Best Practices

Through our ever-growing client base, our involvement in national associations, and our keeping abreast of the credit union industry, we are pleased to once again share a few “best practices,” as we have done in the past. Our goal is to potentially share ideas to generate income or reduce expense at your organization. While few or none of these ideas might be directly applicable to your credit union, our intent is to serve as a beginning point for you to continue your own “brainstorming.”

• Alternative to payday lending — Chances are almost certain that some of your members are using payday lending services. However, because most credit unions are not offering this or another similar service, your members are going to another source for this service. Credit unions are uniquely positioned to offer this service to your members at significantly reduced fees. However you might structure this product, you can assist your members by significantly lowering their costs. The best practices in this area include rolling a portion of the fee into a savings account for your member.

• Foreign ACH transfers — According to research conducted by Mary Lou Pickel of the Atlanta Journal-Constitution, the amount of money that Mexicans living in the United States send back to their homeland is projected to double to $40 billion by 2010. Currently mainstream financial institutions have only an estimated 3% to 4% of the remittance business. Surveys among users have indicated that they are very willing to pay a fee for the convenience of conducting these transactions. Transaction costs to financial institutions are minimal (Federal Reserve charges 67 cents) to send money electronically to Mexico’s central bank. Charging relatively low fees could prove to be financially rewarding for your credit union. In addition to Mexico, many of your SEGs may have employees either offshore or have family members offshore that they routinely transfer money to. Marketing this service may generate additional fee income for a valued service.

• Non-financial services — Bring additional non-financial services to your members. Your credit union’s size provides significant buying power for various services. For example, your credit union probably already offers group life insurance to your members at competitive rates and many credit unions offer amusement park tickets at reduced prices. What other services could your institution leverage with its buying power? Could you partner with retail businesses, ticket agents, sporting or entertainment venues, tax preparation services? Could you assemble a “pool” of small business members to obtain better insurance rates for their employees? A short thought-generating session could provide numerous additional ideas. In addition to favorable pricing for your members, fee income could be generated for your credit union. As opposed to “punitive” fees, these are positive fees for a valued service. This could also be a method of providing credit union value to your members and differentiating yourselves in the market.

• Insurance — With the cost of most types of insurance skyrocketing, continue to evaluate the various areas of insurance. Can deductibles or terms be modified to get more favorable premiums? Are current levels of insurance really necessary? One area that has been identified at some credit unions is in the area of plastic card insurance. With these premiums ever-increasing, these credit unions have decided to self-insure for losses. If the risk of self-insurance is too high for your institution, consider purchasing maximum deductible plans that cover the catastrophic losses but allow you to manage lower-level risks.

• Collaboration — In what areas of your credit union could you leverage the power of collaboration? Credit Union Service Organization’s (CUSO) or simple contractual arrangements are increasing as a tool to retain top talent and procedures and share the costs amongst several credit unions. Do you have an underutilized system or talent pool that you could share with another institution and get paid for the service? Could you partner with another credit union to provide a new service or product and share the costs? With operational expenses exceeding net interest margins at many credit unions, some creativity in managing expenses can generate significant savings. Some areas that might be considered are in the area of collections, technology support, marketing, payroll services, employee benefits, etc. In addition to sharing costs with other credit unions, as credit unions develop more small business relationships, the service could be marketed to them as well, providing additional fee income.

Where Are New Members Coming From?

With an overall slowdown in share growth and new members (52% of credit unions reported membership declines in 2005), many credit unions are spending more budget dollars on marketing today than ever before. One item that is often overlooked in the process is a close identification of how or why your new members actually joined your credit union. Best practices include specifically inquiring of new members what prompted them to join your credit union. Was it an advertisement — if so which one? Was it a referral from a current member (best source of new business, in fact, is existing members)? Did a vendor or trade partner make a referral? Having accurate data will allow your marketing dollars to be allocated to the best and most valuable sources. Some marketing studies have indicated a cost per new member of up to several hundred marketing dollars. Niche marketing is becoming more important. On a more personal scale, are you rewarding members and trade partners for their referrals? Often, a personal acknowledgment goes a long way to strengthen a member or partner relationship and has proven to be a cost-effective method of growing your credit union. While it is normal to pay a commission or fee to attract indirect auto loans, are you “paying a commission” to local realtors recommending your institution for the mortgage? It is also common to pay a “bonus” upon opening a new account. Are you also offering a “bonus” to the member who referred the new account? A better understanding of new-member relationships will allow for better targeted growth.

Fraud Risks

Fraud instances are reaching all time highs within the credit union industry. During 2005, the NCUA issued a record number of Prohibition Orders, more than double the number of any single year in the previous five years. The most common frauds within the credit union industry generally fall into one of four categories. Member identity theft, plastic card losses, employee misappropriation, and also becoming more prevalent is fraud within the indirect lending area. Noticeably absent from this list is the financial statement misstatement that has garnered so much attention on Wall Street, even within the banking industry.

While credit unions have gone to great lengths to educate members about the perils of identity theft and the importance of protecting personal data, credit unions themselves need to continue to look within to ensure the safety of member information. In addition to the obvious areas such as website security and statement security, criminals are continually finding new methods of obtaining member data from financial institutions. We have all heard about the recent instances of electronic records going missing, including stolen employee computers, missing data tapes, etc. Recent incidents have also been reported in which on-site dumpsters have been searched (commonly known as dumpster diving), off-sight storage locations have been broken into, and even branch basements without properly controlled access have been visited by ill-intending intruders. In addition, third-party incidents are becoming a higher concern.

Despite your ability to closely monitor and control member data while on-sight, you lose control once the data leaves your premises. Data is routinely shared with third parties such as examiners/regulators, statement processors, insurance companies, marketing firms, and even your auditors. Make sure your credit union has written policies that you share with these partners and make sure due diligence includes inquiring about data security measures currently in place at your vendors.

With indirect lending becoming much more instrumental in growing your auto loan portfolios (in fact, in 2006, credit unions not offering indirect lending had overall negative auto loan growth while those offering this product had overall increases), lending risks are growing proportionately. Typical frauds within this these programs include inflating the value of collateral (often with accessories not actually on the vehicle) to increase amount that can be borrowed, inflating the qualifications of the borrower, and even having phantom borrowers. Best practices in this area include dedicating credit union personnel to continue to monitor all indirect relationships, tracking losses by indirect partner, filing SARs whenever problems are suspected, and knowing what legal recourse you might have against fraudulent dealers.