Posts filed under ‘General’
I’m sorry to start off the week with such downbeat news, but if it makes you feel any better as you’re reading this blog, I am getting poked and prodded by a dentist.
In case you missed it on Friday, the FFEIC, the joint body representing all financial regulators including the NCUA, issued a bulletin warning financial institutions to take steps to guard their computer systems against the “Shell shock” vulnerability. With the caveat that I am not an IT person, regulators and industry professionals are concerned that operating systems including UNIX, Linux, Mac OS 8 X and certain Windows servers are vulnerable to hackers being able to take over your computer system.
Just how big a deal is this? It appears that no one knows for sure yet, but according to the BBC, the bug could impact as many as 500 million machines. If what the experts are saying is correct, a hacker could easily use the vulnerability to compromise your banking operations.
Be sure to read the FFEIC memo, if you haven’t done so already. For those of you with a third-party vendor, make sure to reach out to them and assess your credit union’s vulnerability. Apparently, the bug can be squashed with an easy to install patch.
Since we’re on the subject of cybersecurity, those of you really interested in getting background on the subject should find time to watch a show about the science behind hacking defenses. You don’t need to be a computer genius to find it informative. Trust me.
Good luck and have a good day.
In July of 2005, Walmart filed an application to open an Industrial Loan Bank in Utah. The Utah bank regulator was flooded with 3,500 comment letters describing Walmart’s application as a sign of the Apocalypse. One commenter described a Walmart bank as a “dangerous and unprecedented concentration of economic power.” Others fretted that Walmart would drive independent financial institutions out of business by utilizing its network of stores as low cost bank branches.
Fast Forward to September 24, 2014. Walmart announced that it is teaming up with on-line GoBank started by the California-based tech company Green Dot. It will start offering off-the shelf, low-cost checking accounts by the end of October to anyone 18 years of age or older with an ID. The mobile account startup kit will be available at Walmart stores nationwide. Customers will have access to 42,000 ATMS. How is this going to impact your credit union? Let me count the ways.
- Say goodbye to even more non-interest income. With GoBank’s mobile banking platform, Walmart and its banking partner clearly feel they can attract enough customers to make up in volume what they lose in potential fee income. As Steve Streit, Green Dot’s CEO and founder explained yesterday: “Many so-called ‘free’ checking accounts aren’t really free because they have high overdraft fees. In fact, an independent study by Bretton Woods estimates that consumers pay approximately $218 – $314 per year for a basic checking account.” He further noted: “No other checking account makes it this easy and affordable to manage your everyday finances.” Of course, there is some fine print being glossed over here. There is an $8.95 monthly fee that is waived in any month with qualifying direct deposits totaling $500 or more. Other fees include a 3 percent foreign transaction fee and out-of-network ATM fees (typically $2.50 for an out-of-network ATM plus any fee the ATM owner may assess).
- Walmart has the potential to challenge traditional banking on two fronts. If you believe that people still want branches to do their banking then you have to fear Walmart. You don’t have to be Nostradamus to see that one day all those bank branches that Walmart has been gracious enough to lease space to in their stores are going to gradually become GoBank branches. If you believe, as I do, that banking is going virtual, then by teaming up with GreenDot, WalMart has a mobile platform than can compete with anyone’s as I explained in a previous blog.
- Just how are you going to attract those young people who are indifferent to walking into a credit union or the person of modest means who is intimidated about doing so? These are people who were increasingly relying on prepaid cards and mobile banking even before Walmart’s announcement. Now, they have the option of getting a full-fledged FDIC insured bank account by walking into a store. No one is intimidated by Walmart and the store has a reputation for great deals and fair prices. And, don’t fool yourself, Walmart is starting out just offering a basic banking account but it will be offering car loans and mortgages in the not too distant future.
- Walmart and Apple are now your two biggest competitors. How do you offer traditional banking services in an industry where the appeal of the new guys is that they are non-traditional bankers? I don’t know, but at the very least, if you still don’t have a mobile platform you better get one soon or merge with a credit union that does.
- Back in 2005 many smaller financial institutions correctly feared that a Walmart bank could put them out of business. Maybe I’m missing something, but, if anything, those fears are even more justified today. Only credit unions with a very unique niche or large institutions will have the economy of scale to compete against big volume consumer banking. So, it is Walmart’s entry into retail banking, coming on the heels of Apple Pay, that makes this one of the most transformative periods in retail banking credit unions have ever witnessed.
