Posts filed under ‘General’

A Modern Day Greek Tragedy

Remember those Greek tragedies we all had to read in High School? The basic plot lines always had the protagonist with a fatal personality flaw, which he didn’t recognize until he met his end. Over the weekend we moved closer to a real-life Greek financial tragedy and this one may impact the United States economy.

About the only thing that the German and Greek economies have in common is that they share a common currency:  the Euro.  For the past five years, the Greek financial system has been kept alive by loans from a consortium of international creditors. These loans have come at a steep price. Led by Germany, creditors have demanded structural reforms in Greek government spending. Although these reforms were starting to demonstrate some benefits, with the Greek unemployment rate over 25%, late last year, Greeks voted to hand over power to a party opposed to further Greek concessions in return for financial aid.

On the one hand, the Greeks bet that the Germans would agree to modify the demanded reforms rather than let the Greeks default on the debt payment and walk away from the Euro. On the other hand, the Germans knew that the Greeks overwhelmingly support membership in the Euro Zone and assumed that the Greeks would ultimately agree to continue structural reforms to maintain their financial system. This game of international chicken took a dramatic turn for the worse over the weekend.

With Greek debt payments due tomorrow, European creditors rejected Greece’s latest offer to restructure its debt. To everyone’s surprise, Greece’s Prime Minister, Alexis Tsipras, called for a referendum to decide whether or not to agree to European demands. Considering that this referendum is scheduled for July 5, this move is strange enough. But what really has Europe digging in its heels this morning is the fact that Greece’s Prime Minister is actually urging its citizens to vote against European demands. He apparently believes that a public rejection by his countrymen will give Germany no choice but to agree to better terms.

Early signs are that this gambit is going to backfire. To prevent a further run on Greek banks, limits have been placed on the amount of money that can be withdrawn from bank accounts and according to press reports, now the European public and its politicians are unified in their opposition to Greek demands. If Greece votes no on the referendum, it will have no choice but to do away with the Euro and start printing its own currency once again.

All very interesting, Henry, but why should I care? Importantly, this will have an impact on the U.S,. Economy, the only question is how great the impact will be. Already this morning, the yield on 10-year U.S. Treasuries is down and the stock market appears poised for an early tumble. In a worse case scenario, Greece exists the Euro and the debt of other European countries such as Italy and Portugal skyrockets as investors question Europe’s commitment to supporting the Euro. This body blow to the European economy would weaken economic growth for the United States and for China as well. In a best case scenario, five years of this Greek tragedy has given private creditors more than enough time to unwind their exposure from a so-called Grexit. Europe suffers a temporary setback but is ultimately strengthened as Greece no longer hangs like an Anvil over Europe. Either way, it’s safe to say that the single most important economic event over the summer will not occur in the United States.  Hopefully, calmer heads will prevail between now and tomorrow.

June 29, 2015 at 8:17 am Leave a comment

Are You Marketing for the Digital Age?

It’s never good when a blog post puts you to sleep and even worse when it’s one you have written, so as important as NCUA’s proposed MBL changes are, an article in today’s American Banker (subscription required) convinced me to return to that subject tomorrow. The article reports that some of the nation’s biggest regional banks (roughly defined as banks that have grown too large as to be described as “community banks” with a straight face) are moving to enhance their image by producing online video content. According to AB, “Regions Financial hired an Academy Award-winning filmmaker to direct a video series about financial planning, while U.S. Bancorp in Minneapolis is sponsoring a video about affordable housing that’s being produced by a prominent Los Angeles creative firm.”

Some in the credit union industry have also embraced this trend. Last year, Coop released a slick documentary style advertisement featuring the millennial singer/songwriter Daria Musk. We need to see more efforts like this.

Full disclosure: few things get me as fired up as what I consider the stale, unimaginative way in which the industry has branded itself. In the debate between those who think that credit unions emphasize their credit union roots too much and those who think they advertise them too little, I’m solidly in the too much camp. Your average consumer might be intrigued by the idea of a not-for-profit cooperative, but they are going to join only if it is in their financial interest to do so.

Let me put on my director of marketing wanna-be hat and explain why I think that digital production should be in the short term plans of larger CUs and the medium term ones of smaller CUs.

First, it takes advantage of the paradigm shift that has upended traditional media. Today the challenge is no longer finding a platform to get your message out, but getting people to view your message.  Anyone can upload a video to YouTube. The trick is getting people to watch it. It’s not as expensive as you might think to pay for a quality video. As one contributor to the article pointed out, the idea is to spend money on production instead of advertising space.

