Tell Me Why I'm Wrong

Feat. Randy Karnes

NCUA’s slow, self-serving march towards examination modernization

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They are more content with reinventing the wheel and spending than learning from the industry

In a recent letter to federally insured credit unions, McWatters and the NCUA outlined some examination modernization initiatives. My first reaction was one of bewilderment at several of their statements given my interactions with both NCUA personnel and state regulators in the last few months.

We have been in multiple conversations and presentations with various NCUA staff and administrators for several years about exam innovation and implementation strategies. There has not been a single case in which we were not politely heard out and then, just as politely, blown off. They seem to feel that collaboration with those they regulate would be a waste of their valuable time and unlikely to add any value to their own intellectual and institutional superiority. From my many meetings and contacts with NASCUS leadership, it is certainly clear that the NCUA holds its state regulatory peers in the same regard.

At a recent update on the ESM initiative they revealed that a major component of their initiative, the Credit and Deposit Analytics Solution, would be delayed due to a lack of off the shelf vendors with a ready to use analytical tool that meets their specs. Their research of their fellow FI federal regulators has revealed that those organizations have built their own custom software for this purpose and that the NCUA will, of course, follow their banking cousins and pursue this custom build path as a new strategy.

Not having been allowed to see the 2017 RFP for this entire project, we don’t know in any detail what the specs for this tool are, but we had shared and shown both McWatters and the Exam Flexibility Committee chaired by Keith Morton, back in 2016, the earliest versions of Analytics Booth (then My CU Today), which we were told did represent the kind of analytics capability they would be needing in the future. Since then, when I bring it up I’m rebuffed. Now I don’t know if we even would want to be federal contractor, but you’d think they would at least reach out to learn more about our efforts. Personally, I think they like spending our members’ money more.

At the same time, we showed them what we had done with Wisconsin regulators to facilitate a test of remote examination tactics by using Virtual StrongBox. Few know that the agency has been on the hook for a September 2015 recommendation of the Inspector General to start using a secure FTP in their examination protocol. Even though their response to the IG in 2015 was that they would have such a tool by year-end 2015 and then later by year end 2016, it has yet to be implemented. The letter described above promises a release of a secure FTP later this year after further testing. Imagine that your credit union had an outstanding audit exception for close to three years! Especially one concerning data security! I’ll believe that they have a working model to move member data securely when I see it.

I congratulate Keith Morton on his test of virtual examination strategies in Region 4, but really, a reduction of onsite exam time by 35% should be unacceptable. There should be no excuse for not being able to remotely review everything from high-level institutional data to individual digitized records like member loan files.

Lastly, unless something has changed in the last three weeks, my contacts with NASCUS have indicated that to this point they have had no formal or continuous input into the ESM initiative (including the AIRES re-write) and any development of FLEX, the Office of National Examinations and Supervision (ONES) Data-Driven Supervision or Virtual Exam Protocols. There was a joint meeting of NCUA and NASCUS regulator board members at the NASCUS State Summit just 3 weeks ago. I’ll be checking if, as the letter might suggest, there has been a long and deep working relationship between the parties, when it has seemed to be 180 degrees opposite of that type of brotherhood.

We’ll be continuing to watch this activity closely and as NCUA makes changes to their exam protocols, we will be making sure that credit unions can leverage those changes to lower their cost compliance. I’m calling on credit unions to let their representatives know about your concerns regarding this waste of money in the name of progress. Tell Me Why I’m Wrong.

What is showing its age more, your board members or your board approach?

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Be careful what you ask for—younger board members might not like what you’re selling

You want younger board members, you can’t handle younger board members! Or replace the word “younger” with some other characteristic you’re looking for: more business savvy, more technical, more mission-based, more member-focused, etc. The bottom line is… have you changed your approach to teaming with board members as a resource to be more?

How young is your approach? Is it a carryover from when your current board members were 33 years old? You might have changed from paper reports to digital ones on a tablet, but are they the same reports? You might have changed the order of the board sections, but have you really changed the board content? You might have moved from a Tuesday evening to a Thursday, but have you added or reduced the number of meetings you have per year? You get the point.

