december 2018 | volume 13 | issue 12 credit union industry ... · the operations issue the only...

DECEMBER 2018 | VOLUME 13 | ISSUE 12

T H E O P E R AT I O N S I S S U ETHE ONLY ALL-DIGITAL, ALL-BUSINESS RESOURCE FOR CREDIT UNIONS

Credit Union Industry Trends to Follow to Make 2019 the Best Year YetChuck FaganPresident & CEO, PSCU

ALSO IN THIS ISSUE

Four Digital Marketing Trends to Watch in 2019Tiffany McEachern

https://creditunionbusiness.com/membership-account/membership-checkout/?level=22

C R E D I T U N I O N B U S I N E S S | D E C E M B E R 2 0 1 8 | C U B U S I N E S S . C O M

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DECEMBER 2018 | VOLUME 13 | ISSUE 12TABLE OFCONTENTS

7 CFO CURRENCY The Increasing Importance Of Credit Unions And Mortgage Lending Alec Hollis

10 MARKETING MATTERS Digital Marketing Matchup Meet Consumers Where They Are Aaron Gregerson

14 PAYMENT TRENDS Credit Union Industry Trends to Follow to Make 2019 the Best Year Yet Chuck Fagan

17 CU TRAINING Make Every Employee Part of “The Why” Kenneth C. Bator

20 DIGITAL MARKETING Four Digital Marketing Trends to Watch in 2019 Tiffany McEachern

22 EXECUTIVE PERFORMANCE CEO Review Pitfalls to Avoid Mike Higgins

25 ANALYTICS The Path from Descriptive to Predictive Analytics David Ross

27 CFO CURRENCY Sound Practices for Liquidity Risk Management Tyler Dunn

31 CU TRAINING How to Collaborate Kenneth C. Bator

34 DATA Explaining the Basics of Machine Learning Brewster Knowlton

THE ONLY ALL-DIGITAL, ALL-BUSINESS RESOURCE FOR CREDIT UNIONS

What does a$24 subscription get?

• High Quality monthly magazine.• Website with 72 back issues• 700+ articles available

“On Demand”

JUNE 2014 | VOLUME 9 | ISSUE 6 | $9.95

T H E B R A N C H B U S I N E S S T R A I N I N G I S S U E

The CU All Stars!

Paul Nunn (CU Training)

Emily More’ Hollis (CFO Currency)

Jennifer Anderson-Kapke (Compliance Update)

Keith Kelly (CU Mobile Mortgage)

James Collins (CU CEO)

Rex Johnson (Lending Solutions)

Laura Enock (CU Content)

Miriam De Dios (CU Outreach)

The Best Way

to Build Branches

is to Knock

Them Down

by James Collins

The Changing

Face of Business

Lendingby Laura Enock

Top row from left: Emily Moré Hollis, Paul Nunn, Jennifer Anderson-Kapke, Keith Kelly

Middle row: James Collins, Rex Johnson

Bottom row: Laura Enock, Miriam De Dios

may 2014 | volUmE 9 | ISSUE 5 | $9.95

t h E E - C o m m E R C E I S S U E

lending tools for a New generation of homeowner: eMortgagesby Keith Kelly

Credit Unions Keeping Up With Banks for Mobile Banking Services by Roy W. Urrico

Products Per Household: What Does it Mean to Your Staff?by Jack Kelly

Credit Unions Keeping Up



ABOUT US

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SUBSCRIPTIONSCredit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine, Inc. A one-year Digital membership is $75/yrAn online membership form is available at www.cubusiness.com/register.

TEAMBUILDERhttps://creditunionbusiness.com/the-team-builder/

SALES AND ADVERTISINGTim O’Hara, [email protected] or 561-282-6015 #1

CONTACT INFORMATIONCredit Union BUSINESS MagazineP.O. Box 2223, Palm Beach, FL 33480(561) 282-6015 | (561) 588-7711 (fax)[email protected]

DECEMBER 2018 | VOLUME 13 | ISSUE 12

T H E O P E R AT I O N S I S S U ETHE ONLY ALL-DIGITAL, ALL-BUSINESS RESOURCE FOR CREDIT UNIONS

Credit Union Industry Trends to Follow to Make 2019 the Best Year YetChuck FaganPresident & CEO, PSCU

ALSO IN THIS ISSUE

Four Digital Marketing Trends to Watch in 2019Tiffany McEachern

PUBLISHING TEAMTim O’Hara, Editor & [email protected] Kumar, Associate Publisher [email protected]

Ralph Louis, Advertising [email protected] Manzone, Designer

CFO CURRENCYAlec Hollis MARKETING MATTERSAaron Gregerson PAYMENT TRENDSChuck Fagan

CU TRAININGKenneth C. Bator, MBA

DIGITAL MARKETINGTiffany McEachern

EXECUTIVE PERFORMANCEMike HigginsANALYTICSDavid RossCFO CURRENCYTyler DunnCU TRAININGKenneth C. Bator DATABrewster Knowlton

THE ONLY ALL-DIGITAL, ALL-BUSINESS RESOURCE FOR CREDIT UNIONS

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BY AUTHOR NAME HERETAB HERE

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Since the enactment of P.L. 95-22 in April 1977, expanding lending authority for credit unions, residential mortgage lending has become an important and growing facet of the credit union model. Today, granted mortgage loans are as high as they’ve ever been. Credit unions posted a record-high of $172 billion in 2016, and may again reach a new high this year, as 2017 year-to-date numbers have surpassed 2016’s year-to-date. In order for credit unions to maintain and grow their importance in

thisvitalmarket,theyshouldconsiderrevisitingsecondarymarketing.Managingthefinancialrisksinherentinsecondary marketing operations remains critical for credit unions. Secondarymarketriskmanagementaimstoprofitablydeliverloanstoinvestorswhileminimizingrisktotheinstitution. For credit unions originating with the intent to sell, this risk-management process is not only essential, but it is also receiving more regulatory scrutiny of late.

Origination Volume and Production SoldIn thefaceof increasingmortgageproduction,creditunionshaveactually reducedfirst-mortgageproductionsoldoverthepastfiveyears,asFigure1demonstrates.Sincethe2013steepeningevent,productionsolddroppedsignificantlyandhasremainednear40%sincethen,despiteasignificantreboundinoriginationvolume.Asofthethirdquarterthisyear,firstmortgageloanssoldrepresented41%offirstlienmortgageproduction.

Figure1

Source: SNL Financial

BY ALEC HOLLIS

The Increasing Importance Of Credit Unions And Mortgage Lending

CFO CURRENCY


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Interestingly, mortgage production sold demonstrates a negative correlation with the 10-year treasury rate, possibly indicating that, as credit unions experience pipeline losses, mortgage loans are re-designated as “held for investment.” While this may prevent realizing losses on the income statement, these losses are realized over time as the credit union adds low-rate loans on the balance sheet; this can be thought of as a form of market timing. While this is not uncommon, there could still be other factors at play. Regardless,thesignificanceofsecondarymarketingrisk management cannot be understated. Movements in interestratescansignificantlyimpacttheprofitabilityofmortgage lending. As credit unions increase mortgage production, the next step is to formalize secondary marketing. Doing so will both satisfy regulatory requirements, and augment the credit union’s ability to scale and increase its lending footprint.

Hedging the PipelineTo hedge pipeline risk, many credit unions use forward agreements with government-sponsored enterprises (GSEs), such as best efforts or mandatory commitments tosellloans.Itisimportanttorememberthesearefirmcommitments to sell in the future – no different than a short forward/futures position. As such, they are typicallyclassifiedasaderivativeinaccountingcircles.Hedging pipeline risk using mandatory commitments can be great for entities with lower amounts of volume, and/or for those looking for protection from fallout risk using best efforts committing. However, for entities with greater volume and/or more sophisticated modeling capabilities, hedging pipeline risk using the “To Be Announced” (TBA), mortgage-backed securities (MBS) market can be beneficial. A TBA MBS trade is a commitment tobuy/sell mortgage-backed, pass-through securities at a future date when “the exact securities to be delivered to the buyer are chosen just before delivery, rather than at the time of the original trade.” First-lien mortgage

loans are ultimately the collateral backing MBS; because they are TBA assets, the TBA market offers lenders an excellent mechanism for hedging.

