Corporate Credit Unions and the 8-Track

This was originally written and posted for the CU Times. Here is the article in its entirety:

Corporate credit unions are quite the unpopular kid at prom these days. With fresh allegations of fraud from senior executives at some corporates, dismal investment portfolios, and lackluster capital positions, corporates are riding a wave of negative publicity. With massive changes to their business model on the horizon and the threat of further regulation, corporates face the same dilemma that the 8-track cassette tape faced:  obsolescence.

Unlike 8-track, the popular audio cassette technology from the 1960s and 1970s, the corporate credit union system has not been short lived. However, forces are changing the marketplace, arguably making corporate credit unions much less relevant. In its January 2009 ANPR, the NCUA suggests making changes to nearly every key component of a corporate credit union’s business model including payment systems, liquidity management, field of membership, investment authority, and capital structure.

Progressive corporates have seen the writing on the wall and have launched new internal programs in preparation for the NCUA’s upcoming systemic alterations.  CU Business Group represents a great example of this concept. A CUSO owned by eight corporate credit unions, CUBG provides mainly business services related items such as loan origination, servicing, and SBA lending. The CUSO model has been quite appealing to corporates lately as a way to branch out and diversify some of their services and revenue.  Many corporates are beginning to get into the CUSO game such as Southeast and Georgia Central with Member Business Solutions and Missouri Corporate and the Missouri Credit Union Association with their CUSO, Heartland Business Services.

The CUSO structure provides a solution not only for corporates, but also for natural person credit unions looking to overcome some of the current issues with corporates. Nearly all services offered by a corporate credit union to its member credit unions are being offered through CUSOs. For example, Palmetto Cooperative Services of South Carolina offers item processing, statement processing, and printing and mailing services. Originally started as a League Service Corporation, Palmetto now boasts more than 400 clients across twenty states.

Investments have been a source of much anguish from the corporates, but many alternatives are provided through CUSOs as well. CUSOs such as MaPS Advisory Services offer complete replacements for portfolio management.  When asked why a credit union would choose a CUSO over a corporate for investment options, Kevin Cole, CFO of MaPS Credit Union and Manager of Client Relations for MaPS Advisory Services, had this to say: “MAS can provide credit unions with an alternative to investing funds in corporate certificates that does not require uninsured membership capital.  Rather than credit unions investing in corporate certificates and corporates investing in mortgage backed securities and other bonds, credit unions can directly own the securities with MAS managing the portfolio to a written investment policy statement developed specifically for the credit union.”

Card and ACH processing is another mainstay of corporate credit unions, but again, many options are available to credit unions of all sizes. PSCU, The Members group, and CO-OP are just a few of the CUSO card processors out there today.  PSCU has over 600 credit union owners and CO-OP has one of the largest ATM networks in the nation.

As practically every operating aspect of a corporate credit union is available from other providers, natural person credit unions will begin to look elsewhere for products and solutions. In today’s economy, credit unions are avoiding risk at all costs, and that includes any potential issues that may arise from utilizing a corporate credit union. Such risks might include changes related from mergers and acquisitions, key employee turn-over, or further capital calls.

While the more modern cassette tape replaced the 8-track in the 1980s, the outdated standard still had a leg up on the competition in sound quality. That advantage was very short lived and within a few years of being introduced, the cassette tape killed 8-track. Corporate credit unions are currently at the same turning point as the 8-track.  CUSO’s and other providers can deliver the exact same services and products to natural person credit unions that a corporate credit union can deliver. While corporates do maintain some slim advantages, they will be quick to deteriorate as the NCUA hands down new regulations in the future.

CUSOs represent a unique opportunity for the credit union industry. Corporate credit unions can capitalize on that opportunity by creating new CUSOs to deliver their existing products in a different format or by adding new business lines. These new business lines could contribute significantly to the bottom line of the corporate, helping to diversify revenue and decrease reliance on products with embedded risk.  Natural person credit unions can also leverage CUSOs to collaborate on new joint ventures to better serve themselves and other credit unions.

Time and time again, new technologies over take old. New businesses enter a market and crush existing competitors. The companies, and business models, that survive have a major skill at their disposal: their ability to confront change. The corporate credit union model is being challenged and if corporates are going to survive, they need to confront that fact and embrace all the tools available to them to ensure that they do not become the credit union equivalent of the 8-track.

