Posts filed under ‘General’
Are your members safer today than they were yesterday? The reason why I’m asking that question is that today is the day Visa and Mastercard shift liability for unauthorized Point of Sale transactions involving debit and credit cards from card issuers who use EMV chip cards to merchants who don’t have terminals that can process these chip based transactions.
This shift is arriving with more of a whimper than a bang. Estimates vary widely, but in March the Payments Security Task Force, a consortium of eight financial institutions, representing approximately 50 percent of the total U.S. payment card volume, estimated that 63 percent of their credit and debit cards will contain EMV chips by the end of this year, expanding to 98 percent by the end of 2017. Merchant terminal conversion is estimated to be as low as 50%.
To me the EMV conversion process contains an important lesson: if this country wants a truly robust system to guard against data theft we need more government involvement, not less.
First, the good news. All consumers will ultimately benefit from a world in which the magnetic strip becomes a Smithsonian exhibit. America desperately needed this push. Despite being in use for more than two decades the U.S. has stubbornly resisted the adoption of chip based technology. This technology makes point of sale transactions much safer by making it much more difficult to steal card information. In Europe EMV brought about a sharp decline in POS theft.
Then there is the convenience factor. We live in an integrated world and the continued use of the magnetic strip really isn’t all that different from continuing to use floppy discs while everyone else is downloading programs from the cloud. Talk to anyone who has traveled overseas. if you don’t have a chip based card everything from paying for tolls to getting on a subway is a hassle. The great American credit card is as antiquated as a black and white T.V. It’s not a coincidence that the United Nations FCU has been a leading advocate of the liability switch.
So why am I so underwhelmed by the liability shift? Most importantly, it is too little too late. EMV chips are already old technology. There are even reports that hackers have figured out how to break into them.
Second, what we are witnessing is another split between the behemoths and small lenders. Given the expense of EMV cards-I’ve seen estimates that a chip based card is five times more expensive than a magnetic strip-it makes perfect sense for a credit union to look at its fraud numbers and conclude that the value of the liability shift is outweighed by the cost of conversion. Similarly, it makes perfect sense for the small business merchant with the corner store to decide to risk higher fraud costs than upgrade his payment terminal. My assumption is that what we have this morning is a patchwork of consumer protection depending on where a consumer does her banking, her shopping and how often she uses plastic.
Then there is the continuing finger-pointing. Merchants say that security is best achieved when chip technology is coupled with a requirement that the consumer enter a PIN number, In contrast the early numbers suggest that chip and signature has been the more commonly adopted approach. These type of tangents ultimately benefit no one.
One of my favorite economic\security metaphors is of a lighthouse. On the one hand all ships benefit from its existence; on the other hand since there is no way to provide light only to ships that contribute to its maintenance it’s always going to be in the economic best interest of some ship owners not to contribute. To me the EMV adoption process has suffered from the same dilemma. It shows, why, when it comes to developing a robust data protection system, government has to take the lead and impose baseline mandates.
The legal system is grabbing the spotlight in credit union land today. Most prominently Louis Jimenez, who was removed as Montauk credit union’s CEO is suing the NY Department of Financial Services alleging that he has been illegally forbidden from consulting with outside legal Counsel without first obtaining a waiver from the Department. Here is an article from the Post. http://nypost.com/2015/09/29/ceo-of-credit-union-with-delinquent-taxi-medallion-loans-says-state-wont-let-him-consult-with-lawyer/
The Court of appeals for the Second Circuit reversed a lower court ruling, Expressions Hair Design v. Schneiderman, 975 F. Supp. 2d 430, (S.D.N.Y. 2013), that had struck down as unconstitutional a NY statute banning merchant from imposing surcharges on credit card purchases. This ruling has importance well beyond New York. There are at least 10 states that ban credit card surcharges, many of which are being challenged on similar grounds. Yesterdays’ decision is the first to be decided by a federal appeals Court. The Association wrote an amicus brief in support of the surcharge ban.
First , some background. Once upon a time the Truth In Lending Act banned credit card surcharges. In 1984 congress let this prohibition lapse and New York responded by passing Section 518 of the General Business Law which is similar but not identical to the expired federal law: It provides that:
No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.”
Crucially 518 has been interpreted as allowing merchants to offer a cash discount on an item’s sticker price. What merchants can’t do is impose a surcharge on the sticker for a credit card purchase . Critics argue that it imposes a distinction without a difference that keeps merchants from accurately expressing a product’s true cost in violation of the First Amendment. “Not true” say the law’s supporters. Merchants can categorize the ban as they wish. What they can’t do is raise the price of a product just because a credit card is being used. (In its Amicus brief the Association pointed out that in Australia, which authorized surcharges last decade surcharges were used not as a means to recover transaction costs but as a means to generate merchant revenue).