It’s tough, scary, and an uphill battle with traditionalists to upset the apple cart, but when you do bring in new board members, even one by one, the traditions are what you teach, not what they demand. Are you the reason that your credit union makes old souls out of every board member you attract?

Often when I meet 80-year-old-plus board members I find that they have stuck around not because of what is happening now, but because they remember what happened when it was “fun, rewarding, and real” for them as volunteers. They remember when they were part of building the credit union, not just rubber stamping someone else running the joint.

And right there is the key to how you need to make young board members feel today. They need a job, a purpose, and a role from their perspective not yours, not the NCUA’s, and not from the perspective that the place is on auto-pilot.

As a CEO, whether with 50 or 5000 employees, it can seem that you too are watching a business operation that is on auto-pilot when you think about the Monday to Friday operation. You can feel that you are supervising the operation and a board is a redundant asset helping you oversee something that cannot afford anymore supervision. So, you already feel marginalized, and you might be doing that to your board without even realizing it.

Just like you, they need to build something, to sense that they own something, and that their skills are important to something. Renew those feelings in your board and it won’t matter how old they are! They will engage what is being built, they will take interest in what they own, and they will get the pride of being important to it all.

Shift from blaming generational issues on your board and tackle the generational stagnation of your organization’s approach to the value of owners and their volunteering. Build something, if not just enthusiasm, and you will see a change. Tell Me Why I’m Wrong!

Why do we count on CEOs for success?

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Work hard to listen to the crowd, but CEOs are still the key ingredient

For over a decade, I’ve invited credit union CEOs from across the country to come to Grand Rapids and attend a CEOs-only event involving learning and discussion—and they’ve been greatly successful. A day and a half of teaching, and a full day of round table discussion (during which I did my best not to dominate the conversation!). We’ve had great conversations on the hot topics of the day, from compliance to service income, learning from peers, building businesses, and putting data into action. We talked a lot about the things we wanted to do or should be doing. Outspoken CEOs and I implored credit unions to listen, and to act. Some have, but many haven’t.

A couple years ago I introduced a different kind of event—boot camps for solution builders and data-minded individuals. These have also been eye opening for me, and we found CU designers across the network who were eager to come in and not just talk about what we should be doing as a CUSO, network, or industry, but to have their hands in the bread making. We’ve built tools and features together that our credit unions are now using today or will be using in the future. In many cases, however, the individuals in attendance, although eager to help build and implement solutions, didn’t always have the power at their own credit unions to make change happen.

So when it came time to start thinking about our annual CEO event, I recognized that credit union CEOs have the responsibility of being the intersecting point between what the CUSO should do and what CUs will do with it. Unless CEOs do their job for both sides of this question, we’ll never effectively match solutions with the efforts of CUs in our network. If credit union owners are the heroes credit unions need to survive long term, CEOs represent the owners of our credit union industry, and we need them to take ownership of its success. Not all CEOs need to be active. And the same CEOs don’t need to be active every time. But we need a healthy community so that there is a material group of CEOs active at the right times.

With that in mind, we made the decision to change what was a popular teaching and roundtable event into a more intensive boot camp experience where CEOs won’t just talk about what they want, but will take part in the strategic development of that future. In our case that means helping design new products and services for the future of our credit unions, but the same should apply across the entire credit union industry. Credit union CEOs need to be the heroes we count on to attain the future we want for our industry. Tell me why I’m wrong.

Trusting the work to capture the attention of owners is worth it in today’s credit union world

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Momentum is picking up around the idea of being more aggressive in developing an ownership community as a key credit union strategy and tactic. The more CU professionals see that it takes active owners (pioneers) to start and sustain credit unions, and passive owners (the indifferent) to end them, the more they are seeing active owners as the heroes in their credit union’s story. Add to that the growth of data and demographic tactics in CUs and who knows… maybe categorizing and cultivating members who think and act like owners might even be a long-term trend in CU operations going forward.

Only fly in the ointment? It takes work, and as we know in credit union land these days very few people trust the tact that work and sustained efforts are worth it without a clear ROI. It’s an accounting thing, or maybe an underwriting thing, but it just seems like credit unions want the black and white ledger calculation telling them it’s ok to expend the effort or risk their members’ money on such things.