Strippers ask for voluntary taxation

Stripper TaxOne of my most popular posts ever, probably for the evocative title, was Do stripper strip at home? Drawing more similarities between credit unions and strippers, the issue of taxation has come up. However, in this particular instance, the strippers are asking to be taxed.

In light of the poor economic and budgetary shape the city of New York is in, they are facing tax cuts to schools and the removal of programs. To help combat this shortfall of funds, and most likely for some good publicity, some strippers from Long Island are asking for a “pole” tax. Boiling down to a cover charge or door fee, stripping establishments would collect the fee with the specific purpose of sending that “tax” back to a local school. While entirely voluntary, the group of stripping advocates are lobbying to make this tax required by the state.

Sin taxes have existed for years on cigarettes, beer, liquor, tobacco, and the like while very few states have a stripping tax currently on the books. Some may call CRA a sin tax as well, forcing banks to reinvest, or pay a special tax depending on one’s point of view, into their local community. Seeing as credit union taxation is such a hot topic, what would happen if a CU stepped up and asked to be voluntarily taxed? A credit union could come out and say, “Because we care about our community so much, we’re going to pay a voluntary tax of 1% of our net income into the general school fund.” Would some CU’ers freak about calling it a tax rather than “community involvement”?

Mica and Leggett to form new consulting company

Dan Mica and Keith LeggettDan Mica and Keith Leggett have announced today that they will be forming a new consulting company to assist credit unions and banks with strategic planning and political efforts.

Dan Mica announced his retirement plans in late 2009, but has been tight lipped about his destination until now. As a former Congressmen, Mica has very unique insight into how the political process works and how best to accomplish the goals of an industry. Keith Leggett, a senior economist with American Bankers Association, has been critical of credit unions and the NCUA in the past, especially in regards to business lending, corporate credit union issues, NCUA governance, and field of membership restrictions. In reference to the recent creation of a new low-income designated credit union, Leggett had this to say, “…I guess being a rogue agency is part of NCUA’s culture.”

While some may be initially shocked that such an avid credit union supporter would be joining forces with what many describe as an enemy of the credit union industry, the combination of their unique skill sets could be advantageous for credit unions and banks.

It will be interesting to see how this plays out in the industry. With Mica partnering with Leggett, could it be viewed as him jumping ship and getting in bed with the ABA? On the other hand, Leggett may be viewed has suddenly having a soft heart for credit unions. Either way, the pair will have a tough boat to row, potentially polarizing any potential clients. The industry will watch with anticipation once the company is launched in January 2011.

Here’s the full press release.

When the hand that feeds you starts feeding themselves

Warning: Slight technical discussion ahead follow by shallow stabs at credit union marketing.

Google announced today their new Google Public DNS service.  For those not in the know, recursive DNS, which is what Google is offering, is simplistically a phone book.  It translates “Mr. and Mrs. Johnson” to 800-555-5555.  Applied to the internet, it translates cuemployee.com to 74.208.31.243, which is the IP address of the server running my blog.  As is the Google norm, it is free.Every computer you use to get on the internet has to use a DNS server and normally these are managed by your ISP, but there are other options.

home-footer-logoEnter OpenDNS.  They’ve been around for a while now and provide both a free DNS service as well as paid options.  With their free option, you as a consumer get very fast resolution when you type a domain name in and it is smart enough to send you to the correct page when you type in google.co.  When a domain name is mis-typed or does not resolve, you are directed to one of their search pages which contains ads, by Google of course.  Here’s an example.  So OpenDNS pays for their servers, staff, etc by the AdSense revenue they gain from their sponsored search pages.

So what do you do when the company that pays your bills goes into the exactly same business you are in?  Does OpenDNS now race against Google for the fast DNS resolution?  Nobody can compete on price since it is already free.

Sounds familiar, doesn’t it.  How are credit unions supposed to differentiate their free checking accounts from one another?  I’m sorry, is it a checking account, share draft account, or a spending account?  Is your checking account free-er than your neighboring credit union?  Wait, you focus on member service, so that’s your differentiation, right?

