APRIL 2018 NEWS.CUNA.ORG

PAYMENTS Perils and promise

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[email protected] 1 3/5/18 7:17 AM April 2018 Volume 84 Ñ Number 4

FEATURES 20 Payments: Perils and Promise Despite competitive pressures and fraud concerns, the payments arena offers new opportunities to connect with members. Amid an explosion of mobile payment options, credit unions must define their true value proposition for the member.

26 Cards Are (Still) King While digital payment options generate the most buzz, credit and debit cards still drive the competitive payments market. Credit unions with successful card programs prioritize service, rewards, and convenience, and segment members based on usage patterns.

30 Open Banking on its Way The market shift toward granting third parties access to banking information to deliver members services is both exciting and scary. Credit unions must prepare for open banking’s impact on member relationships and competitive pricing.

(COVER ILLUSTRATION: SCOTT KHAIL)

4 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org BETTER RETIREMENT OUTCOMES FOR THEM. LESS RISK AND MORE RESOURCES FOR YOU.

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CUNA Mutual Retirement Solutions is a division of CUNA Mutual Group and the marketing name for CPI Qualified Plan Consultants, Inc., a CUNA Mutual Group member company. CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Annuity insurance products are issued by CMFG Life Insurance Company, located in Madison, Wisconsin. Each insurer is solely responsible for the financial obligations under the policies and contracts it issues. Securities distributed by CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer, 2000 Heritage Way, Waverly, Iowa 50677, toll-free 866.512.6109. Non-deposit investment and insurance products are not federally insured, involve investment risk, may lose value, and are not obligations of or guaranteed by the financial institution. Representatives offer retirement and investment education but do not provide investment, legal or tax advice. Participants are encouraged to consult their own advisors. Mercer Investment Consulting is a leading global provider of consulting, outsourcing and investment services with over 2,700 clients and 50 offices worldwide. Mercer provides advice, strategic guidance, reporting, and fiduciary oversight to its roster of international clients, including CUNA Mutual Group. Mercer meets with the Board three or more times a year to provide economic commentary, detailed investment reports, and guidance for the Board in making their investment decisions. References to Mercer shall be construed to include Mercer LLC and/or its associated companies. 401K-1446318.1-0316-0418 © CUNA Mutual Group, 2016 All Rights Reserved.

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LEADING EDGE

TWENTYFOUR/SEVEN

12 Use empathy mapping to better understand members’ financial well-being—and how best 40 to serve them. Cybercrime predictions for 2018 include smarter malware authors and a looming ‘bot’ battle.

14 PRESIDENT’S PERSPECTIVE 42 TOOLS OF THE TRADE Open your eyes to the Credit Union Awareness Initiative’s research-backed, consumer-driven In the arms race against card fraud, identify brand platform. the best solutions to protect members and your credit union.

16 TRENDLINES Knowledge of local conditions enables credit WORLDWIDE unions to succeed in business lending.

18 SPOTLIGHT New CUNA Board Chairman Maurice Smith prides himself on being a ‘credit union nerd.’

COMPLIANCE MATTERS

44 Displaced populations in Colombia can access financial services thanks to World Council’s partnership with local credit unions.

46 BRANCHING OUT What do you get when your annual information technology exam and April Fool’s Day coincide?

8 POSTAL INFORMATION 36 A new CUNA compliance resource contains all 10 ON MY MIND 2017 major regulations and effective dates, along 45 ADVERTISING INDEX with CUNA’s final rule analysis. 45 MARKETPLACE

38 NEW IRA LATE CONTRIBUTIONS REQUIREMENT The IRS now requires separate reporting on Form 5498 of any late rollover contributions self-certified by an IRA owner.

6 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org AMERICA’S CREDIT UNION CONFERENCE

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Daniel Lerner Jeff Henderson Jonathan Mildenhall Whitney Johnson Speaker, Author, Coach Celebrity Chef and Author Marketing Expert and former Author and Business Leader Marketing Of cer of Airbnb

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Special Report: CUNA HR & Organizational Development Council Conference The credit union movement’s premier human resources/ organizational development conference will include ses- EXECUTIVE COMMITTEE

sions on workforce planning, leadership from the front MAURICE SMITH • chairman, Raleigh, N.C.

lines, maximizing potential with emotional intelligence, and how to develop BRETT MARTINEZ • vice chairman, Santa Rosa, Calif.

