Do Credit Unions Have an Unfair Advantage on Interest Rates?

by tom 22. May 2015 08:55

For those of you who may have missed it, on April 30 the National Credit Union Administration(NCUA) passed new regulations designed to limit the way some credit unions recruit members. Credit Unions say the new regulations are too strict and will impede their ability to serve their members, but the banks say the regulations don’t go far enough. When you look at the issue in depth you have to ask yourself if credit unions really have an unfair market advantage over banks. Do current credit union membership recruiting practices need to be changed to level the playing field?

At issue is the fact that credit unions get tax advantages because they serve members typically linked by a “common bond,” i.e. members are teachers, or in the armed forces, or members of a specific group. The tax protections make sense when you consider the  history of credit unions. Originally, credit unions were a form of microfinance designed to provide needed financial services to farmers and disenfranchised communities underserved by local lenders. However, in today’s economic climate, some credit unions are seeking to expand their charter to serve the community at large while retaining their special interest tax status.

Many credit unions have broadened their membership criteria so anyone who has a pulse can join. Rather than serving common interest groups, credit unions have opened their doors to all, and banks are complaining this gives credit unions an unfair advantage – they can offer better interest rates than banks and still retain their tax exemptions.

The new NCUA ruling is designed to rein in those abuses. Basically, the new ruling states that any charity or organization formed by a credit union must have a purpose other than broadening the credit union’s membership base. Credit unions argue that the new ruling is unnecessary, since there is already a test in place to determine if an association or group is legitimate. In fact, in announcing the ruling, the NCUA stated that over the past three years, 99 percent of credit union applications would have met the criteria of the new requirements so any concerns by credit unions are largely unfounded. The NCUA also identified 12 types of associations that would automatically qualify for credit union membership, such as alumni groups, labor unions, and parent-teacher associations.

There are, of course, exceptions. Eighty three credit unions currently describe themselves as open to everyone, which is 40 percent more than there were in 2011. Some of these credit unions were formed for special interest groups and have since expanded their mandate to accept anyone. These are the offenders that banks point to as being unfairly competitive because of tax exemptions that allows credit unions to offer better interest rates. The new ruling failed to include provisions that credit unions felt were too onerous, including a test that new associations operate independent of the credit union for one year, or that any existing credit union members can be grandfathered in.

Critics from the banking community point to credit union tax exemptions as unfair competition, but how much does that really hurt bank revenues in the long run? What the bankers often overlook is that credit unions appeal to certain members because of the power of the tribe. Whether a common bond is real or simply perceived, credit unions give members a sense of belonging that banks have trouble replicating. People join credit unions because they have pride in the tribe, the group that makes them special, and they expect the credit unions to treat them accordingly.

To be more competitive, banks have to not only compete on deposit rates and product fees, they have to compete on service. Banks can’t bring that inherent sense of tribal membership, but they can offer customers more personalized service and make them feel special in other ways. Those banks that can appeal to customers as people and not just depositors are going to be more successful at wooing away prospective credit union members. Banks looking to compete on rates alone are overlooking one of the most powerful assets that credit union members bring to market; making their customers feel important.

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Credit Union Trends | In The News | Regulations

Weekly Term Accounts APY Spread and Premium Index–May 18

by tom 18. May 2015 16:33

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Time to Simplify Overdraft Fees

by tom 18. May 2015 13:08

Rick Barham, founder and CEO of Market Rates Insights, recently wrote this article for publication in BAI Banking Strategies.

It’s time to simplify overdraft (OD) fees. Better yet, it’s time for banks and credit unions to completely rethink their overdraft fee strategy to simplify terms for customers and address the concerns of the Consumer Financial Protection Board (CFPB), which is scheduled to issue new rules in July. Barham Head Shot_2015

OD fees are increasingly unpopular and very complex. Here are some basic definitions of overdraft products:

  • Overdraft protection: FI sweeps funds from an alternative deposit account (such as checking or savings) or via credit facility (generally a line of credit or a credit card) to cover a shortfall.
  • Overdraft forgiveness (sometimes called “overdraft courtesy,” “overdraft privilege,” or “bounce protection”): FI offer customers a “grace” amount to overdraw the account.  They will still be charged an overdraft fee, but the customer’s check/ATM/debit/bill pay/etc. will be paid, and funds are swept and nonsufficient funds (NSF) charges apply. This applies to both checks and debit transactions.
  • No protection (sometimes called “return all”): FI rejects a check when an overdraft is attempted by the customer, who still faces a “returned item fee” or NSF. Debit cards are typically denied under this plan.