And here is where it all falls apart. We will spend all kinds of “at-risk member’s money” to attract a potential consumer to our products. We love the high of a purchase, or a “yes” to our service and revenue generating products. We love the black and white accounting of something offered, something taken; there is a buzz in the value exchange. Consumers’ money, attention, affirmation, etc. for our corporate offerings. So why don’t we have something to sell consumers to be owners? Something that gave us all a buzz – something that said the consumer gets it! So we would get it.

We need to craft a different future, even if it is only for the credit union professional’s benefit. Members understand that ownership generally comes with a “transaction”, but the $5 par deposit as an ownership transaction just is not cutting it anymore. It’s forgotten as soon as it’s done; just the cost of opening an account. What then? How do we make ownership real in the minds of members, and beyond a simple one-time exchange? Stock?

Either way, an active ownership community within our overall member community is an asset! That asset has been undermanaged for years if not decades as credit unions have fought to develop their consumer communities. It may take a revolution related to data analytics to shine a light on the demographic and the value of these members, but as more and more CUs face moments when only an “owner” can make the difference, I hope it is not too late to do the work to turn the tide for many of the credit unions who are learning the difference between agents, consumers, and owners! Tell me why I’m wrong!

Not a peep on the NCUA Inspector General’s recent report

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What does it take to get our attention?

Did any of you notice the damning NCUA Inspector General report released on March 14 addressing the audit of NCUA’s Comprehensive Records Management Process? I dare say that any federally chartered or insured credit union that chose to ignore NCUA regulations to the degree that the NCUA staff did with the Federal Records Act of 1950 and the regulations of both the National Archives and Record Administration and the Office of Management and Budget would be facing serious censure. Any credit union executive would probably lose their job if they further knew about these shortcomings for over a five year period and not only failed to take corrective action but also seemed to be less than forthcoming about these failures to the agency board over a similar period of time.

The IG audit covered a period of 2012 to 2016.  It was mid-year 2017 before the NCUA Board approved development of a full-time division within the Office of General Counsel (OGC) to manage day-to-day activities of records management and January 2018 before management issued a records management policy that addressed current federal laws and regulations. The prior six years, under the authority of the Office of the Chief Information Officer (OCIO), the audit is a story of misplaced priorities, ignorance of federal laws and regulations, obfuscation of the failure to act, and ineptitude in system development. Can you imagine an agency email system which is required to retain emails but lacks the capability to easily search, identify or retain those emails? Here is an especially descriptive quote from the IG audit:

“As shown throughout our report, decisions made by NCUA management to address records management requirements negatively affected the agency’s implementation of sound records management program.”  (“Audit of NCUA’s Comprehensive Records Management Process”, pg. 8)

Here’s another addressing intra-departmental communication:

“Specifically, we found that executive management did not timely or accurately update the NCUA Board on records management, offices did not effectively communicate with each other, and management gave limited guidance to staff on how to handle records in the conduct of their day-to-day duties.”  (Audit of NCUA’s Comprehensive Records Management Process”, pg. 10)

So that you can place this limited sampling in the proper context of the total report, I suggest you go to the NCUA website for the full report. One warning, you will not find this report prominently highlighted on the front page of the web site.

There’s an APB out for CUNA and NAFCU

Every bit as concerning as this audit should be to all of us, I am just as shocked by the lack of attention to the audit paid by our well-staffed and well-funded functionaries at our advocates CUNA and NAFCU. Try a search of “2018 NCUA IG Reports” on the websites of both and you’ll come up empty.  Not a word of concern from the guys who are supposed to be paying attention to the goings on at NCUA on our behalf. Must not have been a big deal to them that the same agency that just stuck their federal finger in our eye and grabbed billions of credit union capital in the distribution of the TCCUSIF, all in order to grow the pot of funds available to pay for the ineffective management highlighted by the IG. Do we really expect that the same OCIO that couldn’t keep track of emails should be trusted with the $25 + million budgeted for the ESM (Enterprise Solutions Management) initiative? Who’s keeping an eye on our federal agency and holding them accountable? Tell me why I’m wrong.

