Tell Me Why I'm Wrong

Feat. Randy Karnes

The risks of vendor consolidation on the credit union industry

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By now you’ve probably read about the announced Fiserv-First Data merger. In an opinion piece, one person suggested that “small banks and credit unions fear big fintech.”

“Fear” is the wrong word here though. It should have been “CU Thinkers See the Long-Term Challenges in Vendor Consolidation.”

It is not just competitors merging here that should concern credit union planners and leaders. It is the consolidation of focus, project resources, and price to ROI expectations that should worry a niche-based industry like the credit union industry. When the vendor marketplace or the industries that support a marketplace design, like financial services, become so out of proportion with segments of customer niches, then those niches are mandated to more and more.

Those niches, in this case credit unions, struggle with each renewing contract and acceptance of norms other than the ones that they count on to propel their unique success. What appears to be simply buying tactics at one level of the credit union becomes accepting new conditions that change the very culture and business approaches that once were the defining differentiators for credit union success.

  1. Focus – As these super-firms–these glaciers–set their marketplace priorities and execute their plans, they will continue to marginalize credit unions and their drive to be unique in a commoditized, externally defined marketplace. How will CUs set their own unique priorities?
  2. Project Resources – With vendor consolidation combined with resource scarcity we see in the labor markets, these recombining firms have less project management focused on niche marketplaces and the concerns of those marketplaces to project manage CU adjustments and change priorities.
  3. Price – Does a vendor design its prices for its success or to the needs of its clients after absorbing the prices cast upon them? CUs are increasingly becoming price takers and massagers through CU distributors like PSCU, COOP, etc., but less so price innovators through ownership or via their own manufacturing of solutions.

While some segments of the CU industry believe they can grow and keep pace with the scale that can keep them in the game with these firms, other segments will feel these pressures growing. Credit unions are not just struggling with the need to compete with other financial service segments for consumer connections, they are or will struggle to find a vendor focus that does not simply press them into being weaker versions of their competitors via commoditizing of their business models – not just their tools that support their products. And like cancer, one day you wake up and find you’ve been eaten from the inside out, and the body does not respond to the mind’s desire to execute its own plan.

CUs must continue to prioritize their own uniqueness, and that is the ownership model. Cooperative ownership is the key to being the manufacturer of price and culture even in spaces that seem dominated by commodity tones. Pushing to design prices that allow a client to earn out on the investment, pushing to focus resource and project management based on the timing of the client, and pushing to ensure that models for shared and cooperative execution come to the forefront.

We are an industry of cooperatives, and that required sense of connection is important to our futures. Only ownership can prioritize disruption of the status quo, competitors, and the core of innovation. Cooperative ownership of our solutions is the key to:

  • Price Disruption – to ensure our cooperative models can earn the ROI on the prices they pay.
  • Access Disruption – to ensure that the things CUs need are not walled off from them or relegate them to the back of the line.
  • Execution Disruption – to ensure that when service engagement options need cooperative alternatives, they are there.

Protecting the decisions and mechanisms for maintaining our differential is the mandate for the future. Whether it be in our dismay about a regulator who seems as resolved as ever to a one-way model for financial service firms or about the fact that we increasingly rely on vendors where we are only an afterthought in their strategies, we all, the customer-owners and members of credit union cooperatives, should not fear the future. We should simply mandate the future to the greatest extent we can by mobilizing active ownership in every level of our value stack or vertical capabilities.

Tell Me Why I’m Wrong.

The new norm for credit unions should be a return to a norm seemingly forgotten

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Last month, Randy sent out an email regarding a generational approach not to how credit unions view their consumer-owners, but how they see themselves and their own staff. He posed the question of whether CUs and CU leaders are self-aware enough to expect norms to change or do they just find themselves out of sync with where they are today and behind the gun. How will new generations of leaders decide what it means to be a credit union moving forward? I took up the intellectual challenge and suggest the following…

Future executive and managerial skills will need to be fine-tuned to meet the evolution of the credit union into what I would call a “pure financial intermediary.” In the purest sense, tomorrow’s credit union would act more as a broker of the member’s financial needs, all while controlling the brand identity of the credit union as seen by the member/owner and the general public. To be successful, small, medium and yes, even the largest credit unions, will identify the expanding requirements to build collaborative operational and aggregated funding and depository solutions to lower operating costs and maximize the fee return on networked lending and depository solutions. The concentration of expertise in shared operational and transactional solutions owned by a network of credit unions will eliminate duplicative overhead expense and minimize, reduce or even eliminate the growing costs of managing balance sheet risk.

