The April issue of the NCUA Report is now available.
I want to highlight one of the articles—Region III’s Report Beware of Three Emerging BSA Risks. This article discusses three services increasingly offered by credit unions that can significantly increase BSA risk—money services businesses accounts, reloadable prepaid cards, and remote deposit capture. For example, the article has this to say about the BSA risk related to remote deposit capture (RDC):
“A rapidly growing electronic service that credit unions are offering to business account members (and some individual account holders) is RDC service. RDC is an automated deposit transaction delivery system that enables members to scan items—typically checks—from remote locations and electronically transmit the electronic images or captured digital data to credit unions for posting and clearing. While only 503 federally insured credit unions currently offer RDC service, this figure represents a 42.5 percent increase from the end of 2011.
The potential use of this service as a way to launder money is a risk associated with RDC. In particular, inadequate internal controls necessary to manage the anti-money laundering risk posed by RDC activity and insufficient automated transaction monitoring systems are two common deficiencies identified in recent FinCEN enforcement actions.
Before offering RDC to members, credit union management must assess all of the risks associated with the service, including BSA compliance, and develop and implement policies and procedures to mitigate those risks. Credit unions should ensure that their transaction monitoring systems adequately capture, monitor and report suspicious activities occurring through remote deposit capture.”
The article also serves as a reminder to credit unions that BSA risk should be one of the areas addressed during the development of new products and services. From the conclusion of the article:
“In Region III, we have noticed that while management often addresses the financial, operational and legal risks in servicing new categories of members and offering new products and services, they may forget to include addressing BSA risks. When developing a new program or service, we recommend including the BSA Compliance Officer at the outset. This will prevent a lot of headaches when examiners come” (my emphasis).
Takeaway: save yourself a headache and make sure evaluating BSA risk is incorporated into your credit union’s product and service development process if it isn’t already!
This story appeared on the National Association of Federal Credit Unions blog at www.nafcucomplianceblog.org. Reprinted with permission
Credit union fee and noninterest income accounted for an average of 12% of gross income in 2012, according to CUNA’s Fees Report. Nonsufficient fund/overdraft/courtesy pay fees from checking accounts serve as the single largest source of fee income for credit unions of all asset sizes, accounting for an estimated 33% of last year's total fee income, on average.
Secondary sources of fee income include loan fees (other than mortgage fees) and ATM/debit card fees, representing 15% and 12% of total 2012 fee income, respectively.
The importance of fees and other noninterest income to the credit union bottom line can't be overstated. Without it, credit unions' return-on-assets (ROA) would have been negative by a substantial margin during the past decade, explains Mike Schenk, CUNA's vice president of economics and statistics.
"It's vital to offset market forces that put pressure on ROA," Schenk points out.
Which fees—and how much?
While credit unions can't dispute the need for alternative sources of income, credit unions still must be careful when deciding which fees to charge, and the amount of the fee. Consumers are increasingly sensitive to both the type of service or transaction that incurs a fee and the cost itself.
Additionally, consumers have proven that if they perceive fees as unreasonable or excessive, they'll take their business elsewhere.
More than 70% of Americans would consider leaving their current financial services provider if it raised their checking fees, according to a 2012 Bankrate.com survey. Clearly, credit unions stand to benefit by highlighting their lower fees, particularly their low (or no) checking fees.
Credit unions continue to lead the way in providing affordable, consumer-friendly checking accounts. Among credit unions that offer checking accounts, 82% have at least one free checking program (an interest-bearing or noninterest bearing checking account with no monthly fee and no minimum balance requirement), according to CUNA's report. Almost all (96%) of these credit unions offer free noninterest-bearing checking accounts, and 70% offer free interest-bearing checking accounts.
Currently, just 39% of banks provide free checking, according to the Bankrate survey. That's down from 76% in 2010 and 45% in 2011.
Among members with credit union checking accounts, 80% consider the credit union to be their primary financial institution (PFI), according to CUNA's National Member Surveys.
And members who use their credit union checking account are more likely to use other services. By encouraging members to use online banking and a balance-carrying product (such as a car loan or a money market account) along with a checking product, credit unions can dramatically increase member loyalty.
Why should your PFI strategy emphasize member loyalty? Loyalty matters because loyal members not only choose the credit union as their PFI, but they'll recommend the credit union to family, friends, and co-workers, and turn to the credit union when they need additional financial services.
In addition, highly loyal members have outstanding loan balances that are nearly 40% higher than less loyal members, reports the National Member Surveys.
BETH SOLTIS is CUNA's senior research analyst. Contact her at 608-231-4056 or at email@example.com.