“bench strength” for important positions. TROY STANG • secretary, Seatac, Wash. Keynote speakers include author/motivational speaker Steve Gilliland, who’ll ex- BRAD GREEN • treasurer, Sheffield, Ala. amine how to make a difference in others’ lives, and Patrick Henry, author of “The Pancake Principle,” which outlines 17 ways to make your members flip for you. TONY BUDET • member-at-large, Austin, Texas JIM NUSSLE • president/CEO, Washington D.C./Madison, Wis.

PAT JURY • immediate past chairman, Des Moines, Iowa The challenge of offering feedback Providing feedback to co-workers is an uncomfort- able experience for many people. But failure to deal DIRECTORS

with bad behavior creates a toxic work environment, DALLAS BERGL Ind.; PAT DRENNEN Iowa breaks down teamwork, and gives power where it SCOTT EARL Colo.; CHARLES ELLIOTT Miss. doesn’t belong. Taking six steps will help carry you through a feedback session and come out feeling GARY FURTADO R.I.; LISA GINTER Kan. good afterward. ROGER HEACOCK S.D.; TOM KANE Ill. DEBIE KEESEE Wash.; MARIA LAVELLE Pa.

MARIA MARTINEZ Texas; PATRICK PIERCE Minn. Do you offer a ‘Cotton Candy Frappuccino’ experience’? FRED ROBINSON Tenn.; JOHN SACKETT Wis.

We expect a great experience no matter where we shop, where STEPHANIE SIEVERS La.; SCOTT SULLIVAN Neb. we are entertained, where we eat, or how we manage our money. JOE THOMAS Va.; SCOTT WOODS S.C. That’s because there is little if any difference between the experi- ences we want to encounter as individuals and what members JEFF YORK Calif. expect from their credit unions. On that premise, start with a simple question: When you think of your expe- riences with Amazon, how would you describe them? And how can your credit LEADERSHIP union get to that point? JIM NUSSLE • president/CEO JILL TOMALIN • chief operating officer

MOLLIE BELL • chief engagement officer Addressing the knowledge gap RYAN DONOVAN • chief advocacy officer A survey of more than 700 credit union executives found that although most understand that data analytics can be a game-changer, only 26% actually know TODD SPICZENSKI • chief products & services officer how to use analytics. Some experts view data analytics as a tool to see and DOUGLAS KIKER • chief strategic communications officer understand member behaviors. It can parse data in many different ways and provide fresh insights into member behaviors.

Credit union people. Credit union ideas. POSTAL INFORMATION

Credit Union Magazine (ISSN 0011-1066) is published monthly for $80 per year by Credit Union National Association, 5710 Mineral Point Road, Madison, THE CUNA NEWS PODCAST WI 53705. (Multiple-copy and multiyear discounts available.) Periodical postage paid at Madison, Wis., Subscribe on iTunes, Google Play, and additional mailing office. Copyright 2018 by Credit Union National Association. Photocopying is illegal and or Stitcher Radio. Or tune in at unethical. POSTMASTER: Send address changes to Credit Union Magazine subscription department, P.O. Box news.cuna.org/podcasts 461, Annapolis Junction, MD 20701-0461. Single issues are available; call 800-348-3646.

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8 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org Continuous access to relevant training for your entire staff

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cuna.org/trainingbundle © Credit Union National Association 2018 ON MY MIND

MANAGEMENT ANN HAYES PETERSON Listen In vice president/editor-in-chief 608-231-4211 • [email protected]

