What the Visionaries See, and What We Can Learn From Them

Many of you have no doubt read the October issue of CU Magazine which invited a number of visionary leaders of the U.S. credit union system to briefly describe their vision of what the CU system will look like 30 years in the future. We were pleased to contribute to this special issue and greatly enjoyed the rich and diverse comments provided by other system leaders.

It is interesting to note that in its September 14, 2012 issue, USA Today included a special section titled “The Next 30 Years” in which they invited global visionaries to provide their views of the world a generation from now. Their list of visionaries spanned a very diverse set of domains of expertise, ranging from Richard Branson to James Cameron to Bill Ford.

We certainly did not agree with all of the visions presented in “The Next 30 Years”, but that is not the point. After all, none of us can be certain of what life will look like three decades ahead. Consider, for example, the fact that 30 years ago the Internet and personal computers were both in their infancy. Few could have predicted how dramatically those two developments would redefine life as we know it.

The real value of any forward-looking exercise such as “The Next 30 Years” is not to debate particular scenarios, but rather to stimulate our own thinking about whether our own business models are robust enough to survive and thrive despite the turbulent changes that are almost certain to occur. In that regard, the entire USA Today section is worth reading. However, we found the comments of three visionaries to be of particular interest for credit union leaders: Marc Andreesen, Jack Dorsey and Blake Nordstrom.

The first of USA Today’s visionaries who caught our eye was Jack Dorsey, founder of Twitter and more recently Square, which is a dramatic new mobile payment system. It comes as no surprise that Dorsey is a huge fan of technological advancement. Dorsey comments: “Every technology was invented for one purpose: Enable humans to take actions faster.”

His future envisions a world where technology surrounds us seamlessly, almost to the point where we don’t even notice it. He wittily comments that no one today notices an electrical outlet, whereas 80 years ago they were a big deal. A key element of Dorsey’s vision is a cashless society, where most transactions are done with a mobile device. He is clearly taking a lead role in that direction with the introduction of Square, which has recently been adopted by Starbucks as the backbone of its retail payments network.

The implications of Dorsey’s vision for credit unions are comprehensive and profound. For many years we have considered a personal checking account to be the primary determinant of “preferred financial institution” status. A checking account, after all, is nothing but a payment system. In Dorsey’s next generation world, checks have no future.

Marc Andreesen is the 41-year old founder of Netscape and co-founder of the cloud-computing firm Opsware. Today he heads Andreesen Horowitz, one of the leading technology venture capital firms in Silicon Valley. Marc’s vision of the future might be deemed bleak and sinister by some, but none will question its boldness: “The spread of computers and the Internet will put jobs into two categories: people who tell computers what to do and people who are told by computers what to do.”

Andreesen goes on to predict the demise of the middle class: “There’s no such thing as median income; there’s a curve, and it really matters what side of the curve you’re on….There’s no such thing as the middle class. It’s absolutely vanishing.” In Andreesen’s future world, if you have not majored in science, technology, engineering or math, you are likely in trouble. Nonetheless, he strongly feels that America continues to provide the best opportunities in the world for entrepreneurs given our ultimately pro-business environment.

Why is Andreesen’s vision important for credit union leaders? The credit union business model today is largely built around lending to the middle class. We typically don’t play in the high end of the market and, despite recent growth in the number of certified Low Income Credit Unions, most credit unions do not generate significant income serving the low end of the market. Therefore, Andreesen’s predicted demise of the middle class is something that would deserve our attention. But is Andreesen right? Only time will tell. What do you think?

The final visionary of interest was Blake Nordstrom, President of Nordstrom Inc. and great grandson of Nordstrom’s founder, John W. Nordstrom. Blake Nordstrom, who oversees a retail chain with 234 stores, sees a future in which retail customers are “channel agnostic”, shopping whichever channel is most convenient (see Dorsey’s comments above) at a given time.

In his world cash registers are a thing of the past. In fact, many Nordstrom stores have already abandoned cash registers and moved entirely toward mobile devices, similar to an Apple store. Nordstrom also predicts the demise of the fitting room as we know, noting that Intel has already developed a “mirror” that allows a customer to see how they would look wearing the latest fashion item, without actually trying it on!

We were particularly impressed that Nordstrom Inc., which is generally regarded as providing one of the best retail customer experiences, is already preparing for a world in which the nature of the customer experience may be very different from that of today. What are the implications for CU leaders? Think about branch design and channel optimization.

A final thought we had as we read the future visions of these highly successful business leaders is that their visions are not going to take 30 years to materialize. In fact, many elements of their “future” visions are already living realities today. The scary part is that the “real” future may be beyond the sight of even our greatest leaders today.

Debit Fee Interchange Income: All Clear or Danger Ahead?