Why Hedge with TBA MBS?BenefitstohedgingwithTBAMBSincludescalability,lowering hedge costs, and flexibility. For institutionswith large amounts of origination volume, individually committing loans can be operationally prohibitive. Hedging using TBA MBS and bulk-delivering loans can be beneficial for managing large amounts ofproduction. However, it becomes imperative to track and model fallout metrics and to have adequate trading and database systems. When a lender forward commits to an Agency, it is effectively paying a hedge fee embedded in the forward price. The further out the delivery date, the lower the price, and the greater the cumulative hedge cost. In the case of a best efforts commitment, the lender is paying an additional fee to hedge fallout volatility. Often, hedge costs can be lowered relative to forward committing using TBA MBS; comparing TBA MBS cost of carry versus the implied Agency hedge cost is necessary to making the determination between the two. For institutions with large amounts of volume, lowering hedgecostscanquicklyaddtolargedollarfigures.Further, for entities with sophisticated modeling capabilities, pipeline exposure can be precisely quantified,anddynamicallyrebalancedasthepipelinechanges, even on an intra-day basis. In many cases, TBA MBS is used in conjunction with other derivatives (including mandatory commitments) to minimize hedge slippage, depending on the asset and the execution. Incorporating mortgage servicing rights value at risk in the pipeline exposure is also an important consideration. Lastly,flexibilitygainsresultfromnothavingasetdelivery date. As the TBA MBS position approaches settlement, the positions can be rolled, effectively extending the hedges and paying only a minimal transaction cost for entities with good trading volume.

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CFO CURRENCY

Thispresentsgreaterflexibilityinrebalancingtoensurehedge ratios are appropriate on a daily, or intra-day, basis, and can also help the institution avoid costly pair-off and over-delivery fees. As credit unions step into a larger role in mortgage lending, now is a good time ensure the credit union’s secondary marketing process allows for scalability and adequately protects the institution from risk. Augmenting secondary marketing for credit union lenders that are capital-constrained, allows the credit union to safely expand its service to more members without having to capitalize the loans on the balance sheet.

Mr. Hollis performs asset liability analyses for fi nancial institutions, various ‘what-if’ analyses, budget forecasting, liquidity forecasting and any other modeling requirement to fi t the needs of ALM’s clients. As an associate, Mr. Hollis’s additional responsibilities

include the presentation of results to client ALCOs and senior management as well as mentoring new fi nancial analyst team members. He holds a bachelor’s degree in fi nance from the University of Notre Dame.

https://www.almfirst.com/



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W hen you stop to think about it, digi-tal marketing has had an astounding impact on financial services. Starting with local search and website opti-mization, digital has allowed credit

unions to find success by meeting consumers where they are instead of chasing new accounts with constant promotions. Digital marketing has, in effect, reversed the idea that awareness of your credit union’s brand needs to seek out the consumer. Instead, consumers are free to “bank themselves.” Meaning, they’ll find you. That is, if your digital strategy is being executed properly. Today’s marketing is so drastically different because the old “set it and forget it” approach just won’t fly. Successfully marketing your credit union in thedigital age means paying constant attention to detail. It means forging relationships with consumers wherever they are – on their phones, computers, tablets, listening to radio or driving down the road. It means being there when they are looking for you, instead of pushing messages on them when they may not be relevant. Credit union consumers can be anywhere…and often are. Which means the credit union needs a great digital strategy in order to compete on a level playing field.Tobeasounddigitalstrategist,youmustbeableto check off every item on the list below.

Gaining Perspective and FocusA key differentiator with digital marketing is that more than ever before, it lets you take a more targeted, sophisticated approach to communicating with consumers. We can now move beyond geographic and

4 MARKETING MATTERS

TURN ON YOUR MARKETERS

www.cubusiness.com

demographic criteria to the heart of what matters to consumers. A good digital strategy is based on objectives, segments and campaigns.

ObjectivesWhen formulating or fine-tuning your digitalobjectives, ask the following primer questions of your credit union:

• What do we want to accomplish? (Membership growth, increased loan applications, etc.)

• How will we accomplish this? (Local search, content marketing, search engine optimization, paid advertising)

• How will we show success in our efforts? (Impressions, clicks, conversions, website visits, etc.)

• What resources and budget can be allocated? (Staff time, marketing dollars, etc.)

BY AARON GREGERSON

Digital Marketing MatchupMeet Consumers Where They Are

MARKETINGMATTERS

http://www.cubusiness.com


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MARKETING MATTERS

SegmentsWhendefiningyouraudiencearoundyourobjectives,rememberthatyouhavetheflexibilitytotargetmorethan one group of consumers at one time. Auto loan campaigns no longer have to be strictly rate-based but can focus instead on rate-driven borrowers and payment-driven borrowers, for example.

• Who do we need to reach in order to achieve our objective?

• Where do we want to reach them? (At home, work, on the go?)

• Howwilltheyfindus?(Search,social,streamingradio, etc.)

CampaignsDigital gives you the freedom to execute multiple campaigns under one umbrella budget. This makes it easier for your credit union to reach the segments you want while appealing to each audience with unique messaging.

• Which segments will receive which messages?• What keywords will be associated with each

individual campaign?

Gaining MomentumAs a digital strategist, setting up your digital marketing is the key to its success. It is not uncommon to be running several digital efforts – SEO, local search, location pages, paid campaigns – at the same time.

http://marketmatch.com/


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Running each of these in sync with one another while achieving desired results and objectives is the mark of great digital marketing.

Set-UpWhen setting up your strategy, consider the following items for your digital strategy checklist:

• What combination of SEO, Location Search, SEM, Display and social do you use?

• Are your segments primarily mobile or in-home audiences?

• What do you want the target consumers to do? What path should they take to get there?

• What medium will be most effective to get the target to act?

o Organic searcho Text adso Social pots and/or ads• With paid advertising, define your campaigns

based on segments and ad groups based on different targets and objectives.

• Claim credit union locations through Google, Facebook, Yelp and others.

• Use keyword analysis to understand:o How your targets are searching o What your targets are looking for right nowo What positive and negative keyword associations

can be used• Make searches, posts and ads actionable for the

medium being used.• Remarket and re-engage with those who have

interacted with your credit union.

Buying and BiddingOne of the largest changes in digital marketing has to be the way we approach paying for advertising and exposure. Marketers are no longer studying rate cards and analyzing CPM (cost per thousand) in order to reach – or chase – consumers. Today, we’re bidding

for exposure. Only, we don’t want just any exposure. Your credit union wants exposure when it’s relevant and right for the consumer. We must meet them where they are.

Adding to your digital strategy checklist, here’s what to consider when buying and bidding on paid advertising:

• Estimate your bid cost and subsequent results with bid simulators.

• Determine a bid/buying strategy:o Understand pricing (ad rank/frequency, ad quality,

budget depletion)o Identifyastartingdailybudgetwithflexibilityto

adjust to meet objectives.o Purchase ads based on impressions, clicks or

conversions.• Understand how your campaign, ad group, ads and

keywords work together to achieve your quality score.

Achieving ResultsResults are often a moving and rolling target in the digital marketing world. Paid campaigns and organic digital efforts are not a passive effort. In order to achieve the desired results for the credit union, paid campaigns will need to be tracked and adjusted several times per week. Organic and location marketing will need to be touched several times per month as well.

This is the part of your digital strategy where resources play an important part in measuring and achieving success.

MaintenanceThe following items also belong on your digital strategy checklist:

• Regular tracking performance of bids, ad groups and keywords.

• Tracking impressions, clicks and conversions against objectives.

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MARKETING MATTERS

• Adjusting, pausing and maneuvering ads and keywords according to objectives.

• Regular reporting and understanding ROI for each campaign.

• Updating and changing site content.• Maintaining and updating location information.• Responding to and maintaining reviews and

communication on social, Google, Yelp and other platforms.

Engaging CreativeWith digital, your ads, posts, search rankings, website and landing pages are now your call to action. Even with a sound strategy and great ads, the entire consumer journey can start to fray if the outreach site is not well designed or fails to create action.

• As a rule, do not send targets to your home page. Use multiple, dedicated, message-specificlanding pages. In fact, there are many tools that allow landing pages to be designed with elements of automation, saving time on set-up and maintenance.

• Understand the online user experience that your target is going through. Test it out.

• Make the destination page a quick read chock-full of keywords that match your ads or postings.

• Create obvious call(s) to action. Provide an “act now” and “send me information” call to action, giving the target a choice in engagement.

• Match your page with campaign goals.• Make mobile navigation just as easy as desktop

navigation.

Put It All TogetherIn short, the impact digital marketing has on your credit union’s success is only as effective as the

digital strategy behind it. Keep top of mind the difference between implementing a digital strategy and implementing digital advertising. The latter needs the former to be successful.

As your strategy comes together or is aligned to meet 2018’s objectives, evaluate your digital strategy checklist. Identify which areas your credit union needs to address with additional resources, budget or knowledge. Because consumers may now be freer to “bank themselves,” doesn’t mean they can’t benefitfrom active digital marketing from your credit union. Help guide them to the resources the credit union provides through a sound digital strategy!