In the first round of litigation the Federal district Court struck down the law, It described New York’s prohibition as “incomprehensible” and it was this ruling that the court reversed yesterday.
First, the Court broke the claims into two distinct types of price postings, “sticker price schemes” in which merchants advertise a single cash price with notice of a surcharge posted on top of the cash amount and “dual pricing schemes” in which merchants posts two separate prices for credit card and cash purchases. The Court flatly rejected the argument that bans on sticker price surcharges were illegal. It concluded that 518 does not regulate speech but prices and pointed out that “[P}rices, although necessarily communicated through language, do not rank as “speech” within the meaning of the First Amendment.” Furthermore, whereas the district court concluded that 518 was nothing more than a labeling prohibition the Court concluded that it was a legitimate exercise of legislative power.
“although the difference in the consumer’s reaction to the two pricing schemes may be puzzling purely as an economic matter, we are aware of no authority suggesting that the First Amendment prevents states from protecting consumers against irrational psychological annoyances.”
The Court did not rule on the constitutionality of New York’s law as applied to “dual pricing” postings so it’s possible that we haven’t seen the last of challenges to surcharge ban litigation. I know you can’t wait,
John Boehner isn’t going out quietly. Good for him.
Appearing on CBS New’s Face the Nation, he admonished his Republican colleagues not to succumb to the rhetoric of false prophets. It speaks volumes about the wretched state of our political system in general and the so called Republican Party that the Speaker of the House will now be able to get more done in the month he has remaining in office than he has been able to do previously.
For credit unions, this means that the next month is actually one of those rare windows in national politics when legislation is going to move. The problem is that none of the legislation likely to most benefit credit unions will be part of this rush to get things done. It just isn’t realistic to think that we can see Member Business Lending or Secondary Capital Reform. This is by no means a knock against CUNA or NAFCU, but simply a reflection of the reality that a political system paralyzed by ideological rigidity can only be jolted into action by the biggest players (such as the supporters of the Export-Import Bank) or deal with issues of so little consequence that no one bothers to oppose them (further reform of privacy notice requirements could fall into this category).
And the news gets worse. The People who advocated for John Boehner’s ouster are lousy at articulating what they are for, but instead listen to the false prophets who fill their heads with the ignorant notion that in America, policies can be advanced without compromise and that anyone who disagrees with their positions is somehow acting contrary to the Constitution. I went to bed last night listening to the angry voices of talk radio, and as far as I could tell, these pundits of hatred want a Speaker who is willing to cripple the nation’s, and in fact the world’s, finances by threatening not to raise the national debt every time they don’t get their way. The want a leader who is somehow able to balance the budget and reduce the national debt without raising taxes or cutting government programs that middle class Americans like such as social security and Medicare. And, most disturbingly, they want an America led by Republicans who not only disagree with their opponents but despise them.
If you think I am exaggerating, then how do you explain the cheers that went up with the news that John Boehner had had enough of trying to deal with this confederacy of dunces for whom Eric Cantor wasn’t conservative enough and Chris Christie committed the unpardonable sin of putting him arm around the President of the United States when he pledged to help New Jersey recover from a massive hurricane?
What really bugs me is that these so called conservatives drape their radicalism in patriotism. How patriotic is it not to pay the nation’s bills or to refuse to compromise to get anything done? If these people were around when the nation was being founded, we would not have our present Constitution or our banking system.
The Federal Reserve yesterday decided to go along with NACHA and mandate that all financial institutions be able to provide same-day payment of ACH transactions. Currently, a credit union receiving an ACH has until the next business day to complete the transaction. This mandate will be phased in starting September 23rd 2015 and is slated to be fully operational by March 16, 2018.
The shift to mandatory same-day processing capability seems like a really big deal to me but has so far not generated all that much excitement in CU Land. Under the new framework, NACHA envisions two “submission and settlement windows” of 10:30 a.m. ET with settlement occurring at 1:00 p.m. and an estimated afternoon submission deadline at 3:00 p.m. ET with settlement occurring at 5:00 p.m. The Receiving Depository Financial Institution will receive a Same Day Entry fee of 5.2 cents for each same-day transaction (That’s right, we are seeing the birth of a new fee for merchants and financial institutions to squabble over for years, nay decades, to come).
If you’re a small credit union concerned about the costs of implementing same day processing the Fed feels your pain…to a point. In approving these changes it noted that upgrading to accommodate same day processing may impose new costs on smaller institutions but it concluded “that exempting small institutions would undermine the ubiquity—and therefore the utility—of the service.” It also rejected the use of a tiered fee system with smaller institutions getting more than 5.2 cents. Remember not all parties will request same day processing. The Fed expects that any additional expenses will ultimately borne by the customer requesting expedited settlement.