The IRS sent out an alert yesterday warning financial institutions against a scam that makes me think yet again that some compliance officers have gone over to the dark side. Fraudsters, posing as IRS employees, are calling up financial institutions complying with the Foreign Account Tax Compliance Act (FATCA) and requesting account information. As the IRS explains:
“The IRS does not require financial institutions to provide specific account holder identity information or financial account information over the phone or by fax or email. Further, the IRS does not solicit FATCA registration passwords or similar confidential account access information.”
Down So Long That It Looks Like Up To Me Category
In a press release “The U.S. Department of Education announced today that the official three-year federal student loan cohort default rate has declined to 13.7 percent for students who entered repayment in FY 2011. That drop was across all sectors of higher education – public, private and for-profit institutions – even though an additional 650,000 students entered repayment in FY 2011 compared to FY 2010.”
That default rate for 2010 was 14.7.
The Good News Is Good News Category
New home sales hit their highest level since August 2008.
How much is cyber theft costing us? The question is crucial because, to simple country lawyers like me, we are facing the electronic equivalent of a man-made Ebola virus. Is it possible that fraud is a manageable cost of doing business? I don’t think so, but I’m afraid many policy makers, merchants and large financial institutions might.
One place to look for the answer is in the Fed’s biannual report on the cost of debit card interchange costs mandated by the Durbin Amendment. The latest installment was issued September 18th. Fraud resulted in $1.57 billion in losses in 2013. Furthermore: “. . . the majority of fraud losses were absorbed by issuers and merchants (61 percent and 36 percent respectively); cardholders absorbed only 3 percent of losses.”
Most importantly, the cost of fraud is rising. “Although overall fraud losses as a percentage of transaction value did not change much between 2011 and 2013, there were substantial changes in the incidence of fraud, as well as in average losses per fraudulent transaction.”
But since overall transaction costs are going down, the Fed won’t be proposing a change to the existing cap, which is currently 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, for institutions that take mandated fraud prevention measures.
Something doesn’t quite past the smell test. In the same week, Home Depot concludes that a mere 56 million consumers had their credit and debit card information stolen by malware imbedded onto its card readers, the Federal Reserve concludes that there is no need to recommend raising the cap on interchange fees for institutions with $10 billion or more in assets. We may have one of those situations where economists can tell us the price of fraud but not its true cost. Remember the cap just applies to institutions with $10 billion or more in assets.
Why should credit unions care? Because, while cyber fraud may be an acceptable cost of doing business for the big guys who can absorb the costs, it’s not for your smaller institution. Furthermore, the Fed can’t monetize consumer anger and mistrust. Your average consumer is going to get fed up sooner or later. They will turn to the larger, more sophisticated institutions that they believe are better able to protect them – a trend that will be accelerated by our good friends at Apple.
Yesterday, the Senate Banking Committee held a hearing ostensibly dedicated to examining the burdens faced by small financial institutions, including credit unions, and what can be done to help them. I say ostensibly because any discussion of helping small credit unions inevitably and understandably morphs in to a discussion of the role of regulations in general and the need for mandate relief for all credit unions. For instance, I know Risk-Based Capital Reform is a major issue, but it simply isn’t that important to a $20 million, single SEG credit union. Still, it featured prominently in yesterday’s testimony.
The reality is that while proclaiming support for small credit unions, the small family farm and the independently owned bookstore around the corner has an emotional appeal, the real question isn’t so much what we can do to save small financial institutions but why we should bother making the effort in the first place. Once we answer that question, then there are actually practical steps we can take to protect viable small credit unions from extinction.
First, let’s define our terms. Up until about a year ago, a credit union was classified as complex by NCUA if it had $10 million or more in assets. To it’s credit, NCUA has now raised its threshold to $50 million with the result that a majority of credit unions are now considered small, at least by one regulatory measure. NCUA’s action shows how difficult it is to define a small credit union. Nevertheless, we all know what it is when we see one. To their protectors, small credit unions are the institutions that remain truest to the credit union ideals. By not growing, they literally do know most of their members and this personal relationship infuses them with a cooperative spirit that you won’t find, the argument goes, as institutions get larger.