By aggressively building collaborative scale, fully leveraging technological tools and refining the special skills necessary for a successful, networked business strategy, tomorrow’s credit union leaders will be able to not only sustain the credit union model but should aim to be the pre-eminent solution for all consumer-based retail and small business financial solutions. We’ll beat the banks and the fintechs by being  “greater than the sum of the parts.” We have often “talked” this strategy, but our execution has sucked.

Adopting this strategy allows the individual credit union to focus and concentrate on what we have traditionally been the best at: providing the expertise necessary to identify and meet the life time needs of the individual credit union owner and member. This strategy also requires that CU management teams possess and execute the skills necessary to be a good network partner. We’ve all seen in our many collaborative efforts among credit unions, some credit union CEOs and their teams are great partners in any networked effort, some not so much.

This is a learned skill! Some will never be comfortable in anything but the traditional vertical hierarchy, but credit union survival and our desire to provide the very best in product design, pricing and delivery/distribution channels demands that future leaders learn and execute the skills required of a networked model. Think about it… at some point in the past, a group of individuals decided to create a network in order meet financial needs that they found lacking in other institutions or completely barred from. We need to take that same strategy up more than a few notches than we find in our current institutional solutions.

In the future , if you think you can manage in isolation or think you and your team can manage in the networked world without a new set of skills, good luck.

Why be right when you can have the last word?

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NCUA Board approves amendments to 2015 risk-based capital final rule, delay until 2020

The NCUA recently adjourned from their October board meeting and with respect to the impending RBC rule has approved action to raise the minimum impacted asset size from $100M to $500M. More importantly, however, they have delayed implementation from January 2019 to January 2020. Vic Pantea provided his thoughts on this decision:

“This action, in my humble opinion, will kill the entire RBC rule for the immediate future. I see a purely political compromise here that allows both McWatters and Metsger to gain satisfaction. McWatters who argued strongly, back in 2015, that the board did not have the authority to implement RBC, cannot reverse implementation as long as Metsger, who voted along with Matz, is the other vote on a 2-person board. But by getting the delay to 2020, we can assume that Rodney Hood will supply a 2nd vote sometime during 2019 to eliminate the final rule, regardless of Metsger’s disposition as an expired board member or if his eventual replacement has been appointed. Metsger, as a consolation, can continue to say that for as long as he held office, he was a supporter of RBC and excessive agency overreach in the name of “protecting the NCUSIF.”

Got to love politics… The pendulum between rules and tools swings back and forth based more on who has the last word than what is right. Always being last to the party on these kinds of things is a good bet. Picture all the effort and money that has been wasted in debating RBC, CECL, and other regulatory divides in the last 5 years.

How many real issues might have moved forward if we had not stalled so many people in debating the “what if’s” of fluff, risk management overreach, and style points for politicians? Imagine all the CU leaders that were discouraged by the doomsday preached when the predictions of these changes doomed all small CUs. And most of the debate was over late to the party, overreactions to disasters already survived, and the idea that data and measurements can predict the unpredictable, low probability events called life.

My advice: live by the creed of “do valuable things and good things will happen” as CU leaders. Let’s find a way to never be herded into a corner again by those who garner our attention over shuffling paper, debate the inconsequential, and doom us with protection from “it could have been worse” insurance policies.

Would you enjoy warm pork rinds with your car loan?

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Have you read the last two postings of Tell Me Why I’m Wrong? Vic Pantea and Patrick Sickels commented on an NCUA Interagency Statement Clarifying the Role of Supervisory Guidance and while they may not be riveting, they are informative. Do not get me wrong, their postings are good work. Logging the document and ideas for a rainy day after a bad exit interview with your examiner is probably prudent. You know those meetings… the ones where the board wants to know what the heck happened in that last exam and why the examiner is throwing their weight around when you promised you are in compliance with the rules.

It is a good document to pull out during a board member orientation where you discuss the concept of being a regulated firm heavily leveraged not only by the rules, but by the feelings of your insurance agent (the NCUA) as well. Remind the new board member to consider Vic’s optimism and support. “I hope that more CU CEOs and Boards will fearlessly and forcefully argue for those strategies and solutions that they have created for the benefit of the members they serve that are within the powers granted them but in conflict with “supervisory guidance.”