Customers find these service options conflicting, confusing, and punitive. Here’s one typical comment by one Consumer Watchdog columnist writing for the Times Leader in Wilkes-Barre, Penn.: “Some banks call it debit-card overdraft ‘protection.’ Others call it ‘coverage.’ Either way, it’s a misnomer if I’ve ever heard one. What it really means is that if you ‘opt in’ to this racket and then overdraw your account using your debit card, the bank will slam you with a fee that’s typically about 35 bucks. On the other hand, if you incur an overdraft with your debit card and have not signed up for ‘protection’ or ‘coverage,’ the bank charges no fee at all.”

Meanwhile, the CFPB confirmed in January that overdraft protection fees will be an agenda item that the agency plans to address in July. When a regulatory body has a product or service in its sights, we often look to our data to see if business practices shift ahead of expected policy decisions. So, what’s changed with OD fees? Our internal databases based on a sampling of 500 plus banks and credit unions show the following:

For the period of January 2015 to March 2015, the “differences” between what banks charge and what credit unions charge for OD and NSF fees remained consistent throughout the time at about 10% and 12% respectively. OD protection fees did exhibit much larger swings, with differences throughout the time period narrowing from 61% to 56%, with banks lowering OD protection fees, and credit unions raising theirs. These differences can be explained by credit unions starting from a significantly lower point than banks, a renewed attention to banking competition at the start of the year, or perhaps recognition of the CFPB July agenda item.

At a more granular level, NSF fees for banks started at $31.50 on average in January and for credit unions at $28.50. Banks’ NSF fees drifted down to $31.37 on average in March while credit unions moved down to $28.48.  For OD fees, in January banks started at $31.80 on average dropping to $31.76 in March while credit unions started at $28.26 and moved up only fractionally to $28.27 in March. For OD protection fees, banks started at $6.49 on average in January and credit unions at $4.02 (again, a difference of 61% versus March of 56%). Banks drifted down on OD protection fees in March to $6.47 on average and credit unions moved up to $4.14.

What this all shows is that it’s business as usual! The CFPB ruling has been anticipated for some time and yet there has been no real change in the industry’s approach to OD fees. There has been no real effort to assuage the CFPB or give customers a more palatable alternative with a new OD model. It’s time to look outside the banking industry for a fresh approach to the OD fees problem. Other industries have faced similar challenges and came up with innovative new solutions.

In the telecommunications market, for example, competing cellular carriers were offering complex service packages that left customers confused about roaming charges, data usage, friends-and-family plans, rollover minutes, equipment fees and unexpected service fees. So many variables and hidden fees made shopping for the right service difficult. T-Mobile changed that with the introduction of a simple, “all-you-can-eat” plan that treats all transactions as “data” with limits. Rather than hiding fees, they created a simple plan with no contracts and made it easy-to-understand. As a result, the company closed the fourth quarter of 2014 with an additional 2.1 million subscribers, a total of 52.9 million, making T-Mobile a looming threat to larger carriers.

When you look back at the basic overdraft definitions cited above, it seems that complexity comes from a “baklava of legacy services” that have been progressively added over many years. Today, most of these services are little understood or appreciated by consumers. Just as mobile is finally looking at everything they offer as “data,” we hope that there’s a financial institution out there that will step forward with a new model of OD fee simplicity. And by that, we mean offering programs that are permission-based/opt-in, covering all transactions and not just some and only under certain conditions. We also think that the next 90 days would be the perfect time to release such a simple, all-in-one service plan that will appeal to regulators and consumers alike.

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Banking Trends | Fees

Are Peer-to-Peer Payments a Threat to Banking?

by tom 30. April 2015 15:01

One of the side benefits of the mobile technology boom is the ability to access data anywhere at any time. Consumers armed with smartphones can access books, maps, videos, tickets, anything available in a digital format, and that includes cash. If you think of most banking transactions as bits and bytes sent between bank computers to handle transactions, then data becomes cash. Just look at Bitcoin. Once you turn pennies into bits and bytes it opens up new transaction possibilities for anyone armed with a computer or a smartphone, which is why the peer-to-peer payments market is thriving, especially with new products emerging as part of social media.