While there is some truth to this critique, the reality is that credit unions can remain true to the movement’s ideals while growing to meet member needs. Economy of scale enables lenders to provide cheaper products and larger credit unions have, in the aggregate, demonstrated a greater willingness to work with members during the Great Recession than have their banking counterparts.
Critics of smaller institutions, or at least those that are indifferent to their fate, point out that as all industries mature, they consolidate. From a purely economic standpoint it makes perfect sense to have fewer credit unions while the industry as a whole serves more members than ever before; but this hands-off approach to credit union development also misses a crucial point. It is one thing for institutions to merge because there aren’t enough members, it is quite another for institutions to merge because no one has been trained to take over as CEO. Similarly, today’s small credit union is tomorrow’s large one. According to NCUA statistics, 538 credit unions surpassed $50 million in assets over the last decade.
The best way to help smaller credit unions is to start making a distinction between those that are growing, those that are small but can continue to prosper, and those that are doing nothing more than living off past capital accumulation. For the first two categories, we should work to establish networks of individuals who are intrigued by the opportunity to run a credit union irrespective of its asset size. On a practical level, this means turning over the reigns to younger professionals who can make up with enthusiasm and ambition what they lack in expertise. It also means championing greater charter flexibility so there is a middle ground between maintaining a SEG based existence and converting to a community charter.
Finally, smaller credit unions have to do more to pool their resources. A good example of this approach is the sharing of compliance resources among several credit unions. For me, the bottom line is this: whether a credit union is big or small, it shouldn’t be forced out of business where there is still a demonstrable need for its services.
Your average member isn’t humming “Happy Days Are Here Again” even though the economy is doing much better on paper.
One of the reasons is the increasingly widespread use of stock repurchases. Corporations buy back their own shares, often taking advantage of low interest rates to borrow the purchase money. Stock repurchases provide one more talking point the next time you talk to your local legislator about why credit unions are important sources of localized economic development or, try to explain to your neighbor what a cooperative is before their eyes glaze over and they edge toward other more interesting conversations at the neighborhood party. Incidentally Banks have not been immune from this trend.
The WSJ is reporting this morning that corporations used 31% of their second quarter cash flow on stock repurchases. This week’s Economist takes a look at the trend and dubs it “Corporate Crack” contending that it may be of short-sighted benefit to investors by creating another financial bubble.
Why should you care? For one thing every dollar spent on a share buyback is money not spent investing in new infrastructure or new employees. Corporate America is sitting on more than $1 trillion in cash and the economy really won’t heat up untill it starts spending it. As former Reagan White House Budget Director David Stockman commented in a blog post this past July:
“During the “difficult” economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That’s right, 95 cents of every dollar they earned—including the huge gains from restructurings, downsizing and job terminations—was flushed right back into the Wall Street casino.”
The trend also underscores why the cooperative financial structure is so important. I like to tell people that credit unions are the last remaining true community banks, I’m no wide-eyed idealist: the simple truth is that credit unions make money by lending it out or investing it. There is no share price to worry about . In contrast, that so-called community bank down the street is probably owned by an increasingly large Bank Holding Corporation thinking of new and creative ways to prop up its share price. So long as the share price and economic growth align this is fine but as Wall Street gets more and more skilled at creating its own economic reality no one can be sure this is really the case.
News of the weird
I had to do a triple take as I was going over some clips last night and read that the National Association of Realtors is getting a proverbial “seatt at the table” as the FAA crafts rules regulating the use of drones. It appears that in a profession dominated by ultra aggressive sales people always looking for a competitive edge some realtors have turned to unmanned aircraft to get a birds-eye view of the latest property for sale. I guess the smell of freshly baked bread to coverup the smell wafting up from the basement just doesn’t cut it anymore
It’s been about a week now since Apple engaged in what’s become the adult version of Christmas Eve when it previewed its newest must-have gadgets. You undoubtedly have heard by now that Apple will be unveiling a mobile payment system with enhanced security features. Its modest goal is to make plastic payments obsolete and it has already signed up the largest banks in the Country and Navy Federal Credit Union. These institutions have agreed to give Apple a piece of every iPay, sorry, I mean Apple Pay transaction.