Aaron Gregerson grows banks and credit unions through a healthy mix of marketing, strategic vision and having a bit of fun along the way. At MarketMatch, clients can expect the experience of working

with a strong creative team of experts in the financial industry.MarketMatch is a leader in thought provoking ideas and strategic solutions for the financial industry.


CHUCK FAGAN, PRESIDENT & CEO, PSCU

Credit Union Industry Trends to Follow to Make 2019 the Best Year Yet

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PAYMENTTRENDS

A s anticipated, 2018 proved to be a year of accelerated evolution of the payments landscape. Credit unions across the coun-try were driven to invest in the develop-ment and deployment of new technologies

and innovations to deliver the best experience possible for their priority stakeholders – their members. Credit unions and CUSOs must remain steadfast in their mis-sion to provide seamless experiences and best-in-class offerings and solutions to consumers by focusing on three priority initiatives in 2019:

Fighting fraudstersFraud and security will continue to take center stage as credit unions search for innovative ways to fightemerging fraud threats and increasingly sophisticated fraudsters. According to PSCU’s recently released Eye on Payments study, 13 percent of credit union members have been a victim of card fraud and 4 percent have had their identity stolen in the last year alone. Similarly, 11 percent of non-credit union members were a victim of card fraud and 4 percent had their identities stolen during the same time period. Credit unions can no longer monitor a single channel to stop fraud in today’s digital and interconnected world. The recent Starwood Hotels guest information database breach proves this point. Marriott indicated an exposure of names, mailing and email addresses, phone numbers and passport IDs, among other information. When data breaches occur at this magnitude and expose this level of information, it is not enough to simply monitor for traditional card fraud–youmustfindwaystocombattheentireaccount

takeover both online and via contact centers, among other channels. Linking these channels together – from in-person, to phone calls and online activity – is the onlywaytoefficientlystopfraudstersbeforetheyhavethe chance to attack. To that end, credit unions should utilize data and analytics tools to proactively protect their members, which in turn safeguards the member experience and the credit union’s assets. While data and analytics are a driver for marketing promotions and attracting new accounts, learnings from these tools are critical today to help thwart impending threats from fraudsters.

Solidifying authenticationTherehasbeenasignificantshiftawayfromin-storecard fraud to card-not-present transactions that can leadtoaccounttakeover,whichmakesitmoredifficultthan ever before to authenticate the user at the point of


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PAYMENT TRENDS

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purchase. This migration makes authentication of the utmost importance. In fact, PSCU discovered that when making payments, consumers today are motivated by two primary needs: safety and convenience. Credit unions should introduce continuing education initiatives to their members to explain how and why the traditional means of authentication, like key questions or the last four digits of a social security number, are no longer enough to protect account and personal information. The more members know about changes in security and expectations for their day-to-day account activities and how their credit union is working to keep their information protected, the more seamless the experience will be for both parties. At the same time, credit unions need to be open to exploring non-traditional means of authentication, like voice recognition, biometrics and other key pieces of technology. This is also an opportunity to explore partnerships to align with organizations that have a strong focus on authentication and leverage their investmentsandlearningsinthefield.

Adopting contactless and embracing mobile walletsAccording to Mastercard, nearly 800,000 unique merchant locations were already contactless-enabled by the end of 2017. By the end of 2019, the company expects 65 percent of U.S. merchants will accept contactless payment methods. Terminals continue to provide contactless payment access through mobile wallets like Apple Pay and Samsung Pay, and big banks like Chase are starting to roll out their contactless plans for the New Year. It is crucial that credit unions be early adopters of contactless EMV. 2019 will be a turning point for the adoption of contactless EMV. Visa and Mastercard are working with transit authorities in cities across the country, including Chicago, New York and Atlanta, to accept phone apps and contactless cards for entrance into their mass transit systems. Once contactless has been

adopted by these mass transit systems, used by millions of Americans on a daily basis, adoption of other contactless methods – like payment with a contactless-enabled card – will increase and expand quickly. To prepare for contactless adoption and mass usage, credit unions must determine how they will get contactless cards in the hands of their members. As larger issuers like Chase order mass quantities of contactless EMV-enabled plastics and provide them to their cardholders, the price will drop, allowing CUSOs and larger credit unions to take advantage of this supply and demand on behalf of their members. Reissuance is still expensive, however. Credit unions need to decide whether to opt for a mass reissue – which many did when EMV chip cards hit the financialservicesindustryafewyearsago–ortosendcontactless EMV-enabled plastics when new cards are issued to members due to loss, fraudulent activity and the like. As contactless becomes more widespread, consumers’ demand for the latest technology will grow. Credit unions should get ahead of mass adoption now in order to keep their solutions and offerings as current as possible. The adoption of contactless EMV will further drive the acceptance and usage of digital payment methods and mobile wallets. When first introduced,there was a mass rush to adopt mobile wallets. But because not all merchants were accepting this form of payment at the time, usage dwindled. Contactless taking off over the next year will make digital payment methods such as tapping a contactless card at the register or using a mobile wallet app the new normal. While digital currently represents only 11 percent of all transactions, it can be expected that contactless adoption will increase digital acceptance. As we look forward to the payments space in 2019, every credit union’s to-do list should include fighting fraudsters,solidifying authentication and adopting contactless EMV. Focusing on these top priorities will enable credit unions to deliver the experiences their members


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have come to know and expect from their financialinstitution and trusted partner.

Chuck Fagan leads PSCU as its President and CEO, driving digitization of the cooperative to enable credit union growth and to provide an unparalleled member experience through service delivery, best-in-class payments solutions and security of member data. Chuck’s career

in the credit union industry spans over three decades, beginning at Virginia Credit Union managing

card services. In 1997, Chuck joined PSCU as the company’s SVP/Eastern Region Manager and in 2004 was named EVP, Chief Sales Officer, and helped pioneer the company’s role in bringing emerging payments technologies to credit unions. From 2013 to 2015, he was CEO of Credit Union Executive Society (CUES), a membership association dedicated to educating and developing credit union executives and emerging leaders. Chuck serves on Visa’s Credit Union Advisory Council and represents the industry on Visa’s Community Financial Institution Advisory Group. He holds a BSBA in finance from Longwood University in Farmville, Va.




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4 CU TRAINING

TURN ON YOUR TRAINERS

www.cubusiness.com

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T here is a lot of talk about how consumers aren’t just looking for products and services these days. They’re looking for and expecting an

experience. I continually have a number of conversations about this during pre-team building sessions with my clients. The first thing I explain to CEOs isit’s nearly impossible to consistently provide a positive member experience when the employee experience is poor. For all of you “numbers people” out there, it’s a fairly simple equation. C’mon, you know who you are. You’re the ones that immediately ask “What’s the ROI?” when the VP of Marketing wants to begin a social media campaign or the VP of Human Resources wants to implement a new training program. The equation is simply Happy Employees = Happy Members. Iheard thisfirst in theearly90sduringaBaxterCredit Union (BCU) event. A video of BCU’s firstCEO, Rex Johnson, was on the screen and he talked about his philosophy of creating happy members through happy employees. When BCU was started in the 80’s they had $0 assets. Today the credit union is just under $3 billion. Seems like a substantial ROI from the implementation of that equation to me. Surprisingly even today with such a strong and proper movement towards improved employee engagement, there remains a lack of leadership at that level. Unfortunately, I see it and hear it on a regular basis. “We already do enough for employees.” “They should just be happy they have jobs.” Both statements

I have heard within weeks of writing this article. This tends to lead to apathy at best and discontent at worst among employees. Logically how does the equation of “employees that don’t want to be here = a positive member experience?” That can’t possibly compute...at least not in that form. You can add some variables to the equation to make it work such as this:

BY KENNETH C. BATOR, MBA

Make Every Employee Part of “The Why”

CU TRAINING



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Unhappy/apathetic employees + pressure/micromanagement + turnover + throw money at the problem = a positive member experience That’s a lot of variables on one side of the equation. Sadly, on very limited occasion I have seen that equation work but it’s extremey expensive. Instead of throwing money at the symptoms why not allocate resources to solving the core problem with training, employee engagement, mentoring, and involvement? Let’s hit on the last point, involvement, for minute. I had a conversation with a CEO late last year who asked me why his people seemed disconnected despite a high-level of communication on management’s part. I explained it’s not just about sharing the why. Communication and transparency are great starts. They lay a strong foundation for a positive employee experience. The answer to this CEO’s issue, and the next step to building something special within the culture, is involvement.