Consumers listen to an average of seven podcasts per EDITORIAL STAFF BILL MERRICK week, Edison Research reports. deputy editor 608-231-4076 • [email protected] MICHELLE WILLITS deputy editor 608-231-4067 • [email protected] When people talk, we ADAM MERTZ associate manager listen. 608-231-4342 • [email protected] JENNIFER WOLDT And so do you. Our CUNA News senior editor podcast launched about 18 months 608-231-4290 • [email protected] RON JOOSS ago, and continues to generate thou- senior editor 608-231-4321 • [email protected] sands of downloads each month. CRAIG SAUER senior editor Research tells us you’re listening at 608-231-4918 • [email protected] ALEX McVEIGH home, in your car, and at your office. senior editor If you haven’t tuned in yet, here 202-508-6767 • [email protected] are two executives recently featured DESIGN & PRODUCTION BEN TENORIO • digital media design specialist on our podcast: CARRIE DOYLE • graphic designer u Jose Garcia, president/CEO, TREESA LANDRY • publishing specialist Northwest Community Credit Union ADVERTISING in Morton Grove, Ill. ANN HAYES PETERSON, JOE DAY vice president Garcia embarked upon two stra- editor-in-chief 608-231-5794 • [email protected] [email protected] MICHELLE DOSHER tegic partnerships to diversify and 608-231-4006 • [email protected] strengthen his credit union. LISA DUSHACK 608-231-4220 • [email protected] First, Northwest Community young credit union professionals who Classified ads: THOMAS GERARD established a fully student-run want to make an impact: Don’t take 608-231-4257 [email protected] branch at St. Xavier University in feedback personally—and always be fax 608-231-4263 Chicago. Recently, the credit union prepared with solutions or research. EDITORIAL ADVISORY BOARD developed a relationship with Spe- “Rather than thinking, ‘I’ve been BRAD ASPGREN • American Airlines FCU, Fort Worth, Texas cial Olympics of Illinois, and soon shut down,’ ” Guyselman takes the SANDI CARANGI • Mercer County Community FCU, Hermitage, Pa. MICHELLE HUNTER • CU of Southern California, Anaheim will launch its first campaign geared view that, “ ‘OK, this is just a detour, KEVIN KESECKER • SECU, Linthicum, Md. toward that constituency. not a dead end.’ I need to rethink it, STEVEN LANGLEY • Schools Financial CU, Sacramento, Calif. RICHARD S. MILLER • FeatherStone Planning and Consulting “We feel that if we could estab- absorb that feedback, and come at PETER STEIN • Educators CU, Racine, Wis. lish a relationship, those organiza- it from a different angle.” Present

tions will promote the credit union your ideas thoughfully and logically, MAILING ADDRESS among the constituents they serve,” she adds. CREDIT UNION MAGAZINE P.O. Box 431 Garcia says. “We feel that strategy is Guyselman makes an effort to stay Madison, WI 53701-0431

best versus trying to grow within the connected to her community—its SUBSCRIPTION SERVICE community one member at a time.” concerns and successes—and mem- SUBSCRIPTION DEPARTMENT P.O. Box 461, The most formidable obstacle to bers’ financial literacy needs. “I don’t Annapolis Junction, MD 20701-046 Northwest Community’s growth know how you can be real if you’re 800-348-3646 is consumers’ lack of awareness of constantly living in your own bubble, Fax: 301-206-9789 credit unions, Garcia says. “Member- and not interacting with people all ship does make a difference,” he says. around you,” she says. “We need to tell that story more” to We’ll continue to tap our move- connect with potential members. ment’s innovative thinkers and Subscribe Today (See p. 14 for an update on the emerging leaders, like Garcia and Two easy ways to order Credit Union Awareness Initiative.) Guyselman. And we hope you’ll keep your subscription to u Rachel Guyselman, CUNA’s first listening. Credit Union Magazine: Emerging Leader Award recipient and the vice president of operations LISTEN TO CUNA NEWS PODCAST u Call 800-348-3646 at Tongass Federal Credit Union, INTERVIEWS WITH THESE THOUGHT u Visit news.cuna.org/subscribe Ketchikan, Alaska. Her advice to LEADERS AT NEWS.CUNA.ORG/PODCASTS

10 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org Accessible, reliable and comprehensive compensation data.

CUNA COMPENSATION ANALYTICS

Get access to the data from the 2018-2019 CUNA Staff Salary Report with CUNA Compensation Analytics, our cloud-based research tool that allows you to manipulate the information to meet your specific needs.

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© Credit Union National Association 2018 u INNOVATION u IDEAS u INSPIRATION

Use Empathy to Understand Members Credit unions can’t serve members To determine those stories, Mor- entire staff is certified as community in a one-size-fits-all fashion. rell says his credit union went development financial counselors. “We cannot treat every single per- through a process called empathy Understanding your members’ son we interact with the same way,” mapping, or understanding what stories and aligning your passion Jim Morrell, president/CEO of $179 influences a member’s story. with your credit union’s mission will million asset Peninsula Credit Union The process involves figuring out benefit your credit union and make in Shelton, Wash., tells the CUNA what the member is thinking about, a lasting impact on the member. News Podcast. “Everybody has their seeing, doing, and hearing in their “Between your personal passion own story.” own lives, as well as what pains and and the mission of your organiza- opportunities exist. All of these fac- tion, you’ll create ‘wow’ stories that tors contribute to how the member will benefit people—not only for feels about their financial well-being. their lifetime, but for the genera- At Peninsula, that means meeting tions that follow and what gets left with members at locations in the behind,” Morrell says. community. Also, inspired by taking part in the National Credit Union HEAR MORE FROM MORRELL Foundation’s Credit Union Develop- ON THE CUNA NEWS PODCAST Jim Morrell ment Education program, Morrell’s AT NEWS.CUNA.ORG/PODCASTS