If you think that mobile payments will continue to be a small part of the transactions market, or if you think that several competing platforms will be sufficient to meet the payment needs of your members, then you will disagree with everything I am about to say. If, on the other hand, you believe, as I do, that an 800 pound gorilla with the potential of upending traditional banking models has just entered the room, then you should keep on reading. Here are some of the biggest challenges that Apple’s entry into mobile payment presents to your credit union.
- The credit union industry is not exactly fast on its feet, but my guess is on a practical level you will have to decide quickly if you want your members to be able to access Apple Pay with their debit and credit cards. (All those people who pre-ordered their IPhones are going to be mighty upset if they realize they can’t use Apple Pay) If you answer yes, remember that this is going to cost money. If you answer no, then you run the risk of members establishing alternative financial relationships with those institutions that sign up.
- On the bright side, Apple may have the leverage to prod merchants into upgrading their systems. As I understand the technology, merchants will have to equip their stores to handle Apple Pay transactions. As the merchants do so, perhaps they will bite the bullet and retrofit their machines for EMV cards, as well.
- In a best case scenario, Apple increases your credit union income by expanding the use of mobile payment as people use their cell phones to pay for transactions they would have paid for with cash. In a worst case scenario, people will use their cell phones for purchases they would have made with plastic. Over time, those extra fees you are paying to Apple will really begin to eat in to your credit union’s bottom line. Think of it this way, just a few years ago, credit unions fought to protect the right of smaller institutions to be exempt from a debit card interchange cap. Now those same institutions are going to have pay more money to Apple or run the risk of sitting on the sidelines during a mobile payment boom. How many record companies are out there today that don’t provide access to iTunes?
In an article in the CUTimes this morning MasterCard reassured credit unions that credit unions have a place with Mastercard and Apple. The statement kind of reminds me of the GM who tells everyone that the coaches’ job is safe: If it was really safe the GM wouldn’t have to say anything.
One of my favorite lines about business is that the most successful companies aren’t the ones that build better mousetraps but the ones that know how to sell the better mousetraps. The financial industry breathed a collective sign of relief last week because Apple decided not to compete against VISA and MasterCard at this point but instead chose to integrate its own payment system onto existing platforms. But let’s not overlook the fact that the same company that bankrupted Kodak has as its goal to be the pre-eminent processor of all consumer payments. My worst case scenario is that the credit union and community bank branch is as obsolete 10 years from now as film is today.
This is a huge day for the Meiers and millions of other families across the country. My five year old daughter starts kindergarten today and my 11 year old begins 7th grade. So, don’t get me wrong, I am extremely excited, but forgive me for the gnawing question in the back of my mind: just how the hell am I going to pay for all this?
The USDA recently released its annual report on the cost of raising a child. Since 1960, the report has provided a crude but important snapshot of what it costs to take part in the great American middle class, Nationally, it costs $245,340 to raise a child through age 17 in a middle class household. Families in the urban Northeast incurred the highest cost at a mere $282,480. In contrast, it cost $223,610 to raise a child in the urban South. In 1960, it cost $25,229 nationally or $198,560 adjusted for inflation. This number does not take into account the cost of higher education and all those community-based extracurricular activities we sign our kids up for — soccer, swimming, dance, etc. (you get the idea).
And this statistic also assumes that my children are going to fend for themselves starting at age 18. They’ve already been told I expect them to go to college. As the report points out, this is not a minor expense. In 2013-2014, the College Board anticipates the annual average tuition and fees to be $8,893 for a public 4-year institution with in-State tuition and $30,094 at private, not-for-profit 4-year institutions with an additional $9,498 to $10,823 in room and board expenses. That’s just the average, folks. There are non-Ivy-league schools that are charging $50,000 tuition per year with a straight face.
I always laugh at parents who actually think that the way they are going to pay for college is with a sports scholarship. Statistically speaking, that’s not going to happen. By the same token, I am fooling myself if I think just getting my kids into college is good enough. As this excellent blog from the New York Federal Reserve points out, college pays off but not for everyone. So, as my daughters start school today, I hope they enjoy themselves, learn a lot, and prepare for the life competition that has, for all intents and purposes, already begun.