The problem with the two postings is WHO CARES? Who thinks an interagency statement that was designed as a “get out of jail card” for the NCUA board and home office bureaucrats to explain that they do try to “temper” their field agents is going to change anything? 

I struggled when Patrick brought the statement to my attention. Patrick’s lawyer side was showing a “precedent for arguments not yet made” kind of thing. Too many times I have seen field examiners blow off the home office’s cautions at the NCUA, and the oversight of the NCUA by other government officials has seldom seemed to weigh in on the side of a CU under pressure. And Vic, reminded me that this might help CUs play up, but is there momentum to be gained when you only hear about when CUs gave in and almost never about the wins made through pushing back? For a second, I wondered if it would be better to post an opinion piece of the value of serving warm pork rinds at loan closings, but I gave in. I took the bait that NCUA was sincere.

But now I worry that even if the NCUA were sincere, the game is set and we all will respond year after year in the same groove: capitulation to our fate. We need supervisory guidance no matter the consequences. Tell Me Why I’m Wrong.

P.s. Are we pushing for a new norm?

NCUA’s Interagency Statement should encourage credit unions to argue fearlessly

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The recently released Interagency Statement Clarifying the Role of Supervisory Guidance is more pablum from agency leaders on Duke St., which will likely conflict with actual examination practices out here on Main St. The history of NCUA communication between national headquarters and the field staff more closely resembles the old party game of “telephone” as any directive flows downhill from D.C.

I hope that more CU CEOs and Boards will fearlessly and forcefully argue for those strategies and solutions that they have created for the benefit of the members they serve that are within the powers granted them but in conflict with “supervisory guidance.” A supervisory agency would prefer that every institution they evaluate look identical, have the same product mix, practice the same pricing strategies, and exercise the same propensity for risk. It makes their supervisory job easier and simplifies the management of an insurance fund that acts more like a “rainy day fund” than real insurance that recognizes and prices the variety and level of risks that credit unions need to assume to meet the needs of diverse, unique and complex fields of membership.

The most common problem experienced by any federally chartered or insured credit union is the inconsistency between what we hear from NCUA headquarters and what we are often told on the local level. I have no doubt that this Interagency Statement will create more than a few conflicting situations in CEO offices and CU board rooms.

What credit unions should demand from their supervisory agency is a level of managerial and communication skills that would make this Interagency Statement unnecessary. Every credit union should be required to be able to fully explain the strategic and tactical reasoning for any product, program and delivery system during the examination process. Every NCUA employee should be equally expected to clearly define the difference between exceptions due to statute or regulation and opinion based on perception. In fact, while I appreciate this explanatory statement to credit unions I think the primary audience for this information should be NCUA staff, national, regional and local examiners.

NCUA clarifies the role of supervisory guidance

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Credit unions handed another tool in the fight against examiner overreach

The NCUA, in conjunction with the other primary financial regulatory governmental agencies, published an Interagency Statement Clarifying the Role of Supervisory Guidance paper on September 11, 2018. This interagency paper provides ammunition to credit unions looking to challenge federal examiner findings, if these findings are based on “guidance” and not “law” or “regulation.”  This paper is likely in response to significant criticism from Congress that federal agencies are regulating through “guidance” rather than through actual regulations or laws vetted or passed by Congress.  The most concrete example of Congressional criticism happened this year when Congress used the Congressional Review Act to abolish CFPB guidance on indirect lending and the Equal Credit Opportunity Act.  This is an opportunity for credit unions to push back on examiner overreach and “regulation by guidance” by citing the Interagency Statement.

The core piece of the Interagency Statement is:

“Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.”  [emphasis added]

This statement by the NCUA provides credit unions with some significant arguments if  individual federal examiners attempt an enforcement action on a credit union based on supervisory guidance rather than on the actual regulation or law.  There are five areas of clarity provided by the Interagency Statement.  Of these, there are three primary points that can be used to push back against federal examiners:

  • Limit the use of numerical thresholds or other “bright-lines” not supported by regulation.  The use of these thresholds should be examples and not suggestive of requirements.