Check out this exchange between Randy Karnes and Susan Mitchell

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A conversation on innovation, collaboration, and CUSO executive compensation

I recently attended an Underground Collision session at the 2018 NACUSO Network Conference during which Susan Mitchell, CEO of Mitchell, Stankovic & Associates, and I discussed many topics ranging from innovation to CUSO executive compensation. Check out this excerpt from our exchange and be sure to check out the full article at the Underground website.

Sue:  Credit Union Service Organizations were started by credit union leaders as a for-profit, entrepreneurial endeavor to add value to members and generate income! Think of the early days of CO-OP, PSCU, CUSG, CU Direct, Shared Branching and CU*Answers. These collaborative efforts started some of the largest, most successful business ventures in the credit union industry and have returned significant dividends to the original investors, not to mention the impact on credit union owners and charitable causes. Is this true today or have they have become competitive ventures that may distract from the credit union mission?

Randy:  I always think of CUSOs as being started to expand the powers of credit unions. CUSOs created the ability to diversify the cooperative tactics and expand on the idea that if a community owned a cooperative venture then they should have the chance to leverage it for even more value. Why have a one-trick-pony venture? If we can do this, why not that. Cool idea. Now the natural extensions usually come in two flavors – financial service extensions or emulating vendor solutions from non-CU owned entities. But the spirit of the design to DO MORE with your cooperative owners is a cool idea.

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What helps you sleep at night might be the very thing guaranteeing your demise

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Is our trust in the power of the NCUA, our need to be compliant, and our faith in old designs the reasons our results leave us with a shrinking existence?

Recently Chip Filson emailed me wondering where to go next with his series on the NCUA’s management of the Temporary Corporate Credit Union Stabilization Fund and distribution. Good work, strong arguments, and passionate about the need for all of us to push to right the wrong in the way history will record this solution. It most likely has run its course, and Chip was wondering how to sum it up, push it forward, or reconcile all of that work against the dismal response from our industry. And while I have seen some recent angst when CU CEOs compare their refunds to their lost investments for the bailouts, I imagine that this episode will go down to “it sucks, but it’s how the world works.” I thought I might share my response to Chip with you.

“Chip, I hate that I am writing this, but like you I wonder – will your diligence pay off here or is the machinery (NCUA’s propaganda efforts) going to roll on by as the parade watchers (credit union stakeholders) turn their attention to new attractions? There is probably not a good reason to expect action from anyone in the CU industry and a tiring reader base, so who could you appeal to that might want to make a stink about this at a higher level? Government watch dogs, a higher-level player who wants to point out sins of past administrations or solutions, etc. Most likely no one. I believe we should now think more about the future. How can you stage this not to be just about righting the past (NCUA mismanagement), but to be more about changing things today for the future? Who might want to be on the NCUA board and sees this mess as a campaign plank for their election/selection?

I remember the day my father told me that he and my mother did not have control over the world and how it would treat me. It struck me that maybe I was smaller than I ever realized in relation to everyone else around me. I could not appeal directly to the powers that shaped my world; I did not have a voice that was easily heard by those who could ignore my hopes and dreams; I was afloat and the concept of control of my own destiny seemed a child’s fairy tale.

It is possible that the credit union industry will one day face the same “in your face” awakening about much of what is fears and embraces about the NCUA and regulations as a motivator and comfort. It will see that false hopes in the NCUA, our insurances independence, and our government’s backing of cooperatives. Will it crush us or free us? Will we go silent for a lack of thinking anything will change or will we search harder for the right people to influence and push for what we need? Will we be even less likely to push the edges of design or debate with examiners as powerless messengers of a system without representation or will see the need to agree to disagree and act to shape new destinies with our consumer-owners?

Without a doubt the real powers in our industry already understand the false hopes of counting on those who really are not empowered to change things. The winners in our industry already see that “going along to get along” with directors and NCUA messengers fits their short term existence, but there is a potential that one day the rest of the industry will awaken to the idea that compliance with someone else’s ideals for what they should be is only a suggestion, not the iron clad, all empowered design for success. It is time to reach for more, time to jump the track and push for a new regulatory approach.

We need to elect or influence the election of NCUA directors. NCUA director candidates must be able to declare platforms that they believe in, and will work towards. We need an agency that has a CEO who can lead the agency and work with directors. We need a functioning entity with cause, vision, and something more than a governmental employee’s hope for a long-term job and a pension. We need a future where the industry understands the boundaries that both constrain us and foster us – the boundaries that we evolve with an agency willing to be transparent and communicative on par with their expectations of us.