Let me put it another way. You can grab a bunch of Legos, build something yourself, and explain all day why you made the structure you did. And people will probably understand but that won’t mean they’ll care. However, if you throw a bunch of Legos on a table and say let’s build something together, you’re likely to get a lot more interest and build something much better than you had initially intended yourself. The point is it’s not just about informing people about the why. It’s about making everyone a part of the why. Here are a few implementable tips to make everyone a part of the why and the story:

1. Have them create the process – There is a lot pushed down upon employees. New regulations. New software. New programs. Is there a wonder why employees can get disillusioned by constantly being told what is going to happen to them whether they like it or not? So when the business needs a new sales process, onboarding process, loan process, etc., wouldn’t there be value in starting the creation of those processes with the people responsible for their implementation and execution? Of course there would. Yes, you may get some crazy ideas. But you will also get many valuable ones as they already know what works and what doesn’t in their jobs, whether they tell management about it or not. And, besides, you are still the leader. You can mold their ideas into what the business needs but there is instant buy-in by making the employees part of the process from step one.

What does a

$24 subscription get?

• High Quality monthly magazine.• Website with 72 back issues• 700+ articles available

“On Demand”JUNE 2014 | VOLUME 9 | ISSUE 6 | $9.95

T H E B R A N C H B U S I N E S S T R A I N I N G I S S U E

The CU All Stars!

Paul Nunn (CU Training)

Emily More’ Hollis (CFO Currency)

Jennifer Anderson-Kapke (Compliance Update)

Keith Kelly (CU Mobile Mortgage)

James Collins (CU CEO)

Rex Johnson (Lending Solutions)

Laura Enock (CU Content)

Miriam De Dios (CU Outreach)

The Best Way

to Build Branches

is to Knock

Them Down

by James Collins

The Changing

Face of Business

Lendingby Laura Enock

Top row from left: Emily Moré Hollis, Paul Nunn, Jennifer Anderson-Kapke, Keith Kelly

Middle row: James Collins, Rex Johnson

Bottom row: Laura Enock, Miriam De Dios

may 2014 | volUmE 9 | ISSUE 5 | $9.95

t h E E - C o m m E R C E I S S U E

lending tools for a New generation of homeowner: eMortgagesby Keith Kelly

Credit Unions Keeping Up With Banks for Mobile Banking Services by Roy W. Urrico

Products Per Household: What Does it Mean to Your Staff?by Jack Kelly

Credit Unions Keeping Up



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CU TRAINING

Ken Bator is the author of The Formula for Business Success = B+C+S and the founder of Bator Training & Consulting, Inc. (BTC) Ken helps credit unions create environments where employees actually want to come to work and members want to keep coming back.

BTC accomplishes this through a combination of Branding, Culture building, and Strategic planning. This is the unique B+C+S Formula created by Bator and featured in his latest book. To have BTC assist your credit union in creating a differentiating and engaging experience, contact Ken directly at 714-681-2821 or [email protected]. Learn more about BTC’s training and strategic planning sessions at www.btcinc.net or www.speakermatch.com/profi le/kenbator/.

2. Have them lead the experience – If they were part of creating the process let the staff lead the process. That doesn’t mean allowing an individual to deviate from the system that the team created. It does mean allowing each individual to innovate. If the ubiquitous greeting of “How may I help you?” isn’t leading to business development discussions then allow staff to innovate. If someone suggests another conversation starter such as, “How are you enjoying our new premium checking?” let them try it and track the results. Always allow for suggestions and alterations to the process.

3. Incentives for everyone – Incentive programs don’t have to be just for sales. And not all incentives have to be cash. Sales is one important function of the business, not the only one. When we only implement commissions for the business development process and those involved in it there is a risk of alienating those that populate the other areas of the organization chart. Consider implementing an incentive program for different activities that contribute to the growth of the business and culture such as sales, executing new ideas,goingaboveandbeyondfortheteam,fillingin for a coworker, etc. Also consider multiple incentives such as PTO or gift cards to local restaurants and other businesses. And don’t forget the incentive of recognition in front of the team. Not everyone is motivated by cash.

The objective is to encourage active employees at every level. When they are a part of creating and enhancing the experience, it becomes much easier to work together to create a unique member experience as well. And, by the way, the experience for leadership usually becomes that much more enjoyable as well


http://www.btcinc.net

http://www.speakermatch.com/profi

https://btcinc.net/



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4 MARKETING MATTERS

TURN ON YOUR MARKETERS

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W hat is digital marketing? Digital marketing is an overarching term for all things related to online marketing, including everything from SEO to social media to websites to email

marketing and everything in between. You might be asking yourself, what is the big deal about digital marketing? Currently, 89 percent of Americans use the internet. As time progresses, that number will only increase. For credit union marketers, this means having an emphasis on digital marketing is imperative.

Here are four big digital marketing trends for credit unions to watch in 2019.

Mobilifi cationThe next time you are in line at the grocery store or sitting at a restaurant, look around and count the number of people looking at their cell phones. The number of Americans who own smart phones has more than doubled to 77 percent since 2011, and that should come as no surprise. Having a user-friendly mobile

app is the ideal option, but if that is not an option, your credit union website should be mobile-friendly at the very least. Allowing members to register for text updates is alsoagreatwaytoaddmobilificationtoyourdigitalmarketing strategy. If your credit union is offering a discount on tax services or free coffee at a local coffee shop, notify your members through a text alert. Start by sending one or two text messages a month and monitor the response.

ChatbotsA chatbot is a computer program that conducts an automated conversation. Credit unions can use chatbots for a variety of instances like member engagement and customer service. This automation assistance tool is especially helpful for frequently asked questions. PSCU’s Engagement Builder offers a chatbot feature that can be implemented on both Facebook and

BY TIFFANY MCEACHERN

Four Digital Marketing Trends to Watch in 2019

DIGITAL MARKETING



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Twitter. A credit union can enter its most frequently asked questions (what is the routing number, can I become a member, what time does your branch close, etc.) and the chatbot will respond automatically. This technology alleviates time and pressure from the credit union’s support team because responses are automated, and a support team member does not need to take the time to respond.

Social MediaIf your credit union is not already on social media, it is a huge missed opportunity. For many users, social media hasbecomeapartoftheirdailyroutine.Specifically,69 percent of Americans use at least one social media platform. Social media gives you the opportunity to share what your credit union stands for with members and potential members, and you can do it all for free or at a minimal cost. Mountain America Credit Union (West Jordan, Utah) does a great job when it comes to social media. It has formed a partnership with The Humane Society of Utah. The credit union’s social media platforms regularly feature pets that are up for adoption, as well as contests and giveaways. The most recent Valentine’s Day-themed giveaway resulted in more than 600 tweets in the firstweek alone, and all thatwas required to enter was sharing the contest via social media. Mountain America was able to reach hundreds of thousands of social media users for the cost of $200 in gift cards and eight dozen roses. The responsibility for social media does not have to fall solely on the shoulders of the marketing team. With branches in North America and Europe, Andrews Federal Credit Union (Suitland, Md.) uses Engagement Builder to let employees outside of the marketing department post on social. According to Marketing Communications Officer Scott Bolden, this allowsstaff to post timely, relevant content in real time. “The team at Andrews Federal is actively involved in the

communities we serve, and there is no better way to display those efforts than through social media,” he says.

User-Generated ContentIncorporating user-generated content into your digital marketing strategy should be a no-brainer. User-generated content not only saves your credit union money, but it also paints your credit union in an authentic light to consumers. After all, who better to talk about your credit union than happy members? BECU (Tukwila, Wash.) does a great job of leveraging user-generated content. Personal members can submit photos that celebrate big and small moments in their lives and be entered to win a Visa gift card. In return, BECU can then use these member photos in its marketing and advertising. Business members can submit photos that feature their business. Featuring testimonials from local businesses that use their business services not only creates exposure for both BECU and the business, but it also attracts other business owners who may be interested in using the credit union’s business services. To keep your credit union ahead of the curve, it is important to make sure your marketing strategy has a strong digital emphasis. These four digital marketing trends can easily be integrated into any marketing strategy, and it is important to keep a close eye on these trends as the year progresses.

Tiffany McEachern works with PSCU’s Engagement Builder team to help credit unions better manage their social media presence. Her background includes experience in content creation, market research

and strategy, web development and design consulting.