I know a few of my more astute readers are asking isn’t this old news? Yes and No. NACHA already approved changes to its operating rules in May 2015. The Fed, along with the Electronic Payments Network operates the ACH system and it requested feedback on whether or not it should go along with the plan. In addition, the fed has offered financial institutions the option of voluntarily providing same day settlement since 2010 but less than 1 percent of FedACH customers are using the service.
This moves the payment system one step closer to where it ultimately has to be: real-time clearance. As your average consumer gets used to paying at the checkout line with a wave of her IPhone and settling a bar tab by simply transferring money into her friend’s account the idea of a gap between payment and settlement won’t be acceptable. Here is a link to the Fed’s announcement and a link to a previous blog I did on the subject,
I’m a skeptic when it comes to customer service. All you have to do is visit a cavernous retail outlet with an abundant supply of everything but informed and courteous staff to realize that your average consumer is more than willing to trade service for a lower cost. I know that some people switched to credit unions out of disgust with banks, but I still believe that most of the disgruntled will end up going where they can get the best accounts and cheapest loans.
I’m bringing this up because it’s that time of year when senior staff and Boards gather to peer into their crystal balls and plan for the coming months and years ahead in an attempt to position credit union resources. In an ideal world your credit union could be all things to all people, providing great customer service, the cheapest loans in town and the most reasonable fees but the world is not ideal; No business of any size can survive doing all things for all people. Having put on my Captain Obvious hat, it follows that a planning session that doesn’t funnel staff and resources towards the areas where your credit union is most likely to see the greatest return is not a plan at all but a glorified wish list that leaves it up to staff to make the really tough decisions.
Against that backdrop one of the questions that most intrigues me is: Is customer service really worth it? This morning’s Liberty Street Blog contains an intriguing bit of research that attempts to answer this question in quantifiable terms. I would love to see someone apply a similar analytical framework to credit unions.
The researchers hypothesized that banks that spend more on customer service by, for example, maximizing the number of ATMS or hiring more staff at the branch level, do a better job of attracting core deposits than other banks, To measure this premise they divided the noninterest expenses of community banks with under $1 billion in assets in by their total assets. They found a clear correlation between the amount of money community banks invest in their service infrastructure and the amount of their core deposits. Specifically “a higher noninterest expense profile is associated with more core deposits, lower funding costs, and fewer liquid assets.” They suggest that one possible explanation for this finding is that “a bank that provides better services attracts more core deposits, lowers its funding costs, and, because it faces lower liquidity risk, holds fewer liquid assets.”
Does this mean that customer service should always be a top priority? Not necessarily. The research also suggests that there is no such thing as a free lunch. For example, those banks with higher operating costs also tend to have riskier lending portfolios. The researchers suggest that one possible reason for this correlation might be that the more “sticky” a bank’s deposits are as a result of customer loyalty the more aggressively a bank feels it can use these deposits. I would suggest that another possible reason is that these banks end up having more members precisely because they have lower lending standards not because of great customer service.
Don’t get me wrong. I understand that Banking is a customer service business and it doesn’t cost you much to expect your employees to politely deal with members. What I am suggesting is that a primary emphasis on a strong customer service infrastructure isn’t without some very real risks and may be a distraction from a discussion of the types of initiatives that really would increase your credit union’s growth. After all, there are many struggling credit unions that are beloved by their members.
Here is the research
Friday was a sad day for New York credit unions. In case you didn’t hear the news, two iconic credit unions, Montauk Credit Union and Bethex Federal credit union were placed in conservatorship and taken over by regulators.
Montauk was chartered in 1922. It has $178.5 million in assets. It specializes in making loans to finance the purchase of taxi medallions in New York and other cities. Since the late 1930’s, when New York City first began regulating taxis, the Medallion industry, distinguished by its yellow cabs and exclusive right to pick up street hails, had been among the most stable sources of credit union loan growth. In addition, the value of medallions spiked over the last decade reflecting increased tourism in the City and a search for higher yields. In 2013 they sold for as much as $1.3 million. But the emergence of Uber, which provides drivers with a low-cost means of entry into the taxi industry, has sent the prices of medallions tumbling. A recent decision upholding the right of Uber and other such services to pick up street hails so long as an App is used further hurts the industry.
On Friday I was talking to a credit union CEO who has participation interests in NYC taxi medallion loans. He has given these loans increased scrutiny in recent months and adjusted his ALLL to account for potential loses.
Bethex Federal Credit Union in the Bronx, N.Y has $12.9 million in assets was started in 1970. Its CEO, Joy Cousminer, is a leading advocate for small credit unions who has been honored by the NYS Senate for her work in the Bronx Community.