(Via Credit Union Directors Newsletter)
Question: Is there any guidance as to when it is appropriate to put a stop payment on a cashier’s check? Members have purchased cashier’s checks, the checks eventually get lost in the mail, and then the member wants us to re-advance the funds without putting a stop payment on the original cashier’s check.
Answer: We should all avoid using terms “stop payment” and “cashier’s check” in the same sentence. Cashier’s checks are accepted by the “drawee” bank when they are signed by an employee of the credit union; i.e., at the moment of issuance. The credit union cannot revoke its acceptance by stopping payment. (That is one of the principal reasons why cashier’s checks are generally required at real estate closings; the issuer of the item is irrevocably committed to making the payment.) The remitter’s or payee’s perspective is not relevant, as neither is liable on the item and neither can stop payment on it.
Section 3-411(b)(i) of the UCC (Texas Business and Commerce Code) explains how to calculate damages if a bank “wrongfully refuses to pay a cashier’s check or certiﬁed check.” In many circumstances, a holder of the cashier’s check on which payment is refused would be entitled to compensation for expenses, interest and consequential damages, in addition to the amount of the item.
Section 3-312 of the UCC controls the reissuance requirements. The remitter or payee is to execute the declaration of loss. After 90 days, if the item has not been presented, the credit union is obligated to reissue the check. If the original check is presented later, the drawee bank may return it unpaid, using “previously paid under declaration of loss” or “reissued under 3-312” as a reason for return. Even though the credit union that replaced the check has been discharged on the item by replacing it under the terms of the statute, returning the check with the status “payment stopped” is simply wrong. (In order to get the check to reject, you might have to put a stop payment on your system, but do not confuse the mechanics with the legalities.)
Paragraph 3-312 was added to the UCC both to protect consumers and to give banks clear guidance on how to replace a cashier’s check without enhancing their own liability. Measures used prior to the implementation of 3-312 included indemniﬁcation agreements and indemniﬁcation bonds. An indemniﬁcation agreement is a simple contract between the bank and the party seeking to have the check replaced. According to its normal language, the customer agrees to make the bank whole if the original check is ever presented.
The value of the indemniﬁcation agreement depends on the customer’s willingness and ability to pay when the day comes. Obviously, that varies substantially based on the amount and the person involved. In most situations, an indemniﬁcation agreement does not reduce the risk involved in any measurable way.
An indemniﬁcation bond is issued by an insurance company. The member buys the bond at his own expense. If the original check ever shows up, the insurance company promises to make the credit union whole.
To avoid liability, the credit union may want to:
1. Pre-print a notice on the member’s copy of the cashier’s check, indicating it will not
be replaced for 90 days if it is lost/stolen.
2. Sell checks that do not meet the deﬁnition of a cashier’s check: for example, one drawn on the bank but signed by the customer, such as a money order.
Reprinted with permission from the Texas Credit Union League (www.tcul.coop).
What makes one credit union more successful than another? Why are some credit unions struggling to grow their membership, while others are growing at a double-digit pace?
Why are some credit unions successfully lending to their members while others are struggling to put new loans on the books? These are questions that many of us in credit union land have asked from time to time.
A recent CUNA Marketing and Business Development white paper entitled “Moments of Truth” by Richard Grady offers some new insights worth exploring. Grady and his colleagues evaluated all the credit unions in the state of Texas and examined two dozen studies conducted over the past decade by CUNA, the Filene Research Institute, various universities, and the American Society of Association Executives. They found that, while there’s no magic formula to credit union growth, the credit unions that are growing faster than their peers, their competitors, and the industry have mastered three “moments of truth”: service, selling, and socializing.
All credit unions are focused on these three principles to one degree or another, but Grady believes that mastery in these areas is what makes the difference. Let’s explore each moment of truth in greater depth.
Moment 1: Outstanding Service
Service is the first moment of truth and, most likely, the easiest for credit unions to relate to. In order for service to be considered outstanding, however, credit unions must go beyond merely knowing their members by name and smiling when they visit the branch. The next level of service involves actually knowing your members, their families, and their interests, and developing a relationship that transcends a warm and friendly greeting. It is taking an interest in people and treating them like members of the family. It involves personal communication, such as notes, phone calls, and e-mails, with valuable information. For the members who don’t visit the credit union branch, the personal connection may come in the form of live online chatting and assistance.
According to the whitepaper, when members receive what they consider outstanding service, they are more likely to consider the credit union their primary financial institution (PFI) and exemplify a greater sense of loyalty. This heightened loyalty leads to repeat business, as well as something that is both intangible and invaluable: word-of-mouth advertising!
We all know that people prefer to do business with those they know and trust, and a recommendation from a friend or family member is all the more powerful.