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A s the youngest member of KNG & Co. with “only” 24 years of consulting experience, I have seen my share of good performance evaluation systems and bad evaluation systems. In this article, I want

to share with you a bad evaluation system that was devised by the board of a billion dollar credit union to illustrate four pitfalls to avoid in your CEO evaluation process. Their plan was fairly simple and I am a fan of simple. There were basically two elements to the plan.Thefirstelement,weightedat25%,wasaboardCEO performance review – the traditional subjective evaluation of CEO performance scored on a 1-5 scale. Thesecondelement,weighted75%,wasbaseduponfinancial performance – return on assets (ROA), networth,assetgrowth,efficiencyandassetquality.At first glance, the second element, financialperformance, looks like a well-balanced set of measures. It includes the four counter-balancing areasofgrowth,profit,qualityandproductivity,plusacapital adequacy (safety and soundness) measure. The trouble resided in where the performance targets were set and this is a general shortcoming I see in most plans that I am asked to review. The board and management team developed a very thoughtful and robust three-year strategic plan. Thefirstyearofthestrategicplanwasreflectedinthebudget for the upcoming year. Seeing the connection between the budget and the strategic plan, the board was pleased, and approved the budget. What happened next is a common mistake boards make. They developed the performance metrics for theCEOindependentof thestrategicplan. Thefirstfinancialmeasure,anROAof0.70%,wasalignedwith

the budget. Unfortunately, the net worth, asset growth, efficiencyandassetqualitymeasureswerenot.Theywere based upon peer, and the targets represented significant departures from the budget and strategicplan just developed. Thetwomostsignificantdepartureswerenetworthand asset growth, and they were poorly thought out. The credit union used the traditional “minimum-target-maximum” approach in setting the performance targets for each measure. The “minimum” performance would provide a small reward, the “target” would provide a market-based reward, while the “maximum” would provide the highest reward. In order for the CEO to be rewarded for the minimum net worth element, the credit union would havetogenerateanROA1.10%,whichis57%moreprofit on the same amount of assets in the strategicplan;recall,thebudgetROAwas0.70%andanROAof1.10%is57%moreprofitextractedfrommembers.In order for the CEO to be rewarded at market for this element (i.e., target) the credit union would have to generateanROAof1.61%(230%ofbudget)on thesame amount of assets in the strategic plan. The same ugliness was present when digging into the asset growth goal. In order for the CEO to meet the net worth “target” in the incentive plan and hit the “target” on asset growth, the credit union would have togenerateanROAof1.75%inthecurrentyear. The comment the CEO made to me was “I don’t think the board wants me taking this much risk.” I could not agree more. The board was literally sending a message to maximize profit at the expense ofmembers, take excessive levels of risk, and ignore the strategic plan just developed.

LESSONS LEARNED: 1) If using financial

BY MIKE HIGGINS

CEO Review Pitfalls to Avoid

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measures as part of your CEO review, make sure they are tied to the strategic plan and not to peer. 2) NEVER use net worth as a factor that drives variable compensation (i.e., rewarding more for a higher net worth ratio). You might think you are doing this to reduce risk, but it actually invites more risk to meet the objective. 3) NEVER use ROA as a factor that drives variable compensation (i.e., rewarding more for higher ROA). ROA is profit extracted from membersandthegoalofafinancialcooperativeisto do the exact opposite – take only what is necessary. 4) Include a member value component;itcanbequantifiedandisagood way to integrate peer data into the overall evaluation process. It measures how well the credit union is deploying the resources entrusted to it. A BETTER WAY: A thoughtful CEO review process should include four elements plus triggers. The four elements arefinancialperformance,membervaluecreated, strategic initiatives and board evaluation. Items like ROA and net worth should be used as pass/fail triggers. If the triggers are met, the reward is either reduced or eliminated, but NEVER increased. If you would like to have us review your current CEO evaluation process for these, and other pitfalls to avoid, please reach out. Our contact information is listed below:Mike [email protected]://www.kngco.com/


http://www.kngco.com/

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BY DAVID ROSS

The Path from Descriptive to Predictive Analytics

ANALYTICS

Iwill never forget the time I received an escalation call from a member whose card had been declined for fraud prevention while checking into a hotel in Paris. She was

furious about what transpired, and her main argument was that we should have known it was really her using the card. Why? Because two months prior, she had purchased airline tickets on that same card. And the airline in question? It was not United, American or Delta – it was Air France. She exclaimed, “Is it really that unusual for someone to buy an Air France ticket and then two months later try to check into a hotel in Paris? You knew that it was me!” It was difficult to disagreewithher, as it shouldhavebeeneasy to predict the airline and hotel transactions were related. That was her expectation as a member 10 years ago in 2008 when that conversation took place. My team and I have seen member expectations continue to grow in the decade since. After years spent partnering with credit unions across the country, my team has found the best approach to knowing and serving members better is through the use of Predictive Analytics. Predictive Analytics, as the name suggests, can help credit unions determine the probability that something is going to occur in the future. This is very different from traditional reporting, which details what has already transpired in the past, and is often referred to as Descriptive Analytics. To be clear, a

credit union needs solid Descriptive Analytics as a foundation before progressing on to the predictive space. It is crucial to understand items such as how a portfolio has performed year over year, where members are transacting, how often a card is used, what interchange was received, how much interest income was generated, and what the total outstanding balance is. A credit union should regularly review reports and dashboards to evaluate KPIs, trending and other key metrics around the aforementioned items. If not available internally, a credit union’s card processor might have this information available. Digesting it is important not just to measure how well the portfolio has been managed, but also to identify potential areas of opportunity. For instance, a graph showing a steeper trend line for fraud losses versus peer groups could mean that a more conservative risk approach should be considered. But while valuable, such an analysis is not predictive in nature – it remains based on Descriptive Analytics.


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ANALYTICS

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4 TECHNICALLYSPEAKING

Predictive Analytics employs a mathematical approach to forecast outcomesPredictive Analytics by comparison is built on statistical data modeling, and probably the best-known predictive model in the credit union world is the credit score. Just as the credit score is used to assess the probability that a loan will be repaid, other predictive models can be built for a variety of use cases. For instance, a predictive model can be built to identify members who are likely to attrite. Similarly, a predictive model could be built to determine which members might be on the verge of becoming detractors, allowing the credit union to intercede before there is any impact to net promoter score (NPS). These are two powerful examples that leverage data to know the member better, and it is imperative to know the member better because that is the expectation today.

Cost and complexity are obstacles that need to be overcomeMoving from Descriptive to Predictive Analytics can present a challenge for many credit unions. To begin, detailed granular-level information is required. Even when a credit union has captured this type of data in a data warehouse, it still needs to deploy a statistical modeling platform with enough capacity and computational power to work with that data. It is also

possible that changes to the data warehouse design will be required to support Predictive Analytics. Once these items have been addressed, there is the need to have a human resource familiar with the techniques required for predictive analysis. Quite often this requires hiring a data scientist, a position that currently commands a six-figure salary in themarketplace.Plus, in2018,multiple publications have estimated a shortage of over 100,000 data scientists in the U.S., making the talent thatmuchmoredifficulttofind.Significantresourcesand costs are clearly involved, making the path to PredictiveAnalyticssomewhatdifficulttotraverse.

Partnering with a subject-matter expert can be a more efficient approachAs an alternative, a credit union might seek out a vendor or CUSO (Credit Union Service Organization) to assist with the transition to Predictive Analytics. This is a very practical approach, but credit unions should carefully evaluate with whom they partner, as there are several pitfalls that might be encountered. One important question to ask is how will the potential partner get the data needed to build the predictive models? If data needs to be sent outside the credit union, how frequently does it need to be transmitted, and is PCI/PII compliance in place? Another question to ask is who is responsible for the analytics, as some vendors provide a data platform only, leaving the analysis to credit union staff. Be careful to understand the actual capabilities the partner is offering – are they providing reports (Descriptive) or are they building models (Predictive)? Finally, ask what happens with the final output. Going back to the attrition modelexample, would the credit union simply receive a list of members likely to close their accounts? Would it be a scored list? What is the next step that should be taken? Taking this proactive approach will help ensure the selected partner is best aligned to meet the credit union’s needs.



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Once a credit union fully embraces Predictive Analytics, it will have insight into the membership that facilitates providing a level of service that exceeds even today’s high level of expectations. Members want to feel as if their credit union truly knows them at the individual level. With Predictive Analytics, credit unions can leverage their data to accomplish just that. Credit unions can know why the member has not activated a card, why a previously active card went dormant, or even when and where the member is likely to be traveling – something that personally would have come in handy back in 2008.

David Ross has spent the past 19 years working in a wide variety of data science and analytic roles. Most recently, he was responsible for global fraud analytics strategy and execution at Citi, a position that

required working with countries around the world to implement best-in-class analytics tools. David is currently leading the initiative to develop models for Predictive Analytics at PSCU.

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W ith additional rate hikes on the way from the Fed, examiners’ focus on Liquidity Risk Management (LRM) has increased meaningfully in recent quarters. The Financial

Crisis laid bare risk management practices that many regulatorsdeemedinsufficient towithstandthestrainimposed by tighter credit conditions and reduced access to funding, particularly in the wholesale market. Adequately responding to regulators’ comments and requirements will require risk managers to maintain a firm understanding of not only the regulatoryprinciples related to policies and procedures, but also of the methodology and procedures for stress testing theirinstitution’sliquidityprofile.

