Editor's Note: This story is part of a series called Credit Unions 20/20 that examines what credit unions will need to do to prosper over the next five years.
NEW ORLEANS—The asset/liability committee as an insightful group of futurists? Two people think that should be the case.
The ALCO can be a great place to “rehearse tomorrow today,” according to Sally Myers, CEO.principal with c.myers Corp., Phoenix, and Rob Johnson, EVP/principal with c.myers. Speaking to the CUNA CFO Council meeting here, Myers and Johnson sought to offer overarching strategies for credit unions to “identify the potential challenges and threats to the institution’s relevance and financial performance,” as well as to help other key stakeholders to “understand them as they decide and execute business strategies.”
“The ALCO meetings are often a history lesson,” said Myers. “This is about how to get the ALCO meetings more forward-thinking. The point at which you address a problem is directly related to the viable options you have for dealing with it.”
Myers said her concern for credit unions, as it is for many people, is about the industry’s relevancy, sustainability and ability to convey differentiation. She quoted General George Patton’s observation that “If everyone is thinking alike, then someone is not thinking.”
Continuing the military analogy, Myers asked credit unions whether they are aware of how their own battlefields have changed, pointing to potential threats from the CFPB eliminating ODP debit transactions; NCUA’s risk-based capital proposal; potential IRR standardization; changes in NCUSIF calculation components, and FASB credit risk compliance costs.”
Looking at the battlefield means paying attention to how small movements can lead over time into significant maneuvers, she reminded. As an example Johnson noted that in 1994, 66% of CU loans were consumer loans; in 2014 that figure had shrunk to 42%.
“This has consistently been changing over the 20 years,” said Johnson, pointing to the how over that same time the average margin on loans has shrunk to 2.85% from 3.86% over that time, and operating expenses have risen to 3.10% from 3.05%, even though total CU assets have tripled over that time.
“So what can you do now to ensure you are better prepared when this future arrives?” Myers asked.
To answer that question Myers suggested an ALCO engage in this hypothetical scenario for the year 2020: “Google and Apple have acquired bank charters and there is intense competition between them for deposit and loan volume, resulting in significant marketshare losses for traditional depository institutions.”
Another Scenario To Consider
Another 2020 scenario to consider: Home ownership is lackluster, as Millennials are more cautious about owning homes. And that has domino effect on HELCs, when they get married, when they have kids, when they get auto loans and for what kinds of vehicles.
Other more immediate discussions to be had include the fact that 53% of the 84-million strong Millennial generation don’t see there bank or CU as doing anything differently from other FIs (71% said they would rather go to the dentist than listen to what their bank/CU has to say); or that Millennials also indicate that they are twice as likely to choose non-traditional payment companies than are those over 50 years old because it’s easy.
“This is the kind of thing to talk about in a forward-thinking ALCO meeting,” said Myers. “Ask yourself what can you do today to better position yourself for this future if this future were to occur, and which (scenario) wouldn’t harm us today. If you are concerned your battlefield is changing, the sooner you think about it the better chance you will have of being relevant and sustainable. This will also start you toward differentiation.”
Among the ideas shared by Myers and Johnson for “moving the process forward”:
- Turn your ALCO meetings into forward-thinking meetings by rehearing tomorrow today.
- Set the scene for your team. “Turn it into a quick story, because it helps people relate. Don’t get caught up in nit-picking, with someone saying, ‘That will never come true.’”
- Estimate and simulate financial implications. “Put it right in front of someone’s face, as disturbing as that may be, because that may be what’s needed to get someone to take action. Then, if that future ever arrives, it won’t look that way.”
- Nothing happens in isolation, so combine events. “Test combinations of things.”
Key Business Model Questions to Consider
To further spur forward thinking, Myers said that if a strategic discussion is being had it should be turned into a debate.” She recommended credit unions think critically about key business model questions, including:
- What would we have to do to be relevant in this environment? “Don’t let the answer fly that ‘We’ll adjust,’” said Myers.
- How would desired members be acquired? “This is a serious one,” Myers said. “If you go back and study your deposits by age, and you have a lot of depositors who are older and holding deposits, ask yourself how many new, younger members do you need to get to make up the volume of that one depositor? Think about the impact to your operations from that.”
- How would effective cross-selling occur? “Credit unions are really good face-to-face, but maybe you aren’t having human interaction anymore.”
- How would we compensate for potential loss of income?
- What are the talent requirements? How are they different from today? “This should be at the top of the list? When you engage with a member, what are the talent requirements, especially in the different delivery channels? They have to know how to trouble-shoot any problems they might be having with whatever device (the member is) on. They need to know how to cross-sell that member. That’s a big, huge shift in talent requirements. How do you strategically manage new third-party relationships? How to make sure those third parties are delivering service in timely fashion? There are many things to consider in these scenarios.”