First There Was PayPal

PayPal was one of the first peer-to-peer payment systems and has evolved with time. Originally, PayPal started as a means to buy goods online, launching with eBay in 2000. The concept was simple enough – simplify online transactions by creating a secure means of transferring funds easily, without a credit card. Today PayPal has grown so that many e-commerce sites accept PayPal as routine payment, and it has become a standard for payments between small businesses and individuals.

While PayPal is incredibly convenient it is not free. PayPal charges a 2.9 percent transaction fee for payments. While it’s useful for online purchases where the vendor picks up the fees, it’s less valuable for peer-to-peer payments since someone has to pay the transaction fee.

Google Wallet has been the closest competitor to PayPal and is accepted on a number of e-commerce sites as well as storefront locations like Starbucks. To promote Google Wallet adoption, Google has teamed up with major AT&T, Verizon, and T-Mobile to make sure that Google Wallet is installed on all Android smartphones for near-field communications (NFC) transactions.

Payments Go Social

The newest trend is social payments. Venmo, for example, was launched by PayPal in 2011. Unlike PayPal Venmo is completely free when used with a bank or debit card, and has a 3 percent transaction fee for credit card transactions. What makes Venmo different is social connections.  Venmo is designed to connect friends and family and includes a newsfeed in addition to money transfers. And Venmo is popular. Forbes reports that Venmo hit $314 million in Q4 or 2014 matching pace with the Starbucks’ mobile payment app.

Peer-to-peer payments are being integrated into social media services as well. Facebook and SnapChat have added peer-to-peer payments. Just send your roommate the rent over Facebook Messenger, or touch phones to split the bar bill. Moving money to pay friends and family has never been easier, and you don’t have to write a check.

If You Can’t Beat ‘Em…

So how does this affect banks? Consumers who use these services have to tie them to a bank account, debit card, or credit card, so banks aren’t losing customers. However, banks are still losing an opportunity to increase their share of wallet.

Most of the big banks offer some kind of mobile payment or peer-to-peer payment system, but they are not open. SurePay is available from Well Fargo but to send money, both the sender and recipient have to have to be set up for the system. QuickPay from Chase is useful only after you have logged in to enroll in the service. U.S. Bank has an instant payment system for $3.50, next day payments for $0.75, or three business day payments are free. The beauty of all the emerging peer-to-peer payment startups is they are free and open, so it doesn’t matter what bank the end user has. And these services bypass the Automated Clearing House (ACH) which typically delays transactions a few days.

Some banks realize it’s going to be difficult to compete in peer-to-peer, so they are embracing third-party payment services. BBVA Compass recently announced that it has allied with Dwolla to deliver real-time payments. By using Dwolla, BBVA can deliver real-time transactions by circumventing ACH. The service is not free – Dwolla charges a flat fee of $0.25 for transactions above $10 – but BBVA customers get to use their bank for real-time transfers, with Dwolla serving as the transaction engine.

As the BBVA case shows, peer-to-peer payment services may really be considered coopetition. They do offer services that banks can’t do well. such as instant peer-to-peer payments, and many do it for free. However, banks are still essential for providing the funding foundation for these services. Maybe it’s time banks took a closer look at some of these services and found ways to bring them under their own services umbrella, as BBVA Compass has done – customers get the convenience from their bank, rather than a third party. Any strategy that allows the banks to deliver the perceived value promotes better customer service, more customer loyalty, and bigger share of wallet.

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Weekly Term Accounts APY Spread and Premium Index–Apr 27

by tom 27. April 2015 17:23

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Non-Banking Mortgage Taking Business from Banks Despite the Risk

by tom 24. April 2015 17:55

The rise of alternative payment services, such as PayPal, Google Wallet, Venmo, and Apple Pay, offer convenience for customers and more competition for banks, and credit unions, but they also pose a greater risk to consumers. The recent security problems with Apple Pay fraud, for example. have been well publicized. And this highlights one of the root problems with alternately financial services – they lack government backing. There is no government oversight or FDIC regulations to monitor these services for financial stability or even fraud.