The Regulatory BackdropDuring the early stagesof the recentfinancial crisis,the Bank for International Settlements (BIS) published guidance on liquidity principles that regulators deemed fundamentaltoanefficientlyfunctioningeconomyandsafe lending institutions. While the core principles did notprovidespecificprescriptiveactions,theframeworkof the principles laid the foundation from which regulators would later build processes that are more descriptive. Within this context, regulators definedliquidityriskas“theriskthataninstitution’sfinancialcondition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its obligations.”

Regulators broadly assessed management practices at the time as lacking, citing a general absence of meaningful cash flow projections and contingencyplanning. To counter this trend, the policy statement re-emphasized the importance of thorough cash flow projections, diversification of funding sources,maintaining an appropriate cushion of liquid assets, and developing a contingency funding plan that was both formal and robust. Intricacy was also a key concern for regulators, in that very large and complex organizations needed to model the liquidity dynamics of their balance sheet/business model in a manner commensurate with the institution’s complexity. However, this should not imply that a simple institution should not develop an extensive stress test. Becauseofthefindingsandsubsequentguidance,regulators have recommended a variety of essential components of sound LRM practices that include:

• Board Oversight — Comprehend modelling, approve strategies,

and supervise implementation – the buck stops with the Board

BY TYLER DUNN

Sound Practices for Liquidity Risk Management

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• Comprehensive Measurement— Identify risk tolerances, use reasonable

assumptions, develop robust stress scenarios, and document strategies•ActiveIntradayManagement&Diversification

of Funding Sources— Regularly test collateral/funding sources, allow

for regulatory & operational limits, avoid funding mismatches, and avoid funding

concentrations• Maintain Adequate Levels of Highly Liquid/

Marketable Securities— Measure and test for the appropriate/necessary

level of liquid securities• A Comprehensive Contingency Funding Plan

(CFP)— Identify stress events, assess severity/timing

given current/potential funding sources, establish event management/response process, and establish monitoring framework for

contingent events

Liquidity Modelling Structure Risk managers often model the LRM framework with a “Sources/Uses” approach, wherein management identifies all sources of incoming cash and offsetsthatamountbyalloutflowsofcash.The“StructureofFunds” approach, which measures the change in the liquidity profile of marketable assets currently heldon the balance sheet relative to assets that are likely to become illiquid under adverse conditions, often augments or supports the sources/uses method. Sources of liquidity might include new deposits, maturing investments, interest/principal payments, fee income, asset sales, borrowing lines, repurchase agreements, or even asset sales (Structure of Funds). Risk managers should comprehensively measure all sources and uses of funding when measuring risk, no matter how small orseeminglyinsignificant.

The Role Of The Cfp The conditions or circumstances used for stress testing are closely related to the role the CFP plays with regard to contingency planning. In many ways, the CFP should help guide the scenarios used for stress testing an institution’s liquidity position. CFPs often define the conditions and relative severity ofmarketdownturns and the impact on sources and uses of liquidity. Thorough CFPs often establish a hierarchy of severity levels that correspond to stress events: for instance, Level 1 through Level 5, where the severity increases at each level. Additionally, each level often contains a description of the market conditions that might occur at each level. Level 1 might assume a 5%declineofcore funding(checking,savings,etc.),whereas,Level5mightassumea15%declineofthesame category of funding sources. An institution’s LRM framework should also rely on the CFP to delineate the responsibilities and escalation procedures required of managers and potential remedies they might use in each of the severity categories.

The Basics Of Stress TestingModelling an institution’s liquidity profile for stressevents can provide a great deal of insight for risk managers and board members. Stress scenarios can vary widely in their assumptions, including an inability to fund asset growth, the inability to renew or replace maturing liabilities, or the unexpected exercise options embedded within liabilities. Considering this variance, several key principles can help guide the modelling process. Most importantly, stress scenarios should contain realistic assumptions of depositor behavior. Risk managers should maintain and leverage data on their core depositors to determine their sensitivities to changes in market rates. This sensitivity can be used to quantitatively assess the likelihood and amount of anoutflowoffundsunderdifferentrateenvironments.

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For example, depositors with very high sensitivities are statistically more likely to withdraw funds when the level of market rates increases, and these accounts shouldresult inmoreoutflowsthanthosewithlowersensitivities – a very important consideration for institutions that use wholesale funding. Second, risk managers should model for a variety of periods, including daily, monthly and annual forecasts. Shorter measurement periods are often associated with maintaining operations, while longer periods can often be used in conjunction with strategic planning or stress testing. Measuring the effects of stress events can help determine the length of time that would be required to breach policy limits or exhaust secondary liquidity sources. In addition, while it can be helpful to measure the liquidity behavior of an isolated instrument or account, stress scenarios should be comprehensive with regard to effect on the total balance sheet. For instance, if a stress scenario assumes a shock in rates (say100bps), then the impactoncashflowbehaviorshouldn’t be limited to one side of the balance sheet. An increase in the level of rates is likely to affect liabilities via depositor behavior (e.g., high yield checking accounts withdrawing to obtain a higher rate with a competitor) resulting in an outflow of funds.However, this rate increase would also affect the asset side of the balance sheet, particularly with regard to borrowers’ prepayment behaviors. An institution with highexposuretofixedratemortgageswouldexpecttoseeprepaymentsdecreaseasratesincrease(cashflowextension), which would also place a strain on cash inflows. The LRM framework an institution uses can provide a variety of insights with regard to safety. However, risk managers can also use modelling assumptions to provide feedback related to the unexpected results of their balance sheet strategy. In addition to measuring the consequences of tighter liquidity conditions,

stress testing can also provide feedback to determine whether an institution is carrying too much liquidity, a circumstance that can result in lower returns and long-term capital growth.

ConclusionsThe quality of an institution’s LRM framework can meaningfully influence strategy in the long run andincrease short-term safety. A robust CFP and rigorous stress testing should be used in a constant feedback loop with each other, wherein the scenarios used for stress testing inform the limits and responses to market downturns. Management and board members that understand the regulatory guidance and use it to structure policies and procedures will likely be more prepared in the event of an unforeseen market shock. Organizations that seek continuous improvement of liquidity modelling through stress testing can use the results to gather insights into optimizing balance sheet strategies in addition to increasing safety.

4 CFOCURRENCY

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A s much as we are taught in college, in CUNA school, from webinars, and from conferences there are certain things that could really be useful to us that just aren’t taught in formal education. For

instance, when I studied for the Series 7 test shortly out of college I learned a number of regulations and useless tidbits about the market but nothing to teach me how to be a quality stockbroker for my clients or how to attract the right business. Even today I think about how I developed my knowledge of branding, culture building, and strategic planning and very little of that expertise was built from my degree programs. I’ve come to believe the same is true when it comes to the art of collaboration. Even in my MBA program on entrepreneurship, there was no discussion that I can remember about how to seek out and determine a good strategic partner for your business. Sure, there were classes about forming partnerships and other legal entities as well as developing contractual relationships. Those courses were about as exciting as a proctology exam. But nothing to help an entrepreneur or business professional determinehowtoevaluatethesynergiesandefficacyof partnering with another organization. Maybe that’s why it’s so hard for some, maybe even most people, to truly collaborate. Although I have clearly seen much more collaborative examples in the small business community than I have ever seen in my 25 years in the credit union industry…a so-called “cooperative industry.” For example, restaurants want other restaurants on their block. It makes it a destination. If one restaurant is packed the overflowgoes to the others. But, God forbid, another credit union opens a branch within 10 miles of another.

I saw plenty of positive examples of collaboration during a small business conference late last year. I attended the New Media Summit, an event for authors, speakers, podcasters, and consultants. I and many others networked but also truly collaborated. People talked about promoting each other’s books and shows. Consultantsandspeakers in thesamefielddiscussedsharing leads and even developing their own joint summits. One relationship therapist even pointed out thatwithfiveotherprofessionals in thesamefieldinattendancethatshedidn’thavefivecompetitorsbutfivepotential partners. This was a far cry from what I have heard within three different credit union associations in the past 18 months with the following: “Don’t let that credit union join. They just want to merge all of us in.” “That credit union isn’t coming to the conference, are they?!” And, my personal favorite, “If that credit union will be there we won’t be.” I hadn’t heard anything like the last comment since junior high so that was kind of nostalgic for me.