Online Poll Developing Leaders In-House Heritage Trust Federal Credit Union behind training and developing a in Summerville, S.C., has developed highly effective workforce,” says a program that identifies high- Robin Horlback, the credit union’s potential employees and provides training director. “Highly effective the tools they need to grow into workers are engaged in all aspects of effective leaders. their work and inspire others to do 58% The L.E.A.D. program—which the same. These individuals display stands for Learn, Excel, Analyze, and confidence, competence, and enthu- Develop—is a comprehensive, eight- siasm. They lead by example.” month program facilitated by the Participants complete behavioral employee development and training assessments to improve their deci- division of the $592 million asset sion making. They also engage in of credit unions plan to spend credit union. interactive workshops to maximize more on social media Heritage Trust Federal recently their strengths, improve perfor- advertising in 2018. recognized the first nine employees mance, transform behaviors, master Source: CUNA News monthly online poll to complete the program, which skills, and support the responsibili- challenges them while teaching valu- ties of supervision and leadership. Next month: Does your credit union able skills that foster an environment The group also works on an offer domestic partner benefits? of teamwork and collaboration. outreach project for the commu- “The motivation behind the nity, then develops a presentation VOTE AT design of the L.E.A.D. program and pitches their idea to the credit began by assessing the drivers union’s senior management team.

12 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org 5 Mistakes That Kill Employee Trust In an age of disruption and relent- make in this regard: things go wrong, your impulse less change, companies must be fast, 1. Avoiding conflict. If you’re might be to keep information to adaptable, agile, and courageous. a leader who avoids conflict at all yourself, hoping the problem will go This requires trust. costs, transparent communication away. This not only damages trust, it Without trust, you will never cre- can’t occur, productivity falters as vastly reduces the chances a problem ate the deep engagement and sense decisions take forever to be made, will be resolved quickly. It’s better to of safety people need to take risks, high performers get fed up and tell it like it is, explain the problem, disagree, and innovate. leave, and you’re seen as weak. and suggest actions to address it. “An organization without trust 3. Keeping your weaknesses a is inefficient and is often stagnant,” secret. The best leaders are those says Amanda Setili, author of “Fear- who realize they don’t know it all less Growth: The New Rules to Stay and aren’t “the best” at everything. Competitive, Foster Innovation, and Not only does revealing our weak- Dominate Your Markets.” nesses make people like and trust This, she says, “results in a slug- you more, it lets them know what to gish pace and an unhealthy attach- expect so they can act accordingly. ment to old business models that 4. Undercommunicating. Where can kill a company.” iStock there is a communication void, peo- Employees must be able to trust “Trust can’t flourish in a work- ple will fill it with the worst possible their leaders—and vice versa—as place where leaders perpetu- scenario. It’s always better to tell the well as each other. Trust must ally avoid conflict,” Setili says. “It’s truth—even when it’s bad news— permeate the entire culture. And important to understand that than to be evasive or silent. because trust begins with leaders, conflict isn’t bad. In fact, it’s an 5. Not following through. Trust Setili says it’s important not to inad- essential component of innovation, builds slowly over time, and it takes vertently squelch it. problem-solving, and growth.” only one broken promise to lose all Five common mistakes leaders 2. Failing to ask for help. When of the ground you’ve gained.

Attract Young Professionals to Your Board Edith Cabrera-Tello, one of the some of these gaps.” back to the younger members of Community She says young board members community. 1st Credit Union’s board of direc- can reinforce the internal and u Find out- tors, says her voice on the board external values of the organization. standing local gives the $614 million asset credit They represent the young popula- college stu- union in Ottumwa, Iowa, a better tion, new ideas, new technology, dents studying understanding of her generation’s new networking, and new leader- business with Edith Cabrera-Tello point of view. ship strategies. an emphasis in marketing, account- “I can explain and provide Her advice for credit unions ing, finance, or management. examples of what other members that want to attract younger board u Provide internship opportunities like me need,” says Cabrera-Tello, members: with an option to become a board coordinator of an English language u Look for committed young member. learning center at Indian Hills members who could benefit from u Think about how the young Community College. “I can even a financial and personal experience board member can connect you provide some ideas to decrease and who are interested in giving with emerging generations.