And while much of this seems like a fairy tale’s outline for change, I would rather work on that than suffer working through fooling myself that the current design of the NCUA will ever yield different results.”

Wow! Looking back I managed to vet a whole lot of stuff, include mom and dad’s teachings and fairy tales… but did I say anything that will inspire Chip to push credit union leaders to act differently? Can we change our behaviors in response to recognizing through our faith in these systems we have adopted bad habits that need to change:

  • Over capitulating to external powers
  • Over paying for compliance without searching for not needing to comply–both rules and the peer pressure of “best practices”
  • Put seat warmers on a pedestal without examination, and accept committees as leaders over our vision empowered
  • Over trust group think and under trust their community’s needs – their local membership needs
  • Count on others more than we count on ourselves

I know all of us like to go to sleep thinking that while we sleep the good guys are on duty and through their powers of control we have nothing to worry about, but I am quite sure that we all need to rethink trusting the NCUA’s powers to fix things will suffice. We overpaid for the Corporate Crisis and will for every crisis if we do not. Tell me why I’m wrong.

P.s. Most nights I do not sleep because I know that my world is safe in the hands of those in control, I sleep trusting with faith in the fact that every day members have goals that inspire our efforts, our work, and our hopes. There is freedom in trusting chaos and yet unrealized success.

It’s is not the amount of data you need, it’s what you do with it that matters

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A Q&A about getting started and remembering to share your data

Introduction:  If you haven’t noticed, it seems like every CEO is having to answer a lot of questions about how and when they are going to dive head first into revolutionizing their firms with data analytics efforts. CU*Answers’ Asterisk Intelligence project is getting a lot of attention these days from our allies, competitors, and commentators. From time to time I get asked some questions that might be worth sharing with you all.  Here are a couple from last week.

Q1: What is the minimum amount of data any CU needs to get moving? Is there a magic number for how much data is needed to effectively deliver insight and drive decision-making?

My short answer: the volume of data needed is a variable most valuable to those selling data, not those using it. Right now we need businesses focused on using data as an art form.

The amount of data is not the right question credit unions should be asking themselves at first. It is the intent that organization has towards data that separates those who succeed and those who struggle. I believe that this is one of the reasons that most CUs are so far behind the curve in relation to other industries:

  • They lean towards efficiency over effectiveness
  • Focus is on ROI, black-and-white ledger totals versus ROL (return on learning) as the foundation for what to do next
  • They are slow to trust shifts in norms, and resistant to shades of grey and variations in their accepted rules of thumb

After adopting new intent towards data, the organization must consider their ability to process or refine data and the yield from the work in doing so. Will they act on insight? What is the proper investment for the amount of effort they will put in to refine it and then to act on it? There is gold in them there hills, if you go up there to look. An organization must look at its leaders and see what motivates them to act, and what kind of processes lead to the strongest response. Some teams lead from an income statement or balance sheet and need very little else; some teams lead from their response to board members and very little else; and some teams lead from their response to experts/regulators and little else. How will that change if you decide to drive decisions from data? If you cannot say it will, save the money.

“Randy, you didn’t answer the question.” Well, the amount of data you need depends on the areas of analysis and the different variables they entail. What constitutes a trend? What is the proper age of data? What correlation to your audience specifics do you need? What are you trying to do with the insight – sell something, invest in something, win an argument, predict something, etc.

Remember most CUs just want to record something for compliance’s sake or gain confirmation and earn affirmation. Actually using insight to up their game is farther down the hill. For the average CU today, I wish they would simply excite their owners with trust and access, let their members feel like the data positions themselves as insiders trusted, and stakeholders empowered.

Q2: CU*Answers has set its sights on offering both shared data analytics services and infrastructure and solutions for the “do it yourself” turn key CU teams.  Do you think a product like Analytics Booth will be valuable to both market spaces? Even if my CU started with OnApproach as our foundation?