BY KENNETH C. BATOR, MBA

How to Collaborate

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Look, I get it. I’m not ignorant to the fact that there are (blanks) out there. (Feel free to insert your favorite synonym for “jerks” in the “blanks” section. My favorite also starts with a “J” and all my Chicago friends will know exactly what I’m talking about.) There are some restaurant owners that won’t work with other restaurant owners because they don’t have everyone’s best interests in mind. There are fellow speakers, authors, and consultants that I have absolutely no interest in even sitting next to during the next summit much less actually talk to. But that doesn’t preclude me from seeking out new people to partner with. As one fellow entrepreneur told me about 15 years ago when I started my own business “The right strategic partnerships can really make a big difference in the growth of your business.” So how should we collaborate? Here are a few things I’ve learned, both within and outside of the credit union industry, from good and bad collaborative efforts that I’ve had over the years. Trust but verify. Your close circle of friends and business associates is a close circle to you for a reason. So rely on the network you have built. As you develop a new business relationship that could develop into a true strategic partnership ask around. Ask about the credit union and the executive. Even if one person says he’s a (blank) or she’s a (blank) be cautious but come to your own conclusion. If multiple people form a consensus that’s negative about an individual or credit union you may want to create some distance in the relationship rather than collaborate on even a minor project. One person could just have had a bad experience. But multiple people having a bad experience with a particular executive or credit union is a trend you don’t want to be a part of.

Give and share what and where you can. I hear “I’m not going to share my plan in front of those (blanks)” a lot these days. I often argue that nothing any credit union, oranyotherfinancialinstitutionforthatmatter,offersis that special. What very well may be special is the staff that provide the experience in delivering what you offer.Thatisdifficultforanothercredituniontostealunless they start poaching your employees. However, if you do feel there is a part of your strategy that by some miracle nobody has ever thought of before, then, by all means, keep it to yourself. But don’t let that keep you from sharing whatever surface-level information on your operation that you can share. There may be a tip there that helps a small institution. Plus, the golden rule of networking is that you have to give something in order to get something. Also, if the local chapter meeting is full of competitors you have no desire to consort with don’t allow that from collaborating at all. Find another group or event to Collaborate – the league convention, GAC, an association, a group of execs on the street, whatever. There is no shortage of events or groups in the credit union industry. Don’t be a (blank) yourself. If your credit union is actively in search of merger partners, don’t be a

about.) There are some restaurant owners that won’t work with other

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Ken Bator is the author of The Formula for Business Success = B+C+S and the founder of Bator Training & Consulting, Inc. (BTC) Ken helps credit unions create environments where employees actually want to come to work and members want to keep coming back.

BTC accomplishes this through a combination of Branding, Culture building, and Strategic planning. This is the unique B+C+S Formula created by Bator and featured in his latest book. To have BTC assist your credit union in creating a differentiating and engaging experience, contact Ken directly at 714-681-2821 or [email protected]. Learn more about BTC’s training and strategic planning sessions at www.btcinc.net or www.speakermatch.com/profi le/kenbator/.

predatory (blank). Starting a conversation in a mixed group of board members and executives with, “So who wants to merge?” is probably not going to serve anyone, especially the person that said it. And, yes, I have actually heard that very question being asked. Instead, see the point above and give freely. Rather than sending letters or having attorneys call credit union CEOs trying to force a merger, offer to help merger targets. Many credit unions that offer help freely and build sincere relationships are tapped for mergers when the time is right. There’s a lot of business out there to be had and plenty for everyone. I know very few entrepreneurs and small business owners that became successful by doing everything him or herself. Strategic partnerships can beveryvaluableandprofitableifcultivatedproperly.So collaborate well today…but not like a (blank).

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F inancial institutions are no strangers to Machine Learning. Many institutions are investing heavily in this technology to improve cyber security, customer segmentation, and marketing campaign

management. To simplify the discussion, think of machine learning as self-driving cars, practical speech recognition, and effective web searches. Machine learning is the science of getting computers to act and learn from data without being explicitly programmed. Machine learning works with data and processes it to discover patterns that can be later used to analyze new data. Industry experts refer to machine learning as “training” that requires sending large amounts of data to the algorithm (a process or set of rules to be followed in calculations or other problem-solving operations) and allowing the algorithm to adjust itself and improve. There is no way a human can look at large volumes of data and make sense out of it. Even if it is possible, the data would be peppered with errors. Precisely why machine learning is considered a significanttechnological development that is so widely used in everyday situations that you probably experience without even realizing it. For example, have you visited an online store and looked at a product but didn’t buy it — and then saw digital ads across the web for that exact product for days afterward? Has your credit card been declined while you were traveling or on vacation? You may have been on the receiving end of machine learning.

Machine Learning Use CasesMachine learning’s capabilities are proving to be particularly useful in identifying patterns across large volumes of customer and user data and helping drive better outcomes. Here are a few use case examples of its impact on certain industries.Fraud Detection: Machine learning is getting better and better at spotting potential cases of fraud across many different fields. PayPal, for example, is usingmachine learning to fight money laundering. PayPaluses tools that compare millions of transactions and can precisely distinguish between legitimate and fraudulent transactions between buyers and sellers.1

Automotive Industry: Self-driving vehicles could lead to a safer, cleaner, more efficient future fortransportation. Software developers use machine learning algorithms to power computer vision that allows the vehicle to make decisions in ways that are similar to human decision making.2

Health Care: In computer-aided diagnosis (CAD), machine learning techniques have been widely applied to learn a hypothesis from diagnosed samples to assist

BY BREWSTER KNOWLTON

Explaining the Basics of Machine Learning

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medical experts in making a diagnosis. Machine learning has recently made headlines by helping to identify cancerous tumors on mammograms and to identify skin cancer. In a trade medical report, the results of a deep machine-learning algorithm helped diagnose diabetic retinopathy in retinal images.3 Additionally, machine learning can be used to understand risk factors for disease and assist physicians by more effectively diagnosing and treating patients.

Machine Learning Then and NowMachine learning continues to evolve and prove its worth in endless applications.Ten tofiveyears ago,companies were limited in their ability to analyzing data sets. The technology to learn from massive data simply didn’t exist. Today, with fast computers and swaths of data sets, companies can analyze and learn things that are much more complex. Plus, the renewed interest in machine learning in recent years has exploded even more due to the amount of data companies collect, consume and compute has grown exponentially. Beyond just a new technology buzzword, machine learning is reshaping many industries in a wide range of applications. Leveraging the insights, predictions and data-backed decision-making poses a tremendous opportunity for industries—especially for financial institutions. Throughmachine learning andthe data insights produced, financial institutions cansignificantlyimprovebusinessdecisionsandbusinessoutcomes—and machine learning will continue to refineandimprovetheseoutcomesovertime.Look for our next articles that explain artificialintelligence as we explore ways in which financialinstitutions can harness the power of AI and machine learning. If you are interested in learning more about how your financial institution can best utilize machinelearning applications, contact The Knowlton Group today. We are experts in data analytics and offer

several services to enable your organization to become data-driven.Sources:

1. Forbes, September 2016: Top 10 AI and Machine Learning Uses Cases Everyone Should Know About2. IoT for All: November 20173. The JAMA Network Journal: Dec. 2016

Part 2: Demystifying Artificial IntelligenceBynow,you’veundoubtedlyheardtheterms“artificialintelligence” and “machine learning”. If you haven’t already, take a quick read of our previous article where we explain the basics of machine learning. Today, banks and credit unions are learning how to use the power of artificial intelligence (AI) toboost customer engagement, decrease costs, improve revenue, and pin-point fraud. AI is poised to truly revolutionize the way financial institutions gatherinformation, harness data and interact with customers and members.So, what exactly is AI?AI all started out as science fiction: computers thatcan talk and think like humans. Industry experts use the term artificial intelligence as an umbrella termthat includes multiple technologies, such as machine learning, deep learning, and computer vision. AI is the generalfieldthatcoverseverythingthathasanythingto do with programming machines with “intelligence,” with the goal of emulating a human’s unique reasoning ability. Think of AI as developing computer systems to perform tasks that normally require human intelligence, such as visual perception, speech recognition, decision-making, translation between languages, and much more.