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 13 PRESIDENT’S PERSPECTIVE

‘Open Your Eyes’ to a Credit Union The Credit Union Awareness Initiative is almost ready for prime time.

messages would move more people union myths while inviting consum- to consider credit unions. In short— ers to consider credit unions afresh. we wanted to know what works. The initial reaction to the cam- So we ditched all of our assump- paign’s videos and materials have tions and we invested the time and been fantastic. Hundreds of attendees resources to conduct detailed, pains- at CUNA’s Governmental Affairs taking research, hosting hundreds Conference waited in line to have of listening sessions with consumers their photographs taken cupping across the country. Some of our find- their eyes in the campaign’s distinc- ings were surprising. tive black-and-white style. As it turns out, we don’t have This initiative will increase overall an awareness problem. For the consumer consideration of credit most part, consumers know what unions, not replace your credit credit unions are. What we have is a union’s brand or supplant your mar- misperception problem. keting efforts. Every credit union is JIM NUSSLE, Most people mistakenly believe unique, but that doesn’t mean we CUNA president/CEO they can’t join a credit union, or can’t be united. that credit unions are too small and The awareness initiative’s greatest During my first year at local—too “mom and pop”—to strength is also credit unions’ great- CUNA, I was meeting as many provide modern table stakes, such est strength: Our ability to work credit union people as possible and as nationwide access and mobile together for the benefit of our mem- introducing myself to the movement. banking. bers and communities. One of the messages I heard over Next, we created a category and over again is, “Jim, we need a brand platform, the core message national credit union campaign.” and positioning that differentiates GET INVOLVED We have great products and credit unions nationally from other services, they told me, but the financial institutions. Our extensive 1. Visit https://awareness.creditunion broader public doesn’t know what research guided us to “Your fantastic (password: openyoureyes). Review the a credit union is or what we stand future, faster.” The message is a brand creative, read our story, and be wowed by for. A national campaign that drives promise to focus and underpin our the expertise of the team we’ve assembled. overall consumer consideration— consumer-facing messaging. 2. Download the message guide at complementing and strengthening What makes “Your fantastic cuna.org/awareness. This is the piece of individual credit unions’ marketing future, faster” work is that it’s play- the awareness initiative that can super- efforts—should be a top priority for ful and down-to-earth. Our research charge your marketing efforts right now. CUNA. I listened. finds it models the tone that reso- It’s a series of recommendations based For the past two years, CUNA’s nates with consumers. And it’s inspi- on our exhaustive research about which strategic communications depart- rational, a reminder that we need to credit union messages appeal to consum- ment has worked with professional communicate to potential members ers. Begin implementing this now, and consultants and a team of credit that credit unions are here to help your credit union will be poised to take full union leaders from across the coun- them achieve their dreams—and that advantage of our category marketing. try to develop our national Credit we do it better than our competition. 3. Provide feedback about the Union Awareness Initiative. With the research and brand plat- “Open your eyes” campaign. We’ll test We’re now ready to start rolling it form in place, we developed our first everything we’ve learned by partnering out, and I couldn’t be more excited creative campaign, a consumer-tested with credit unions nationwide to optimize about its potential. prototype we’re preparing to roll out how we roll out awareness campaigns. What differentiates this initiative regionally. Based on the tagline “Open Email your thoughts on the concept to from past efforts is our laser focus on your eyes to a credit union,” the digi- [email protected]. research. We wanted to know which tal-first campaign rebuts major credit

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© Credit Union National Association 2018 TRENDLINES

The Home-Field Advantage Knowledge of local conditions enables credit unions to succeed in business lending.