The latest concern is over mortgage lenders. A news report in American Banker this week explains the dilemma facing Ginnie Mae – they don’t have the resources to police non-banking mortgage lenders.

FHA Loans at Risk

Large banks have ceded the market for riskier borrowers to non-banks, especially for mortgages. However, the borrowers may have more to lose than the non-bank lenders. Any one of a number of events could put theses companies into financial hole that could make it hard to stay in operation, let alone pay off their backers. Ginnie Mae doesn’t have the resources to monitor the financial health of these firms. Ginnie Mae is asking for a bigger budget to expand their mandate – it currently has a staff of 145 and a budget of $23 million – but the majority of loans backed by the Federal Housing Administration (FHA) are now being made by companies without any supervision.

According to the latest estimates, more than 62 percent of FHA-backed home loans are held by non-banks. The number of FHA loans held by large banks has dropped to 30 percent.

Although none of these companies have defaulted to date,  the risk is still there. Some of these firms have been raising cash as a cushion for the time when rates rise, which will happen. They also need to be prepared to defend against potential lawsuits in the future. Since mortgage lending is cash-intensive, there is more risk; when a loan defaults the lender still has to pay bondholders.

Riskier Mortgages Lucrative for Non-Banks

These maverick lenders are doing a booming business, One of the latest entrants in the U.S. mortgage market is  SoFi The company started by refinancing student loans and now has a $100 million portfolio, offering mortgages up to 5 million in 17 states. SoFi is competing effectively by offering an all online loan application process, and authorizing mortgages with as little as 10 percent down payment.

SoFi is getting most of its funding from Goldman Sachs, Barclays, Credit Suisse, and Deutsche Bank in to from of warehouse lines of credit, and it secured peer-to-peer loans in 2014.  Sources at Goldman Sachs estimate that non-banks could steal as much as $11 billion in profits from banks, including $2.3 billion in mortgage servicing and fees.

Could these non-banks trigger another mortgage crisis if market conditions shift? No one has the tea leaves to read that future, but the fact that these unregulated organizations are commanding more of the FHA-backed mortgage market should be cause for concern. Not only could the failure of these companies affect the housing market, their success in selling mortgages to higher risk buyers could mean more poaching of mortgages from banks and credit unions. These companies offer great term rates with low down payments that are attractive to any potential home buyer.

This is just another market segment where non-banks are attacking bank profits. Today, they are lending to those buyers who wouldn’t qualify for a loan but tomorrow is another day. Maybe today’s mortgage banks should be start thinking about tomorrow.

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In The News | Loans | Regulations | Banking Trends

Weekly Term Accounts APY Spread and Premium Index–Apr 20

by tom 20. April 2015 17:32

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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National Pricing Indicator | CD rates | Market Research

What Drives Customer Loyalty? Integrated Channels and Convenience

by tom 16. April 2015 19:28

You have probably heard about the Brand Keys 19th annual Customer Loyalty Engagement Index that ranked customer satisfaction for the top banks. There were six banks in the ranking – most likely because the same six banks were consistently named by the 36,000 consumers surveyed. The banks that ranked in the survey included PNC Financial at number six, Bank of America at number five, Wells Fargo at number four, ATB Financial at number three, and Citigroup at number two. JP Morgan Chase ranked number one for the fourth year in a row. What is Chase doing right that promotes greater customer loyalty than the competition?image

The Motley Fool did its own editorial analysis of the rankings. JP Morgan Chase is doing a better job reaching customers through social media and technology. The bank leads the industry with more than 3 million Facebook followers and is active on various social media platforms, targeting itself to serve the Millennials and the small business market.

To service its established customer base, the Baby Boomers, JP Morgan Chase has been expanding its banking services to include investing. Where the bank had virtually no wealth management services four years ago, the bank now has dedicated services for customers who have been less affected by the recession and are looking to maximize their investments.

And all this good will and customer high fives comes as JP Morgan Chase announced it is closing 300 branches or 5 percent of its locations over the next two years. Customers don’t seem too worried about losing their local branches – the number of deposits made with assistance from a human teller dropped to 42 percent last year, where it was 90 percent in 2007. Mobile deposit and ATMs are taking over. The benefit for the bank, of course, is savings. JP Morgan Chase reports that it costs on average $0.62 per teller deposit versus $0.03 for a mobile deposit.