Example:  A well-capitalized federally-chartered credit union with $30 million paid-in and unimpaired capital surplus as of its last year-end report is in the process of loaning $250,000 to a CUSO.  An examiner says the credit union should lower the amount of the loan to $150,000 due to “risk.”  That threshold is not supported by Section 712.2 of the Code of Federal Regulations, which limits the total loan amount to 1% of unimpaired capital or surplus (or $300,000 in this example).

12 CFR 712.2 – How much can an FCU invest in or loan to CUSOs, and what parties may participate?

…

(b) Loans. An FCU’s total loans to CUSOs must not exceed, in the aggregate, 1% of its paid-in and unimpaired capital and surplus as of its last calendar year-end financial report. Loan authority is independent and separate from the 1% investment authority of subsection (a) of this section.

  • While federal examiners remain free to identify “unsafe or unsound” practices, examiners are not to criticize a financial institution for failing to follow supervisory guidance.

Example:  A credit union is criticized for not using the FFIEC Cybersecurity Assessment Tool.  The FFIEC’s own FAQ states that the Cybersecurity Assessment Tool is not mandatory.  This could form the basis of a challenge to the examiner’s finding.

2. Does my institution have to use the Assessment? No. Use of the Assessment by institutions is voluntary. Institution management may choose to use the Assessment, or another framework, or another risk assessment process to identify inherent risk and cybersecurity preparedness. The FFIEC released the Assessment as a voluntary tool that institution management may use to determine the institution’s inherent risk and cybersecurity preparedness.

  • Public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law.

Example:  The most obvious example was overturning the CFPB’s Bulletin “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.”

  • Aim to reduce multiple supervisory documents on the same topic.
  • Encourage credit unions to discuss supervisory questions with their appropriate NCUA contact.

As with any resistance to examiner findings, executive management and the Board’s willingness to engage, history of the credit union’s safety and soundness, and demonstrated meeting of the membership’s needs will all influence the success the credit union may have.  This letter from the NCUA and other agencies simply represents another tool available to credit unions and CUSOs concerned about examiner overreach.

Approval seeking is not a positive leadership trait

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Why social media and the hunt for Likes and approval is likely to derail future leaders

If you were to ask past leaders in our industry—or any industry for that matter—most are likely to agree that hunting for approvals in an echo chamber is a trap. So how do you coach a new generation of leaders that are growing up in a world where social media reigns?

Future leaders do not need to be “liked” or garner approval as their strongest talents—they need to hone their skills as learners, influencers, and debaters of value. I am not sure that social media does any of that for most of its participants. Can you really learn anything from tracking manipulated, advertised opinions and Likes via social media today? How do we push our leaders to ensure that they are building the talents and drive to build learning organizations and voices that can inspire all of us to benefit?

Being a lifetime student does not come from being agreed with, it comes from the challenges of opposing viewpoints and then creatively learning to reconcile that dissent. When you are fearful of rejection, you will insulate yourself and your beliefs and ideas to the point that learning stops and talents wither. But this is not a new problem; we see it in organizations that do not share their business plans with members, who no longer believe the market cares about their hopes for cooperative ownership, and who have shifted to the idea that consumer acceptance and Likes about the nuances of today’s financial service tactics are more important than what separates us from look-alike-competitors who sell the same nuances.

While the term “echo chamber” may be approaching overuse, it is one that the credit union industry should recognize as not a new problem. As the agents of our credit union member-owners, we have created our professional and third-party commentator echo chambers since the first day we pushed our volunteers out of the operations. The CUNA system, the regulatory system, and other vendor organizations have isolated our conversations and taught us to accept the status quo limits of our influence and debate. We hunted for acceptance and the positive feedback of like-thinkers-like-relationships for decades until we accepted the doctrine of our credit union industry to be worth its weight on our entrepreneurial hopes or innovative thrust towards member-owner potential.

So, we do need to guard ourselves from accepting and pushing our future leaders into an even bigger acceptance of the social media echo chambers that are too consumer-focused and manipulated by network managers way beyond our control or influence. We need to encourage future leaders to think critically, hunt out dissent, and look for the teachings that come from debate and alternate ideas. We need them to hone their skills at negotiating with ideas counter to their own and influence the future from what they learn.

We need to highlight where we fell victim to wanting the Likes of the NCUA, the molds of our trades, and the limited scope of our agreements with each other, and challenge them to debate and learn from the energy of disagreement on the way to new ideas implemented. Tell Me Why I’m Wrong.

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.