In our last post, CUs’ Checking-Related Fees = Better Value for Consumers, we noted that increases in the credit union system’s other operating income as a percentage of average assets are generally off-setting recent declines in fee income stated on the same basis.  While this is certainly good news, a key component of other operating income, debit interchange fees, came under pressure in 2011 with the implementation of the Durbin Amendment. 

Under the Durbin Amendment, debit card issuers with total assets ≥ $10 billion had their debit card interchange fees capped at $0.21 per transaction, plus 5 basis points multiplied by the transaction’s value.  Furthermore, non-exempt financial institutions that comply with the Fed's fraud-prevention standards may charge an additional $0.01 fee.  Some analysts and regulators thought the Durbin Amendment might also indirectly lead to a decline in debit card interchange fees for exempt financial institutions, i.e., those with total assets < $10 billion.  Prior to the Amendment’s implementation, there was some concern that card networks might not offer two-tiered fee structures to accommodate higher interchange fees for exempt financial institutions.

The following graph, based on a Fed survey of payment card networks released earlier this year, shows average debit interchange fees in 2011 for both exempt and non-exempt financial institutions.  Average fees are shown for both the nine months prior to implementation of the Durbin fee cap (January-September 2011) and the three months after its implementation (October-December 2011). 

As expected, non-exempt financial institutions experienced a dramatic decline in average debit interchange fees for signature (59%) and PIN (32%) transactions once the cap went into effect on 10/1/2011. In contrast, the impact on exempt financial institutions’ average debit interchange fees was relatively minor: a 6% decline for signature transactions and a 3% decline for PIN transactions.

Despite the relatively small initial impact on exempt institutions’ average debit interchange fees, a number of real and potential headwinds may still put this important source of revenue at risk:

• Per the General Accounting Office (GAO), the Fed’s regulation implementing the Durbin Amendment “prohibits issuers and card networks from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks.”  To entice retailers to route debit transaction through their networks versus competitors’ networks, some card issuers may reduce their debit interchange fees.

• The Fed survey identified only one card network that did not offer a two-tiered interchange fee structure as of late 2011.  However, as the GAO report suggests, “economic forces” might cause some card networks to discontinue offering a two-tiered structure profitably.  The higher fee structure offered to exempt institutions might be phased out by some card networks if this scenario plays out.

• Finally, widespread adoption of alternative payment methods could also lead to a decline in debit and credit card interchange income:
• Some retailers attempt to steer consumers to payment methods that reduce retailers’ costs, e.g., discounts for cash payments or retailer-issued ACH debit cards, such as Target’s Debit REDcard.
• A number of alternative payment providers offer payment options (example 1 and example 2) that bypass the card (interchange) networks entirely by tapping either ACH or proprietary networks.

Where do you see debit interchange income headed?  Please share your thoughts and any relevant anecdotes of your credit unions’ post-Durbin experiences in the Comments section below.

CUs’ Checking-Related Fees = Better Value for Consumers

Recently, Bankrate.com released results of its 2012 surveys on bank and credit union checking fees.  A comparison of these two surveys suggests that the 50 largest credit unions appear to be widening their relative value on checking-related fees vs. the five largest banks and five largest thrifts. 

First, the credit unions in Bankrate.com’s survey have expanded their lead over these competitors in terms of the percent of institutions offering free checking, i.e., no monthly service fee.

     Percent of Institutions Offering Free Checking

Source:Bankrate.com

While some may question the economics of offering free checking, TCF Bank bucked the prevailing trend in banking this past summer by re-introducing a free checking product.  The bank, which previously dropped free checking in 2011, cited its desire to differentiate itself from larger banks as a principal reason for changing back.

Second, Bankrate.com noted that 58% of the credit unions surveyed require a minimum balance of $1.00 or less to open a new checking account.  The average required minimum balance for these credit unions amounted to $11.88 with the highest required minimum balance being $100.00.  By contrast, the average minimum balance required by banks in Bankrate.com’s survey was $723.02, up 23% over 2011.

Finally, credit unions have maintained their advantage vs. banks in the largest single source of credit union fee income: overdraft or NSF/courtesy pay fees.  As can be seen in the following graph, credit unions’ average overdraft fees were $4.61 lower than the bank average in the 2012 survey.

Average Overdraft Fees

Source: Bankrate.com

Holding the line on checking-related fees is not without its costs; fee income as a percentage of average assets has declined since its peak of 87 basis points (bps) in the third quarter of 2007 (see following graph).  Fortunately, this decrease was offset by relatively rapid growth in other operating income as a percentage of average assets, which has grown over 22 bps since the beginning of 2006. 

Credit Unions’ Fee & Other Operating Income / Avg. Assets

Source: NCUA 5300 Data and CUNA Mutual Group analysis

Interchange income is a key component of other operating income that many expected would decline, either directly or indirectly via market forces, with the introduction of debit interchange caps in October 2011.  In an upcoming installment of the Sustainable Growth Blog, we will delve deeper into the impact of the Durbin Amendment.