Technology is not only driving banking innovation but customer loyalty. Bain & Company reports that integrating banking channels, including web, mobile, ATMs, and branches, is driving loyalty.By using technology to integrate its banking channels, JP Morgan Chase has gained share in every region of the United States.

Bain conducted its own survey of 83,000 consumers in 22 countries to assess how technology is affecting customer service and improving bank profits. This is what they uncovered about mobile technology, merging channels, and customer loyalty:

  • 50 percent of customer transactions were through digital channels in 18 of 22 countries. More than half used both digital and physical channels such as a branch.
  • Mobile banking has become the most used in 13 countries, accounting for 30 percent of global transactions.
  • Online usage dropped 3 percent while mobile usage jumped 19 percent in one year.
  • Consumers use multiple channels to research new banking products. Forty-seven percent of U.S. customers consulted banking web sites and 37 percent talked to a banker.
  • Bain also notes that “hidden defection” is on the rise and one third of all customers bought a banking product from a competitor in the last year.

Innovation is driving customer loyalty, which in turn is building deposits. Chase is reported building its deposits and loans, reducing noninterest expenses, and boosting its asset management revenue. Loyalty on one area, such as mobile banking, is opening opportunities to increase share of wallet.

So how big a role is technology playing in your banking strategy? Do you see your channels converting to promote greater customer loyalty?

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Interested in the latest product trends from banks and credit unions? Be sure to signup for ProductBuilder Alert, our weekly sampling from our ProductBuilder database of financial product ideas. Here’s a sample from this week:

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Weekly Term Accounts APY Spread and Premium Index–Apr 13

by tom 13. April 2015 17:46

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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National Pricing Indicator | APY | Market Research | CD rates

Turning Branch Banking Into a Virtual Experience

by tom 9. April 2015 10:51

Not long ago we commented on predictions regarding the decline of the branch bank. While only 1 in 11 banks is actually planning to close branches, we also are seeing a new type of branch bank emerging that can be set up anywhere – the virtual bank.

Interactive Teller Machines (ITMs) are finding their way into shopping malls and locations where setting up a bank branch doesn’t make economic sense. We are seeing more financial institutions experiment with these virtual banks that connect the customer with a live teller who can handle virtually any transaction.

Transactions are handled much in the same way as they are at an ATM, but using an interactive video link to talk to a teller at a remote location. Among the financial institutions announcing installation of ITMs in recent weeks are LAFCU in Michigan, University Federal Credit Union, in Utah, Frontier Bank in South Dakota, and Comerica Bank in suburban Phoenix. Jack Buttars, CEO of University Federal CU, boasts, “These machines can do everything you could do at a branch. There's no service we can't offer.”

For banks and credit unions the advantage, of course, is that ITMs can be installed almost anywhere. They have a very small footprint – usually the size of the average vending machine – and all they need is a secure Internet connection to deliver two-way audio-video service. Rather than paying for brcik-and-mortar offices and on-site staff, banks are consolidating their services at centralized call centers where tellers interact with customers anywhere in the country via video chat. For many institutions, ITMs are proving an effective alternative to branch banking.

One of the real advantages of deploying ITMs is they help expand a bank or credit union’s market reach. Many rural areas that would not generate enough business to support a branch bank can certainly take advantage of an ITM. Now areas that never had banking services available before can now get almost all the services they need via ITM.

Is Internet technology a substitute for face-to-face interaction? Of course not, but it’s a close substitute. Right now, virtual tellers are assisting customers with routine transactions at strategically placed kiosks, but there is no reason that ITMs can’t evolve into full-service operations capable of handling loans and investments as well. Anyone can get a loan online these days, so there is no reason that banks can’t extend the same service via ITM.

The next logical step is to eliminate the kiosks altogether and enable virtual transactions from your home computer. There is no reason that the same connection that links smartphone and Web users to bank services can’t be expanded to accommodate video chat. Why not negotiate a new car loan from the car dealership, or review your investments from the local coffee shop.

We certainly won’t get rid of banks and credit unions any time soon, but bricks and mortar banking is becoming less relevant to customers. The power of the Internet will continue to promote frictionless banking, and save financial institutions time and money as ITM technology continues to evolve.

The Latest from ProductBuilder Alert

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