.

Innovation for the sake of innovation is a losing strategy. Financial institutions can’t make changes unless they first know why they need to make a change, and what their needs really are.

Graham Tasman, principal of business advisory services at Grant Thornton in Philadelphia, said self-awareness is one of the most important factors for innovation.

“That includes understanding what the future of banking is and what their position will be in the banking ecosystem in the future so they can plan accordingly,” Tasman said. “Systems don’t create the innovation, they are enablers. Innovation comes from having clarity around what the credit union wants to be known for in the eyes of

18 | CENTERPOINT | Winter 2018

their members, what they think their member value propositions are, which to me means there’s a member strategy element to this that would come first.”

That’s the strategy that Connecticut-based Patriot Bank used when it decided to update its branches. After having a lot of conversations with bank employees and customers, Patriot realized that most of its walk-in traffic wanted to perform a cash transaction and get in and out of the bank quickly. It made more sense for the bank to operate smaller, more efficient branches that focused on moving customers in and out, rather than the large offices it had, said Patriot Bank CEO Rick Muskus.

Patriot remodeled or relocated its nine branches to smaller offices and installed interactive teller machines (ITMs) that provides personal service 12 hours a day from employees who work offsite. Patriot also installed ITMs at two additional locations, giving the bank a footprint of 11 locations, and it offers a mobile site that serves customers from Maine to Florida.

“It’s the world we live in,” Muskus said. “In hectic environments, the state of the union in terms of how busy people are and the demands on consumers and business customers, the ability to transact from your office or home is a massive convenience, as well as the ability to show up at the bank at 6 o’clock after it’s closed and be able to do all you could do at 2 in the afternoon.”

“Those types of conveniences are important in our business model these days,” Muskus said. “That is really the thrust of why we continue to always look for improvement avenues when it comes to utilization of our branch offices and online technology.”

THERE’S AN APP FOR THAT.

When you say innovation, it’s easy to think right away about creating a great online or mobile experience that allows members to do anything they want from their office or smartphone. That’s the consumer model that made Amazon, Uber, Lyft and other companies so popular, and members naturally expect the same thing from their credit union.

The nation’s biggest banks, such as Bank of America, J.P. Morgan Chase & Co., Citigroup and Wells Fargo & Co., are in a better position to invest research and development dollars into creating technology that seamlessly integrates systems and keeps all the development under one roof. Smaller banks and credit unions, however, usually are looking at outside providers to help – and that can create some additional challenges.

“The whole fintech movement and the companies that are not banking entities themselves, but technology startups focused on the financial services sector, are really diving deep into what the customer needs and developing capabilities to support that,” said Will Callendar, partner at A.T. Kerney. “Many banks and credit

unions would want to be able to offer some of those technologies on a partner basis to their customers and members. There is a whole triage process that you would go through from that dimension to understand what is out there from a third-party fintech provider that would logically and consistently expand the product set.”

“Once you identify those different players the question quickly becomes, how would we integrate those into our core IT platforms?

A lot of credit unions are still operating on systems that were developed a generation ago and through no fault of their own, they weren’t built with the idea of third-party integration in mind,” he said. “So the workaround and the ways you address that have become pretty critical questions.”

One example, Watkins said, is a credit union who looks to a fintech provider to develop a mobile app to schedule appointments.

There are plenty of obstacles.

“Does it actually integrate into your frontline staff so when I come to do my appointment, they know that I have an appointment? When I get there, can I just check in with an iPad of some sort, or do I get there and they have no idea I have this appointment and I still have to wait 20 minutes?” he said.

It’s up to the credit union to make sure the fintech’s technology works as seamlessly with the credit union’s systems as an Amazon or Uber app does.

“Be really disciplined in the market research,” Watkins said. “Is this something that would make me stand out in the market space, and then have I done my market research to make sure that this is something that the member not only thinks is cool, but is something that they are going to want and use? It’s not just my members, but it’s also the general population that I’m trying to capture as I’m growing my business.”

a breach, it’s the credit union’s fault even if the fintech was sloppy.

You have to manage that integration.”

And remember – computers are going to continue to get faster, data generation is going to continue to increase and the needs and demands of members will continue to grow and be more dynamic.