Without a doubt, because the designers of both shared data analytics and business intelligence teams have the same problems in delivering long term value. First, build the infrastructure and factories that set the foundation for the analysts to do their work and generate value, and second, build a team of analysts and actors to turn insight into realized value and gain. In the end, the insight and intelligence has to move outward as a distributed function to be successful and products like Analytics Booth do just that!

There definitely is a role for Analytics Booth in CUs that go forward with their own solutions. Internal teams are about centralized process management, infrastructure, and controlled project sets in general. They do not often have goals for audience management, distributed processes, engagement, and self-service-self-starter interactions. The systems they build are subsets walled of in networks, and they have long lists of things to do before they go external to the net, planning rooms, and the offices and homes of external stakeholders. In essence, they are not built to exchange insight and data like currency in the beginning. That is Analytics Booth’s primary focus – build trust, leverage insight, reach out to stakeholders and let them contribute. Data is an asset best leveraged for insight and best positioned when many have the chance to look at it.

Note: Internal teams have a lot to do – and invest. It can be overwhelming and demoralizing if they cannot gain traction quick enough with a distributed audience to gain support for continued investment. AB is only one answer to this problem for internal developers. The ASAP (Ask See Act Profit) concept that says data insight must be ACTED on with muscle memory and default to action is another issue Asterisk Intelligence is working on to support the internal development dilemma. Check it out!

What questions might you have about your next steps to go active with a business intelligence or data analytics effort? Let me know.

Is Amazon a disruptor or a distraction?

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Stop worrying about “threats” and focus on our real advantages

The other day a credit union CEO sent me an article about Amazon potentially working on offering checking accounts to its customers. He wondered: “Why do credit unions ‘suck’ at telling our story? Is this an industry issue, local issue, or generational issue?” My take on this potential disruptor…

  1. Amazon is great at drawing attention to itself as a potential disruptor (e.g. drone delivery!)
  2. Amazon is great at attracting capital and endorsement alliances – health care insurance, etc.
  3. Amazon is great at redrawing boundaries where there are no boundaries – the internet, low regulation, and virtual relationship spaces.

So, the article is their MO and just another chance to stir the pot. Not necessarily unique, just a nice moment to grab some attention and see what falls out on the ground. I would bet the first thing is some large international banks that would like to have Amazon front a lot of checking relationships…maybe even the one that is involved in the health Insurance play.

As to telling our story… our story is LOCAL in 99% of the cases. Some of the emerging 10s of billions of dollars sized firms have other aspirations and opportunities, but for the rest, LOCAL and its genuine affinity is the only competitive advantage that we can leverage. What makes it genuine is the cooperative ownership structures and intent. And LOCAL can be an impactful story locally, but never on par with the reach of OPEN MARKET players. It is what it is, whether we “suck” is a matter of opinion, but judgement should be based on how we tell our stories locally against other locally leveraged players. Amazon can claim local consumer prowess, but not local genuine designs – thus its issues with sales taxes, and other competitive impacts on local players.

What is genuine about your local advantages, intent, and practices beyond just consumer ideas? How can you make those advantages bigger, sincerer, and counted on in the minds of every stakeholder you have – including you? Confidence in these needs to shine through as calm, indifferent to games you cannot play or change, and through your default responses. You live and die by your trust in the duality of your local community both as consumers and owners of their own designs. Win or lose… and how can you lose if you follow them as much as they follow you?

Remember that some people in our industry overplay the idea that our movement is not a local one, and therefore burn up a lot of resources and break hearts when they organize forgetting the need for a proper tone of a large local movement. We need local as an affinity, local as respecting autonomy, and local as seeing that it is owned by consumer communities versus an open market affinity, too much respect for group think, and thinking agents decide.

It’s not crowd control that we need, it is crowd inspiration we need to move the ball for individuals wherever they are. What you are doing is far more important that what the movement hopes to inspire. Do the work, we have a movement—worry about the movement more than the work, we have nothing.

I like the book “The Subtle Art of Not Giving a F#&%” for this reason… there are just a lot of things outside of what we do that has little bearing on what we can do. Tell me why I’m wrong!

A 21st century model for de novo credit unions

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Are newly hatched credit unions being cannibalized by the industry?