Moment 2: Selling
The second moment of truth lies in a credit union’s ability to successfully promote its products and grow its business. A credit union that is extremely successful in selling does not over-aggressively promote products to members who may or may not need them. Rather, they take a relationship-oriented approach and focus on providing solutions for the financial needs and challenges of each individual member, one on one. For example, if a member does not qualify for a loan, a credit union that has mastered selling will take the time to develop a financial plan with the member that will allow them to achieve their goal over time. This plan may include the development of a budget, financial counseling or education, and the identification of certain behavioral changes that will improve the member’s credit score.
Credit unions that are experiencing better-than-average growth, particularly when it comes to loans, are also dedicated to forming relationships with retailers outside the credit union industry in order to better serve their members. Many successful credit unions attribute their loan growth to the meaningful relationships they have built and continue to sustain with their select employee groups (SEGs), realtors, and auto dealers for indirect new and used auto sales. When asked to summarize this second moment of truth, Grady advises credit unions to “treat people who interface with your members with the same service gusto. Dealers, retailers, realtors, and others love to do business with people who treat them ‘special.’”
Moment 3: Socializing
Community involvement, or “socializing,” is the third and final moment of truth that fosters growth and member loyalty. We all know that credit unions are invested in their
communities, providing sponsorships and support to numerous charities and organizations. However, the credit unions that excel in this area are doing more than writing checks and providing financial support. Their staff and volunteer leaders are volunteering their time at charitable events, participating in community projects and maintaining a visible presence in their communities. The result is positive public relations exposure and increased word-of-mouth promotion.
“Being significantly and visibly involved in the community on issues that matter to the community provides greater return on membership growth and employee satisfaction than all the marketing dollars in the world,” says Grady. “Pick one universal and ongoing issue, and be exceptionally good at helping solve it.”
If your credit union is looking to expand fields of membership, increase PFI standing amongst your current membership, and generate more loans, these moments of truth can offer a great foundation for analysis and brainstorming.
Have you mastered service by finding ways to connect personally with your members? Have you mastered selling by delivering personalized, meaningful solutions? And have
you mastered socializing by being visibly engaged and involved in the communities you serve?
These questions, and the moments of truth they inspire, may lead your credit union into exciting growth opportunities.
Tracy Conner is vice president of member relations for the Credit Union Association of New York and may be contacted at firstname.lastname@example.org. Reprinted with permission from Connection, the publication of the Credit Union Association of New York (www.cuany.org).
Quarterly reports on the National Credit Union Share Insurance Fund (NCUSIF) and Temporary Corporate Credit Union Stabilization Fund (TCCUSF) were the only items considered at the NCUA Board meeting today. The NCUSIF update mirrors the optimistic trends the credit union system is experiencing. Overall, the number of CAMEL 3, 4, and 5 credit unions has decreased, and the dollar amount of insured shares in these institutions has also diminished, indicating that credit unions are performing measurably better than last quarter. NCUA staff reported that the NCUSIF’s equity ratio increased slightly to 1.31% as of March 31, 2013, but is expected to revert to 1.30% at the June 2013 update, at which time the capitalization deposit will be expensed. The ending reserve balance was $330 million; $13 million of which is allocated to specific credit unions.
As of March 31, 2013, there were 339 CAMEL 4 and 5 credit unions, which represent 1.79% of insured shares, or approximately $15 billion. These numbers are also better than the last quarter of 2012, when there were 369 CAMEL 4 and 5 credit unions, which represented 2.02% of insured shares and approximately $16.9 billion. NCUA staff noted that there were 1,558 CAMEL 3 credit unions, which represent 12.10% of insured shares, or $101.6 billion. This is a slight decrease from 1,571 CAMEL 3 credit unions and a drop from 12.68% of insured shares and approximately $105.9 billion at the end of 2012.
Combined insured shares in CAMEL 3, 4, and 5 credit unions represent approximately 13.89% of total insured shares, down from 14.6% at year-end 2012 and 19.2% at year-end 2011. There were 4 total credit union failures in the first quarter of 2013 with a cost of $75,000 to the NCUSIF, which appears to be a slower rate based on the 22 total credit union failures in 2012. There were 16 failures in 2011 and 28 during 2010.
For first quarter of 2013, the total net position of the TCCUSF was similar to the last quarter of 2012. The Fund had $5.1 billion in outstanding borrowings with the U.S. Treasury as of March 31, 2013. Last month, NCUA announced that total projected assessments for the Fund had dropped by $900 million, and the projected range for total remaining assessments is now between $1.6 billion and $3.9 billion, down from $1.9 billion to $4.8 billion six months ago.
Mary Dunn, CUNA Deputy General Counsel