In June Bethex was one of the credit unions highlighted in a WSJ article reporting that 50 credit unions were identified in a confidential report from FINCEN for their increased vulnerability to potential money laundering. Here is some additional information.
Pressure To Settle MBS Lawsuits
Just how much money credit unions will get to offset their special assessments for losses stemming from the purchase of Mortgage Backed Securities (MBS) by the corporates may become clearer in the coming weeks. The Law360 blog is reporting that “ A New York federal judge on Friday gave Morgan Stanley & Co. Inc., Goldman Sachs & Co. and other big banks six weeks to meet face to face with the National Credit Union Administration and try to broker resolutions to lawsuits that claim the banks’ toxic mortgage-backed securities helped ruin multiple credit unions.” Stay tuned.
You can tell that the kids are back in school and everyone’s resigned to the fact that summer is over. The fact is that there has been more credit union news generated in the past two days than there has been for the entire summer. Here are some highlights with the usual caveat that the opinions I express are my own and that, lest you think I am suffering from forgetfulness, I reserve the right to circle back to any of these issues in an expanded form at a future date.
Board Meeting Results
At yesterday’s NCUA Board Meeting, the Board finalized an interpretive ruling increasing from $50 to $100 million the size of credit unions considered small under the Regulatory Flexibility Act. As I explained in a previous blog, the true impact of this change won’t be known until we see how aggressively NCUA uses the designation to exempt credit unions from regulations. According to NCUA, the change means that an additional 733 federally-insured credit unions fall under the enlarged threshold.
The $100 million ceiling is actually lower than some industry advocates had argued for, pointing out that similar designations for the banking industry can be as high as $550 million. In the preamble to the updated interpretation, the NCUA responded to these critics by pointing out that the $100 million threshold actually means that a proportionate number of credit unions will be considered small.
Corporates Thrown A Bone
As readers of this blog will know, I have been critical of the industry’s efforts to ensure that all credit unions, regardless of their size, have access to emergency lines of credit. Remember, the question is not if we are going to face another financial crisis, but when. Consequently, I am pleased that NCUA took a small step to help credit unions yesterday by giving corporate credit unions the ability to provide bridge loans of up to 10 business days to credit unions awaiting funding for loans approved through the Central Liquidity Facility (CLF). These loans will be excluded from the calculation of a corporate credit union’s net assets for purposes of determining their capital requirements. Much more needs to be done in this area, but at least this is a start.
NCUA Gets Another $130 Million for Corporate Stabilization Fund
While I was skeptical of how successful it would be, NCUA’a aggressive legal pursuit of the investment banks that provided failed mortgage-backed securities to corporate credit unions continues to bear fruit for the industry. On Wednesday, the NCUA announced that it had settled one of its claims against the Royal Bank of Scotland for $129.6 million. This settlement stems from mortgage-backed securities purchased by Members United and Southwest Corporate Credit Unions.
NCUA has now recovered $1.9 billion as a result of these lawsuits. We won’t know for several years just how much money can be used to reimburse credit unions for the special assessments they’ve had to make as a result of the MBS purchases made by the failed corporates. But with the NCUA overcoming significant procedural hurdles in recent months, it is possible that its litigation will ultimately result in substantial reimbursement for credit unions. Chairman Matz deserves credit for going forward with this litigation.
Do Banks Have Reason to Fear Credit Union Loan and Membership Growth?
American Banker is reporting this morning that “credit unions are adding members and loans at an accelerated clip, though the accuracy and relevancy of these numbers are up for debate.” The article points out that for credit union advocates this increased growth is proof that people continue to lack confidence in the banking industry. To credit union critics, statistics on credit union members are both unreliable and misleading. For example, our good friend Keith Leggett concedes that while there is still some dissatisfaction with larger banks, a lot of the new credit union members “are basically members in name only.” (e.g. they are becoming members to get a car loan with no intention of doing more of their banking at the credit union)
I actually think both the critics and supporters of credit unions have valid points in this discussion. Skeptics are right to point out that a lot of membership growth is somewhat shallow. The metric that the industry ultimately has to work to improve is the number of consumers for whom the credit union is their primary financial provider. That being said, capital constraints permitting, every time a member gets a loan from a credit union, credit unions are provided with one more opportunity to make a sales pitch. Considering how difficult it is to get people to switch accounts, the sheer volume of people taking a look at credit unions should not be underestimated. Furthermore, the banking industry continues to minimize consumer dissatisfaction with its Great Recession antics at its own peril.
On that note, let’s have a nice weekend, with a special thanks to all of you who showed up at the Association’s Legal and Compliance Conference this past week.