Uses Cases and The Power of AIFrom Google’s development of the driverless cars to Skype’s launch of real-time voice translation, AI is now becoming an everyday reality that is changing aspects of our lives. To give you a better idea of how


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AI is becoming more prevalent and how it’s evolved, here’s a short list of popular AI use cases and some applications FI’s are widely embracing today:Voice enabled assistants.Didyouknowthefirsttoolenabled to perform digital speech recognition was the IBM Shoebox, presented at the 1962 World’s Fair? Today, everyone is familiar with voice assistants and other smart device voice technologies. As more and more people gain familiarity with voice assistance to quickly gather information, we will be seeing an increase in acceptance of and a rise in the demand for other applications that rely on voice enabled technology. From healthcare to driving directions to workspace operations, this form of AI can make a significantimpactonhowbusinessesoperate. Financial services are a high-profile industry forvoice assistance. In December 2017, Jack Henry’s Symitar® division introduced voice-enabled financialtransactions to Amazon® Alexa® through its Financial Innovations Voice Experience (FIVE) solution. Consumers can simply speak to Alexa to conduct a wide variety of transactions such as: check account balances, transfer funds, make payments, get loan payoff amounts, cancel payment cards, and more.Smart Assistants: Smart assistants and home robots like Aido have come into the domestic scene. From assisted healthcare to automated customer service, consumers are experiencing the power of smart machines all the time. Even the Drone technology has been re-designed to accomplish tasks for you autonomously by a command on your smart phone. The capabilities and usage of smart assistants is expanding rapidly, with new products entering the market. An online poll found the most widely used intheUSwereApple’sSiri(34%),GoogleAssistant(19%), AmazonAlexa (6%), andMicrosoft Cortana(4%).Marketing Automation: Retailers and big brands are investing in the power of AI to further personalize and customize marketing emails based on customer

preferences and behavior to engage them more and to prompt consumers to make a purchase. AI tools and software allow companies to send customized email newsletters based on previous interactions recipients have had with content to create a richer, more engaging brand image.Risk Management: Fraud detection and risk management is an imperative focus for banks and credit unions. That’s why AI is being applied to fraud mitigation technology at a rapid pace. Through AI and algorithms, financial institutions are moreeffectively mining data to uncover suspicious activity and meaningful patterns, which then translates to information used to detect, spot, and mitigate fraud. Using AI to identify accounts, customers or transactions, for instance, that have unusual characteristics can expedite warning signs of abnormalities and verify suspicious activity that fraud is taking place.Analytic Tools: Financial institutions realize they have a head start with the application of AI, since they have large data sets and experience with analytical tools. Improving the customer experience is one of the greatest use cases for banks and credit unions since AI and advanced data analytics provides the opportunity for improved and faster decision making by deriving deep and actionable insights (e.g. customer behavior patterns). Some of these interactions will be with new voice or chatbot technology, while other applications


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will be behind the scenes, supporting marketing communication. The use cases of AI are limitless—especially for financial institutions.AI helps us open ourminds tohow machines can help perform task more efficientand more accurate, while delivering greater overall results. By partnering with fintech providers and dataanalytic professionals, the power of AI and the insights it leads to can be realized faster, ultimately determining the financial institutions’ competitive differentiationin the future. If you have questions regarding AI or machine learning, contact The Knowlton Group today.

Sources:Financial Brand: How FI are Turing AI into ROI. Sept. 2017USA Today: June 5, 2017: Apple Unveils $349 HomePod to bring voice to home audioDataversity: AI overview May 2017Internet of Things: Tech Target

Part 3: Technology Innovations Changing the Financial Institution EcosystemThe Financial Applications for AI and Machine LearningIf you’ve been following our FIRST and SECOND installments of this three-part series on machine learningandartificialintelligence,thenyouareready



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for our conclusion of how these advanced technologies and applications are changing the financial servicesecosystem. Artificial intelligence (AI) andmachine learning(ML) have been major contributors to the banking industry well before the advent of mobile banking apps and chatbots. Both AI and ML are beginning to play an integral role in how banks and credit unions operate and interact with consumers: from approving loans to managing assets and protecting against fraud. Though often perceived as the same concept and used interchangeably, they are quite different. In a nutshell, artificial intelligence is the simulation ofhuman intelligence processes by machines. Machine learning, on the other hand, is basically a sub-fieldin the larger AI research landscape. It is the process of using algorithms to learn from data and then make predictions about similar data in the future.

Leveraging AI and ML AdvantagesWith the volume, variety, and velocity of data increasingrapidly,financialinstitutionsarestartingtorely on AI and ML to make the most out of the wealth of data they own for more accurate, data-backed business decisions. Through machine learning, AI can easily and effectively consume and process large amounts of data at an expedited level. Its real-time speed offers efficiency as it continues to learn and become evenmoreefficientovertime.

Consider these key applications of AI and ML, and the benefits they offer:Lower Costs:AI and ML give credit unions and banks the power to bring together insights from diverse data sets to personalize marketing messages and to offer the right product to the right customer through the right channel at the right time. ML helps with better marketing efficiency,betteruseofresources,automatesprocessesand reduces wasteful onboarding promotions with

better-targeted marketing campaigns—saving time and money.Improved Customer Service and Online Experiences:According to the Content Marketing Institute (CMI), AI can help personalize messages, offers and interactions online. Chatbots use machine learning to understand customer behavior, track spending patterns and tailor recommendations on how to manage finances. Satisfaction is greatly improved when afinancial institution can provide product and servicerecommendations specifically tailored to individualconsumers.1

Fraud Detection: AI and ML programs can identify unexpected and suspicious actions for near real-time fraud detection. The value of this in cost alone is significantconsideringthatconsumerslostmorethan$16B to fraud and identity theft last year.2 ML systems have the potential to improve detection of money launderingactivitysignificantlyduetotheirabilitytoidentify complex patterns in the data and transactions.Better Compliance: According to Digitally Cognizant, asfinancialinstitutionsaretryingtoreininthecostofregulatory compliance they can unleash AI’s abilities to accelerate throughput up to three times. This could saveanestimated30%ofcompliancecostsannually.Plus, AI is helping regulatory compliance teams interpret regulatory meaning, comprehend what work needs to be done, meet requirements, and codify compliance rules.3

Enhanced Revenue and Profitability: As AI and ML enablefinancialinstitutionstobettertargetcustomerswith relevant marketing messages about new products and services, FIs can leverage this ability for more opportunities to onboard new customers/members and cross/upsell existing ones. These refined approachesleadtomoreprofitablebusinessoutcomesandgrowth.Improved Retention: AI and machine learning can help identify segments of the customer or member base that are at risk of leaving for a competitor. Through machinelearningandpredictivealgorithms,afinancial


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institution can forecast at what point in a relationship consumers are most likely to leave and what triggers a switch so they can put controls in place to reduce attrition at those trigger points.Increased Productivity: The automation of many, once manual, processes that were impacted by human errors isahugewin forfinancial institutions.Byprovidingcontinuous automation, ML offers greater speed and efficiencyinmanyareasofoperations.Overthenextfew years, AI will be used to transform the most central functions in banking, such as inter-bank reconciliations and the quarterly “close” and reporting of earnings, as well as engage in the more strategic functions such as financialanalysis,assetallocationandforecasting.4

Potential Challenges of ML and AIThoughAIandMLoffercountlesspotentialbenefitstofinancialinstitutions,likewithmostthings,therearepotential pitfalls. Some challenges the industry may experience with these innovative technologies include:

• The uncensored power of smart computers and algorithms presents financial institutions witha source of regulatory, compliance and privacy challenges.

• Some industry experts suggest that governance of machine learning algorithms is not as strong as it needs to be. According to Federal Reserve, rules such as SR11-7 Guidance on Model Risk Managementdescribe how models should be validated, these rules do not cover machine learning algorithms.5

• The complex IT landscapes burdened by legacy systems pose several challenges when adopting new technologies such as AI and ML.

• Automation produced by AI and ML will cause anestimated8%declineinthenumberof tellersbetween now and 2024.

• For ML to succeed, it needs access to large datasets. This means financial institutions must

make data freely available to ML software and solutions so they can ingest inputs and churn out accurate insights and predictions.

What the Future HoldsMachine learning and AI will continue to be in the limelight for many forward-thinking financialinstitution executives—and for a good reason. By advancing forward with AI and ML platforms, credit unions and banks can substantially reduce operational costsandsignificantlyimprovethebottom-line. Whether your institution has already invested in new AI and ML technologies or needing guidance on how to best leverage these applications, The Knowlton Group can help. Working with banks and credit unions each day across the country, we understand how to help our clients maximize technologies to yield the greatest outcome. Contact us today to start the discussion.

Sources:1. 8 Ways Intelligent Marketers Use AI; Content Marketing Institute. August 20172. Fraud Cost $16B to Consumers: CNBC, February 20173. How Banks Can Use AI to Reduce Regulatory Compliance Burdens: Digitally Cognizant, June 20174. AI Is Becoming a Major Disruptive Force in Many Banking Finance Departments: Forbes, February 20175. Federal Reserve’s Supervisory Guidance on Model Risk Management: Federal Reserve, April 2011

Brewster Knowlton is the founder and principal consultant at the Knowlton Group. He is also a leading expert in providing data solutions and strategies for credit unions.

december 2018 | volume 13 | issue 12 credit union industry ... · the operations issue the only...

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