I was channel surfing during the holiday and happened upon one of those Nat Geo shows about survival in the wild. It was striking that among all the threats to newly hatched crocodiles the biggest killer of baby crocs was other crocs. Sound familiar? There’s no secret about it, a new credit union start-up has about as much chance of survival and a normal growth pattern in today’s marketplace as a newborn crocodile. Much like life in the wild the new credit union faces many challenges to its survival, and much like the young crocs the greatest threat may be viewed as coming from its own kind.

Now I don’t mean that other credit unions and credit union institutions purposely make survival difficult for a de novo, but I do think that as a network of shared values and commitment to cooperative principles, we should be doing much more to help to guarantee the success of all new start-ups, and we should fight for that survival with the same fervor that the investors in a de novo bank will fight to protect their investment.

While there are many among us that think that the continued decline and consolidation is in our collaborative best interests, please don’t count me among them. New start-ups are about new ideas, new people, new excitement and new blood in an industry overwrought with risk aversion that often overrides the best interests of our owners. It wouldn’t be too much to say that anything new—procedure, policy or product—is more often initially viewed with excessive skepticism.

Admittedly, my position is an anecdotal composite of my 45 years in credit union management and consulting and not a peer-reviewed academic study of the success ratios of new credit unions. We can agree that a network of fewer than 6,000 CUs that continues to contract in the asset ranges of its smallest institutions will logically bring us to the assumption that any ne devo credit union will be fighting the same battle for survival.

Here are some of the obvious threats to a de novo start-up and some collaborative solutions.

Capital

Much of what challenges any small credit union, but especially a de novo, is the limitation of a small capital position and the corresponding strategic and operations constrictions. ALM strategies, loan policies, costs of operations, new member acquisition strategies, identification of qualified staff and the human resource expenses related to that staff, all of these considerations and much more will squeeze start-up capital positions that will most likely be worst case between $3-5 million or best case between $5-10 million.

Remember the home-based credit union model that was the incubator of hundreds of credit unions since the Great Depression? (I’m talking about the 1930s, not 2008-2014.) The complexities and competitive pressures of today’s financial services market ensures that those days are unlikely to return. Even the volunteer nature and self-sacrifice of many credit unions’ founders is unlikely to play a significant role on the financial success of a de novo as it did in the first half of the 20th century.

Regulatory limitations

What kind of services and products would it take for you to switch from one FI to another? Credit cards, mortgages, brokerage services, mobile services, small business loans, convenient hours? For the modern consumer today, it’s a fair guess that it would require this much and more in terms of a menu of financial solutions. How is any start-up supposed to succeed if you must tell prospective members that you only offer a few core services and you don’t really know when you’ll be offering others? That’s the regulatory box that de novo credit unions face.

Our own federal regulator/insurer automatically limits the chances of success because of financial risk aversion and a natural fear that the de novo lacks the expertise to manage modern financial products and delivery channels. Better for the small to disappear and the large to expand. It’s tough enough to survive with limited capital, but practically impossible without meeting the product and service needs of your potential members. Can today’s technology tools and a new de novo strategy overcome this barrier?

Leverage the network

Who’s responsible for the future health and success of our network of credit unions? We are! All of us, credit unions, CUSOs and affiliated partners should actively pursue those strategies that allow for a healthy de novo environment. We should act as collaborative partners in much the same way that private investors facilitate a de novo bank. We must lend our collaborative expertise, established delivery channels and the strength of our balance sheets to ensure the success of a de novo.

How does a de novo ever grow if it has to tell members that because of limited capital or liquidity it can’t accept a large deposit or has to ration loans? How does a de novo prove itself to new members if they don’t have access to full service debit and credit plastic programs? Why can’t that de novo find an established CU partner who will participate in any lending activity that can’t be met by the credit union? Why can’t a start-up make mortgage loans if it utilizes the expertise of a well-established mortgage CUSO for everything from application to closing to servicing? How about meeting the small business lending needs of a de novo member? Why not offer a robust brokerage services program for alternative deposit and investment options? Surely we can identify and gain the support of a CUSO or credit union to meet those needs, without the new credit union having to give up its branding rights.