Second, without the constraints of a thirty second or a minute spot you can really get creative in associating your brand not just with a product but with an ethos. For example, the Coop commercial uses aspiring star Musk to identify credit unions with an independent, determined and cooperative spirit. This is a heck of a lot more appealing than repeating over and over again that credit unions are comprised of “people helping people;” at least to anyone under the age of eighty.

Third, you have to move your advertising to where the consumers are and more and more people, particularly younger ones, are streaming their content on demand and watching on their tablets. Even cable companies like HBO and ESPN are cutting the cable cord. Traditional TV watching is so eighties. According to a survey released by Nielson this past December, about 2.6 million households are now “broadband only.” That only represents about 2.8% of total U.S. households, but it is more than double the 1.1% of households that were broadband only last year. Now, don’t get me wrong — Americans aren’t turning off the tube to read Moby Dick – in fact, they are watching more video than ever, but unless you can pony up the money to broadcast during a live sporting event, the days when they can be force fed traditional advertisements are fast coming to an end.

You know that famous phrase by Marshall McLuhan that “the media is the message?” Increasingly, businesses are being judged not just by what they say but where they say it. Time to start planning those online videos if you haven’t already.

June 24, 2015 at 9:05 am Leave a comment

Why Ride-Sharing Impacts Your Credit Union

Ride sharing is about to have a bigger impact on your credit union than you may have thought possible.

Yesterday, the Attorney General and the Department of Financial Services reached an agreement with the Lyft Ridesharing Service that will allow it to start plying its trade in Buffalo and Rochester. Since July 2014, the AG and the DFS blocked the company from operating in Buffalo contending that it was violating the Insurance Law by not requiring people who signed up as drivers on the service to comply with basic insurance requirements. The agreement announced yesterday addresses some of the insurance concerns but could still leave credit unions holding the bag in the event one of your members gets into an accident while providing a Lyft ride.

Lyft is a ride sharing service that competes against Uber. The service matches people who need a ride with willing drivers using an App. The two parties negotiate the fare. Here’s where it gets interesting. Your typical car insurance has a livery exception, meaning that if one of your members gets into an accident providing ride-sharing services they won’t get coverage. Needless to say, this makes your collateral worthless.

The agreement reached yesterday specifies coverage for three distinct periods: the time during which the Lyft driver is waiting for pick-up requests; the period between when a driver has accepted a request and the driver is going to pick up the passenger; and the period running from when the driver begins transporting the passenger to when he drops them off. While this is a step in the right direction, drivers are still not required to obtain comprehensive collision insurance that would protect the vehicle against property damage. In other words, the agreement doesn’t go far enough to protect lenders.

The Legislature had been considering passing legislation to address the issue, but with time running out on an already past deadline Legislative session, movement in this area is unlikely. The agreement raises several questions for credit unions to consider. Most importantly, while the agreement just applies to Buffalo, it may provide a template for ride sharing services to start operating in other parts of the state. Uber is already in operation in New York City under an agreement with that city’s Taxi and Limousine Commission.

Is there a way for credit unions to protect themselves? You may be able to mandate that members get special comprehensive collision insurance if they decide to become a ride sharing driver. The problem is, that you won’t know if they have honored this requirement until they get into an accident.

June 19, 2015 at 8:49 am 1 comment

What Baby Boomers Can Learn From Caitlyn Jenner

With war raging in the Middle East, more politicians running for President than there are citizens, the economy continuing to stumble, and Congress fiercely debating the propriety of government surveillance in the aftermath of 9/11, it’s only logical that the nation was transfixed this week by the transformation of Bruce Jenner, aka the World’s Greatest Athlete, into Caitlyn Jenner, who this blogger is man enough to admit is one attractive 65 year-old. But whereas Ms. Jenner is a shrewd business woman who knows how to convert her fame into social media fueled riches, most people born between 1946 and 1964, aka the Baby Boomers, have neither the inclination nor the prowess to pad their golden year nest eggs the way Ms. Jenner has. As a result, almost 75 million Americans are headed straight off the demographic cliff, with my generation following shortly behind them.

The statistics from a recently released Government Accountability Office study are frightening, to put it mildly. About 55 percent of households age 55-64 have less than $25,000 in retirement savings, including 41 percent who have zero. Most of the households in this age group have some other resources or benefits from a defined benefit (DB) plan, but 27 percent of this age group have neither retirement savings nor a DB plan. Furthermore, those of us who have been saving aren’t doing a very good job of it. Among the 48 percent of households age 55 and older with some retirement savings, the median amount is approximately $109,000–commensurate to an inflation-protected annuity of $405 per month at current rates for a 65-year-old.