Take down by the FDIC

TDECU‘s Safe & Sound page has been killed by the FDIC.  Here is a link to the cached page and the site now redirects to their normal site.  I can see how this may be a sensitive topic to some, but regardless, it is good to discuss it and any implications it may bring for future CU’s.  No where does TDECU talk about a specific bank, just the industry in general.  I don’t see how this is any different than any of the talking heads on CNBC blabbering on about the market and if your money is safe.  CU Times caught wind of it as well although their article doesn’t seem to back up TDECU as much as I thought it should.  Is this just bankers pushing credit unions around or is the safe and sound site a little too “alarmist”?

Welcome to communism

We are seeing our free market capitalism disappear before our eyes.  

SEC bans short-selling

Fed takes control of AIG

Treasury set to bail out Fannie Mae, Freddie Mac

The founding ideals of our country are so closely tied to the basic premise of credit unions (member-owned, democratically controlled) that I now can see how credit unions will be different in the future: they won’t exist.  Whether the threat comes from the Treasury Department’s Blueprint for a Modernized Financial Regulatory Structure, which omits the NCUA from the President’s Working Group on Financial Markets and merges the NCUA with the new FDGA (Federal Deposit Guarantee Administration), or some new “measure” that the government takes to shore up the markets, credit unions will face a major threat if the government continues to bail out large financial institutions.  

Imagine telling our members where they could spend their money at.  Oh, I’m sorry, we have a corporate agreement with Chevron and you can’t buy gas at Shell or BP.  Mister Member, we’ve noticed you’ve spent too much money in Vegas and Atlantic City in the past few months so we’re going to put your assets in control of the credit union to insure proper usage.  Crazy you say, right?  AIG messed up and rather than letting the people who took the risk get hammered, the government is bailing them out.  Banning short selling is even more shocking to me than that.  

This is a silly argument, but what would happen if a CU told their members where they could spend their money?  The members would leave.  Or using the US-credit union analogy again, we’d use our democratically elected officials to change the rules.  

I’ll leave you with a quote from the 10 Planks of the Communist Manifesto:

Centralisation of credit in the banks of the state, by means of a national

bank with State capital and an exclusive monopoly.

I'm a millennial/Gen Y and proud of it!

Last night 60 Minutes aired a piece on "Millennials", people born between 1980 and 1995 (aka Gen Y), entering the workforce and what complete junk. 

Apparently we are self-absorbed and we need to learn how to use a knife and a fork.  I don’t know about you guys, but I never had my parents speak to my college professors because I didn’t like my grade.  Oh and we have no idea what it is like to be at work at 9 o’clock and have someone hand us work.

Complete and utter one-sided BS.

 

Clips from the actual show: Part 1 & Part 2

Here’s the piece from 60 Minutes

Thoughts from 37Signals

YouTube Parody

50 and 50

The Fed just dropped the discount window another 50 bps and the fed funds rate 50 bps.  The 50 bps drop in the funds rate was quite a surprise and the Dow jumped nearly 200 points immediately. 

Credit unions now need to carefully observe their balance sheets and manage appropriately if they are asset or liability sensitive.  All of those CD promos did good things for liquidity, but CU’s are going to be hurting if they are long on those CD’s.  Expect to see those CD promo rates drop as well as those wonderful money market funds.  Hold on to your balance sheets, it is going to be a wild ride!

Mmm, Cake… Cake Financial that is

Cake Financial has launched their public "alpha" today at TechCrunch40.  Bringing a new spin to social networks, Cake enables investors to track their performance next to their peers, their friends, and other investors.  By automatically plugging in to most of the major brokerages, Cake can automatically retrieve your holdings for up to ten years and track your performance compared to the rest of Cake and the market.

From their blog:

Specifically designed with the 40 million Gen X and Gen Y consumers in mind, Cake is a new kind of financial service. Members can open an account with Cake in minutes because there is no transfer of money or change in existing brokerage relationships to get started. Instead, members can link their Cake account to an unlimited number of existing portfolios from leading online brokerage firms. This allows Cake community members to see up to 10 years of historical activity as well as current portfolio holdings, trading activity and performance data of fellow members. All safely, securely and anonymously.

A recent study from the Harvard Business School reveals that many ordinary investors consistently beat the market. Cake is designed to allow members to capture and share the behavior and habits of these high performers with each other. 
Social networks are slowly beginning to infiltrate investing.  Motley Fool picked up on it with CAPS last year and Cake has this latest offering.  CAPS does a great job gauging the whole market, but Cake brings more intimate, person-to-person conversations to the table.  Can’t wait to see how Cake matures.  Go check it out.