“It seems like the market has to rationalize and reconcile the future of banking,” Tasman said. “If I’m a CEO of a credit union, large or small, and if you fast-forward 10 years, how do you describe the services that a credit union provides? Is it a bunch of products that you’re selling like you do today, whether it be digital or not, or is it a member experience that knits all that together in a way that makes that credit union more sticky with a client?”

“If credit unions can’t figure out how to get plugged in with the life and lifestyle of their members, they are probably going to miss the boat.”

WHERE THERE’S REWARD, THERE’S ALSO RISK.

Just creating the app or partnering with a fintech provider doesn’t mean you’re through. Vendor management with your fintech partner is a longterm commitment, and the more partners you have, the more risk a credit union assumes.

“You’ve now extended your transaction network to some third party that has to have all the compliance and regulatory fitness that your own credit union has in the eyes of the regulator,” Tasman said. “If you extend a transaction out to a smartphone and you don’t control the front end as the credit union, sitting in the back seat and there’s

Winter 2018 | CENTERPOINT | 19

INNOVATION

To Become An Innovator, Start By Reframing

by Amy Radin

I Amy Radin

f you feel tremendous pressure these days to innovate, you are not alone.

According to the Gartner 2018 CEO and Senior Business Executive Survey, 62 percent of 460 CEO respondents reported their organizations have digital initiatives or transformation programs underway. The recognition that new sources of client and shareholder value must be pursued to remain vibrant is pervasive across all sectors of the economy, including financial services. The trends – including demographic and societal shifts, technology disruption, regulatory change, and many others – are creating opportunity and threat for banking sector incumbents. The forces of change have made status quo untenable for businesses, their employees, and external constituents.

Few business leaders come out openly as being against innovation. But innovation is hard to do and invites pushback, even resistance. Being an innovator on a daily basis means knowing that efforts may not succeed the first, second, or even third time. Confronting this possibility can make innovation controversial, even polarizing. It conjures up the

62%

20 | CENTERPOINT | Winter 2018

idea of cool stuff, but it also means change in a world where shareholders have come to expect – and reward – predictability. Complexity, ambiguity and uncertainty are part and parcel of living in innovation territory.

The reality is, innovation is a non-negotiable priority, but it is daunting to execute and deliver results.

The good news is that any organization can influence the success of its innovation outcomes. Where is the starting point? Leaders must be willing to set aside legacy ways of doing things, and adopt the tools, methods, metrics, processes, policies, talent and structures that enable and accelerate innovation.

Be open to the many possible forms innovation can take. There may be opportunities to innovate the client experience, communications or the brand, the business model in its entirety, or internal processes and technology platforms. You may be seeking incremental innovations to sustain your business, or a few small bets on potentially disruptive moves.

What should your innovation portfolio look like?

OF 460 CEO RESPONDENTS REPORTED THEIR ORGANIZATIONS HAVE DIGITAL INITIATIVES OR TRANSFORMATION PROGRAMS UNDERWAY.

"COULD ANY OF US HAVE IMAGINED, EVEN 10 OR 15 YEARS AGO, THAT WE WOULD FIND IT IMPOSSIBLE TO LEAVE HOME WITHOUT OUR HAND-HELD MULTIFUNCTIONAL COMPUTER AND COMMUNICATIONS DEVICE?" Have a clear business objective. Are you seeking to attract and build relationships with a particular client segment, grow revenues, decrease expenses, or both? What are the drivers of your objective in today’s business model, and where do you see your leverage to have an impact? Factor in the feasibility requirements to make your ideas operational realities.

Actively engage to get insights about your clients especially their emotional needs, and not just those that are rational.

A few years back I worked with a team that pioneered a digital experience where borrowers who were late on loans could arrange new payment terms. What was the appeal to clients?

Collections phone calls, the industry standard, are embarrassing. Most people are good people to whom bad things happen: a job loss, medical emergency, even a car repair can set a borrower back financially. By providing a private, additional alternative to the collections call, the bank found repayment levels increased meaningfully.

Understanding client emotions around their financial needs has implications for business performance, and can be a source of innovation that delivers results.

Use metrics that are relevant to assess innovation performance and potential. Legacy performance measures may have little relevance to innovation breakthroughs, and can turn out to undermine potential opportunities when they are applied to nascent concepts. Consider focusing on metrics that can nurture these investments and empower the team.