These statistics demonstrate that the country is growing more, not less, dependent on Social Security. The problem is that the Social Security Trust Fund is already straining under the weight of these commitments.  The Report points out that the Social Security Trust Fund is projected to become depleted in 2034, at which point it will only be able to provide 75% of scheduled benefits.

Readers of this blog will know that I am somewhat obsessed with prodding credit unions toward attracting younger members. But even as credit unions justifiably readjust to younger generations, there clearly is going to be a market for products that assist older workers and retired Americans to stretch their savings as far as possible. Increasingly, your member of modest means will be a Baby Boomer for whom the cost of putting kids through college on a salary that barely rose with inflation over the past 30 years has made it impossible to put aside much for her retirement. This problem was exacerbated by the decision of her company to stop providing a defined benefit plan and instead offer a defined contribution plan.

On that cheery note, have a great weekend.

June 5, 2015 at 8:15 am Leave a comment

The Mouse That Roared?

The news that the proposed $19 million settlement between MasterCard and Target has been rejected, in no small part because of the vocal opposition of credit unions that complained that the proposed deal didn’t adequately compensate smaller issuers for the costs of the breach that impacted as many as 40 million cards and 110 million people, is an important victory for the industry.  It demonstrates that the concerns of smaller institutions have to be a major focus of any efforts by the courts and policymakers trying to apportion the costs of data breaches.  This may have been the moment when the little financial institutions came together and announced that, when it comes to data breaches, “they’re mad as Hell and they are not going to take it anymore.”

Under an agreement announced between MasterCard and major issuers in March, issuers would have gotten $19 million to settle claims related to the breach provided that at least 90 percent of card issuers signed off on the deal by  May 20th.  If you, like your faithful blogger, were already in long-weekend mode on Friday, you may have missed the news.  As NAFCU’s Carrie Hunt said in this morning’s American Banker, “[t]he failure to opt in to the settlement by financial institutions sends a strong signal to card companies that the current reimbursement system does not work and financial institutions need to be made whole.”

Opposition to the settlement was led by a group of small banks and CSE Federal Credit Union in Lake Charles, La.  They sued Target last year and are seeking to bring a class action lawsuit.  They complained that the settlement amounted to “pennies on the dollar” compared to the actual costs of the data breach.  They filed a motion seeking to block the settlement.  Even though that attempt failed, they lost the battle but won the war.  Their failed attempt provided a platform from which they could argue that the settlement was a bad deal.

Now what? Good question.  When you begin to parse through the legal issues and try to determine not only the cost of breaches but how they should be apportioned we get into murky water here with both sides having incentives to negotiate.  Target wants to move on and it would take years of litigation before credit unions or banks ever get a dime for the breach.

That is why, as good as the lawsuit feels, Congress and legislatures are best suited to apportion the costs of data breaches and prevent further instances.  The litigation comes at a great time for the industry.  Congress is starting to pay attention to data breach issues . . . finally.  The lawsuit shows that the existing system doesn’t adequately protect credit unions for data breach costs.

For your largest issuers, they are just another cost to be absorbed but for smaller institutions data breaches result in direct and indirect costs that, if left unabated, will push even more credit unions to merge or close their doors.

May 26, 2015 at 9:18 am 1 comment

Meaningful Financial Aid Reform

Regulators are once again proposing restrictions on the way federal student loan aid is distributed and banks are once again crying foul. It’s a predictable and increasingly tiresome sideshow that keeps us from focusing on the real problem confronting our higher education system: the skyrocketing cost of a college degree.

Before I get on my soapbox, here is the informational part of today’s blog. According to the U.S. Department of Education, there has been a proliferation of agreements between financial institutions and colleges whereby financial institutions offer prepaid cards and debit cards on which students can receive their federal student aid. These cards can also be co-branded with the college’s logo. According to the Government Accountability Office, 11% of colleges and universities participating in federal student aid programs have entered into these kinds of agreements and 40% of all post-secondary students are enrolled in such institutions.

On Friday, the U.S. Department of Education proposed regulations to clamp down on these contracts. According to the Department, the proposed regulations would prohibit institutions from requiring students or parents to open specified accounts into which credit balances are deposited; require institutions to ensure that students are not charged overdraft fees on an account offered by a financial institution with which the school has a contractual relationship; require colleges and universities to provide a list of options from which students may choose to receive credit balances; and require institutions to ensure that payments made to a student’s pre-existing accounts are as timely as and no more onerous to the student as those accounts marketed to the student. The regulation is published in today’s Federal Register.