You might say that this strategy limits the revenue potential of the de novo. It becomes much more dependent on fee-based non-interest income than spread, so how does it pay the bills? It utilizes trusted network partners to the maximum of those solutions being available. For starters you can look to the CU*Answers Scholarship program which provides two years of free core processing for any de novo. What is no cost core processing and all of its electronic delivery capabilities worth? I’m told that you can calculate that being approximately $1.50/member/month.

What kind of savings would a de novo appreciate using networked outsourced back-room operations, like an in-bound and out-bound call center, accounting services, compliance services, credit decisioning, data analytics expertise, lock box services and many operational functions that often test both the financial capacity and skill sets of a de novo. I certainly believe that it is both a fiduciary responsibility and sound strategy for a de novo board of directors to oversee an operation that utilizes a strategy that lowers the cost of services to members, provides the highest level of professional operations and provides the flexibility to meet the changing needs of its owners/members.

Adoption of new delivery channels

Many of today’s credit unions continue to be plagued by the burden of legacy brick and mortar branch networks. It’s tough for many of today’s CEOs to tell members that one or many branch locations are the best use of credit union resources to meet the changing needs of members. Today’s de novo doesn’t have to deal with the fixed asset costs of a physical location for service delivery, not if you start from the position that all products and services will be provided through virtual services like home banking and mobile banking. That cash can be delivered through shared ATM locations, and that loan services can be delivered via any device plus a human call center or video services, then the de novo has only to support the physical location needs of management and those operations that are self-managed.

A support consortium for de novo opportunities

Organizing and starting up a new credit union was a relatively straight forward exercise in the 20th century—as we’ve seen, this is no longer the case. Fortunately, we have the resources within our national credit union network to support a healthy and vigorous de novo environment. First and foremost is the availability of credit union capital. The strategies for capital deployment among credit unions are atrocious and greatly mismanaged. Few credit unions have come anywhere near their regulatory limitations for investment in CUSOs or other allowed activities. Do we begin to walk the talk about being cooperatives with a shared vision and start to identify underutilized capital that can be leveraged to support de novo strategies? Can a consortium of committed CUs be identified that would have pools of capital investment available for supporting a healthy de novo environment?

Secondly, the consortium could support the need for de novo loan participations. In the start-up period loan demand often exceeds deposit growth. It sure doesn’t send a good vibe out to your potential new members that you may not have the capacity to meet their loan needs, either by dollar amount or loan type. A network solution that matches de novo loan demand with supportive participation partners is sure to increase the long term viability of a de novo.

A third function in a consortium of de novo supporters can be filled by CUSOs. Just about every daily operational activity can be supported by a CUSO whose business model is to provide an outsourced solution for the credit union who does not have the scale or expertise to offer or manage certain products, services or delivery channels. Supporting the de novo environment is another way to expand the market for any CUSO in any line of credit union business.

This same consortium of supportive credit unions and CUSOs can play a considerable role in educating the regulatory community of this realigned business model for new credit unions. The regulator needs to adapt to the new energy around the de novo that represents a network wide support system for new CUs and provides levels of expertise and financial support that have never been seen in the past.

Finally, we need to build a comprehensive marketing effort to build awareness among those who share a common bond that starting a credit union is an achievable goal and that there is a capable and well-resourced network of supporters available to help them. Those who have been around for a while can remember a time when this was one of, if not primary, functions of state leagues. Most leagues had a dedicated individual or group of advisors who traveled the state supporting the organization of new credit unions both pre and post chartering. It is a common theme that we have heard from those wishing to start-up a credit union today finds such resources lacking. They are most often directed to NCUA as their primary source of information and guidance. Let’s see… an agency dedicated to small credit union merger as a strategy acting as primary advisor and cheerleader for the de novo credit union. Sounds disastrous to me.

Meeting more aggressive goals

Much like the private investor in the local community bank, our credit union network needs to recognize the power and opportunity of co-operative ownership in new credit unions and the vitality that brings to all of us. Leveraging the co-operative business model not only acts as a force multiplier for our shared efforts to gain market and build our co-operative brand, but it puts all on notice, the general public, legislators, regulators and our competitors that we mean to fully exploit what we believe to be our social and economic advantages. It is the proof that we will not be satisfied to continue to see a contraction of the number of credit unions nor the minuscule position we hold today in the retail and commercial financial marketplaces.