Choices should have rigor, be reasonable for the evaluation of potentially unprecedented products and services, and be able to hold their own even in zero-sum resource allocation processes.

New growth opportunities are put at risk when overly precise and backward-looking metrics, from traditional business

models, are applied to gauge potential impact and measure worthiness to continue to move forward.

Deploy prototyping and experimentation capabilities, including active collaboration with users. Could any of us have imagined, even 10 or 15 years ago, that we would find it impossible to leave home without our hand-held multi-functional computer and communications device?

Very few people can articulate their dreams of what is possible, so answers to questions like, ‘what do you need’ tend not to be terribly productive.

That’s why prototyping can be so valuable: by giving users a model, even a very rough one, to play with and to which they can react, product development, marketing and technology colleagues can figure out through observation what client needs and preferences are. User collaboration in product, service and experience developments also helps get everyone within the organization on the same page with regard to where their efforts and investment dollars can have the greatest impact on results.

Innovation can be messy compared to the banking sector’s traditional operating standards. Innovation is not neat or linear. Think about it as a series of interconnected, irregular and moving loops. Compared to the structure of pre-digital organizations, it can feel messy, even chaotic. But now more leaders are realizing that innovation has a rhythm and discipline all its own. Those who are embracing new approaches to tools, metrics, processes and policies, as well as talent and structure are making progress. These leaders know that innovation is no longer tomorrow’s problem, and that the means to create innovation impact on key goals is within reach.

Amy Radin is an innovation catalyst, advisor, and keynote speaker on making innovation happen.

Winter 2018 | CENTERPOINT | 21

STATISTICS

CONSUMERS ARE QUICKLY ADOPTING FINTECH. 10%

Borrowing

50%

10%

Financial Planning

THEY REPORT USING FINTECH FOR

20%

Savings and Investments

Money transfer and payment

24%

Insurance

GRAPHIC: CENTERPOINT

1 in 3 people in the U.S. are using fintech. The demographic most likely to use fintech are 25- to 34-year-old consumers followed by 35- to 44-year-olds. These demographics are comfortable with the internet and mobile technologies and also require a wide range of financial services as they achieve life milestones.

Data according to the EY FinTech Adoption Index 2017. Survey respondents could select more than one depending on their usage.

22 | CENTERPOINT | Winter 2018

Bold New Venue. Expanded Attendee Efforts. A More Compact Conference.

All New MGM Springfield Casino and Resort

3.29.19

Springfield, MA

Conference Highlights Include

• Complimentary Breakfast and Lunch and Coffee Breaks • You Choose the Breakout Sessions You Want to Attend • Celebrate the Future of the CU Industry at the Rising Stars Awards Breakfast • Grand Prize Raffle – and Dozens of Other Giveaways

The Great New England Credit Union Show has grown rapidly since its debut a decade ago and has become a must-attend event for anyone who works in the credit union industry.

At the 2019 GNECUS, you’ll: • Learn more about trends in cyber security, member engagement, the future of payments and much more in education sessions led by industry experts. Visit greatcushow.com for more information about each session.

• Discover the newest products and services in a sold-out exhibit hall • Mix, Mingle, and Connect with hundreds of credit union colleagues.

Start a conversation and get fresh advice on how to face your biggest challenges.

So when you join us for the Great New England Credit Show – or, as we fondly call it, GNECUS – you’ll not only come away with information you can’t find anywhere else, but you’ll have a great time doing it.

For information on SPONSORSHIPS and EXHIBITING OPPORTUNITIES at this exciting new venue visit www.greatcushow.com or contact us 860.719.1991 info@ambizmedia.com

PRODUCED BY

Winter 2018 | CENTERPOINT | 23

BANK DESIGN Leominster Credit Union in Worcester, MA

BRANCH TRANSFORMATION Empire State Bank in Staten Island, NY

ARCHITECTURE

GFA Federal Credit Union in Peterborough, NH

Experience the difference®

905 South Main Street, Bldg B Suite 201, Mansfield, MA 02048 • 508-339-6600 • www.nes-group.com • www.drlarchitects.com 24 | CENTERPOINT | Winter 2018