Banks responded quickly to this proposal saying that these existing arrangements offer students a cost-effective means of accessing their funds and suggesting that the Education Department may be overstepping its jurisdiction by prohibiting overdraft fees.

Now I am climbing on to my soapbox. For more than a decade now, advocates for higher education reform have complained bitterly about the cozy relationships that some colleges have entered into with financial institutions. For instance, Governor Cuomo drew national attention as Attorney General for his investigation into the relationship between academic institutions and banks.

There is nothing wrong with any of these proposals, but let’s not delude ourselves into thinking that banking practices are to blame for the skyrocketing cost of a college education. According to the College Board, the average cost of tuition at a public, four-year college for an in-state student is $9,100. The average tuition at a four-year private college is $31,231. Remember this doesn’t cover living expenses, books and beer money. I wish the groups advocating for the type of regulations proposed by the Education Department would call for an investigation into the skyrocketing cost of getting a college degree in this country. Increasingly, it seems to me as if the children of middle class parents are being held hostage by institutions of higher learning: pay us whatever we ask for or risk your child’s future.

May 18, 2015 at 8:39 am Leave a comment

Just How Strong Is The Economy?

With apologies to those of you who hate sports analogies, some recent research produced by the Federal Reserve Banks of New York and Chicago demonstrates that we are living in a wedge shot economy:  it looks great from about 150 yards out but as you get closer things aren’t quite as good as they seem.  Suffice it to say that Fed officials have a tough decision to make about when to raise short term interest rates.  If the economy is gaining strength, the time to start raising rates is now or the economy could overheat.  Conversely, imposing interest rates on a feeble economy is the financial equivalent of bloodletting.

Just how sluggish is the economy?  The first bit of analysis comes from the Federal Reserve Bank of New York’s Liberty Street Blog, which, by the way, is a site well worth bookmarking for anyone interested in following economic trends in a digestible format.  It analyzed the most recent Quarterly Report on Household Debt and Credit and its findings go a long way toward explaining why the housing industry has lagged as a stimulus to economic growth even as the worst of the Great Recession fades in the rearview mirror.

Credit card spending is rising for people across the credit score spectrum but even the most credit worthy borrowers are holding back on housing debt.  New mortgage originations are 70% lower than they were in 2013.  In addition, since 2008, the “lions share” of new mortgages have gone to persons with credit scores of at least 720.”  This presumably older and cash heavy demographic isn’t snapping up McMansions at bargain prices either.  Instead “[t]he upsurge in originations by creditworthy borrowers in 2012 and 2013 consisted mostly of refinances and added relatively little to outstanding balances, thanks to record low mortgage rates.”  In other words, the people with the best credit and most money to spend are cutting back on home buying just when the economy needs it most.  Truly patriotic Americans would be taking on debt for the good of the nation.  Just joking.

Then there is the more heated debate about just how good a job the economy is doing creating jobs for people who want them.  Economists will tell you that every economy has a natural rate of unemployment.    Policymakers have to determine what that rate is and raise rates once slack is out of the economy.

Look at the headlines and an economy with an unemployment rate of 5.4% adding more than 200,000 new jobs is enough to make any self-respecting inflation hawk break into a cold sweat.  After all, do we really want a repeat of the late 70’s with its toxic mix of high interest rates, high inflation and disco?

But what if demographics have changed the potential workforce and there is a lot more slack in the economy than the headline numbers suggest?  If this is the case, it is a best premature and at worst counterproductive to raise rates.

The latest researchers to wade into this conundrum are from the Federal Reserve Bank of Chicago.  In a recent report, Changing Labor Force Composition and the Natural Rate of Unemployment, they argue that changing demographics mean that the economy has a naturally lower level of natural unemployment than it did just 15 years ago.  Consequently, policy makers can wait longer before dampening economic growth.  They argue that demographics are destiny and that a growing supply of college educated job applicants and unemployed teens will create an economy better able to accommodate workforce expansion. According to their calculations, the natural rate of unemployment is currently slightly below 5% and will, if present trends continue, decrease to around 4.4% to 4.8% by 2020.

The problem I have with this argument is that it assumes that a college degree will always equal employment and that teens will naturally be absorbed into the workforce as they age. I hope they are right, but, increasingly, I have my doubts.

On that cheerful note, get to work and keep working.

May 14, 2015 at 10:27 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

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