lowest loan approval rating out of all understand their needs. major business lenders at 46%. Small Credit unions also are local. This banks and online lenders approve means they have a better knowledge between 60% and 70% of applicants, of local conditions and industries, and large banks approve 54% of the ability to visit and get to know applicants. local businesses, and the capacity to Credit unions also must compete be more creative and flexible in their with a rapidly growing online and products and services. alternative lending sector, such as For example, credit unions that balance-sheet lending, peer-to-peer serve large immigrant populations— lending, and invoice trading. Between who account for more than 25% of 2013 and 2015, these alternative lend- new businesses—might try to serve ers grew from $800 million to $4.8 these populations by hiring bilingual JORDAN VAN RIJN billion in loan originations. commercial loan officers or offering Online lenders receive about one in creative nontraditional loans. Commercial lending is a five small business loan applications, fast-growing part of credit union significantly more than credit unions loan portfolios. Credit unions have that have been around much longer. Credit unions expanded their member busi- So, what are credit unions’ com- ness loan (MBL) portfolios from petitive advantages? For one, credit roughly $3 billion in 1996 to about unions consistently receive some receive some of $70 billion today—an annual aver- of the highest ratings for customer age growth rate of 17% over two service. Among small-business loan the highest ratings decades. applicants, 78% were “satisfied” with The percentage of credit unions credit unions—second only to small offering MBLs also has grown dur- banks at 80%—and just 3% were “dis- for service. ing that time, from about 20% to satisfied”—second only to community 35%, and the average loan is about development financial institutions. They also can establish referral $250,000—meaning most of these This contrasts with 61% and 46% partnerships with other local organi- loans are going to small businesses. who were “satisfied” at large banks zations that support small businesses. This is a wonderful contribution and online lenders, respectively. Credit unions can’t beat online lend- to the economy, as small businesses Many loan applicants were dissatis- ers in speed and turnaround time, create 60% of all net new jobs. But for fied with the interest rates and terms and they face significantly higher many credit unions, business lend- at online lenders, and the long and costs of regulation and compliance. ing is a relatively new endeavor that difficult application process at banks. But they do have a large membership poses a variety of challenges. First, Business owners also comprise a base, a reputation for outstanding ser- many business owners don’t think of large percentage of credit unions’ vice, and the ability to adapt to local credit unions when applying for com- membership base. According to the conditions. mercial loans. Fed’s Survey of Consumer Finances, To the extent to which credit According to the Federal Reserve’s roughly 10% of credit union mem- unions reach out to entrepreneurs, Small Business Credit Survey, only bers own business equity. Given simplify the loan process, and offer 11% of small-business loan applicants there are about 110 million credit creative services, they can succeed in went to credit unions, versus 50% to union memberships, that means business lending. large banks, 46% to small banks, and about 11 million business owners 21% to online lenders (applicants are already credit union members. JORDAN VAN RIJN is CUNA’s senior econo- often apply to more than one lender a Credit unions should do their best mist. Contact him at 608-231-4286 or at time). Further, credit unions have the to reach out to these members and [email protected].

16 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org Photographer/ Thinkstock OY AT EESS CUNA

oost yourmaretingeorts it that grabattentionandresonate withtoday’s consumers. to allthecontentyouneedcreate stand-outmarketingmaterials oneannualinvestment,you’llgainaccess your marketingefforts. With CUNA Copy&ArtExpress CUNA Copy & Art Express with Premium Imagery! Express with Premium Imagery! CUNA Copy&Art the retailvalebypgradingto and savehndredsofdollarsoff hinstoc imagesincldingaccesstotheiStoccollection trendy andptodateimages.etmorethanmillion royaltyfree ae yormaretingtothenetlevelwithevenmorehighality // Cutting-edge promotions inonelocationforeaseofaccess // A wideselectionofads,articlesandsocialmediapieces // © Credit UnionNational Association 2017 and efand ciency to suityouraudiences latest industrytrends Continuously updatedphotosandcontenttore ect the ae yormaretingtothenetlevel TM isthekeytosimplifyingandenhancing cuna.org/caae SPOTLIGHT

A ‘Credit Union Nerd’ With a Cause

CUNA Board Chairman Maurice Smith—a self-professed “credit union nerd”—aims to empower people and communities. The CEO of $1.9 billion asset Local Government Federal Credit Union in Raleigh, N.C., discusses his approach as chairman, his commitment to the credit union movement, and his proudest achievements as a leader.

Q What are your goals as CUNA Q You began your career as a Board chairman? The chairman’s loan officer. What lessons from agenda depends largely on the that experience still guide you collective consensus of the entire today? My father, rest his soul, board. The CUNA Board chairman’s gave me some advice that I will role is to ensure the governance never forget. He said, “Son, you will process works as it should. This have the opportunity to meet people means each director receives fair from all walks of life as a loan Maurice Smith and ample opportunity to contribute officer. People will put their lives in to the dialogue on policy, strategy, your hands and trust you will make lives. I see the difference we make and CUNA’s direction. fair decisions.” with honest, transparent pricing and As for my personal goals, I want My father encouraged me to look policies. I am proud of our record of to pay homage to the rich history beyond the numbers and listen to fair lending, to give every member of CUNA and the chairs who have the stories that accompany every an equal opportunity to thrive. This preceded me. I remember my loan application. My father said, is our reward for a job well done. A first CUNA Governmental Affairs “This is how people know you care bit nerdy? You bet it is. Conference in 1993. about them as human beings and I was captivated by the display not just an account number.” Q How do you engage in of credit union philosophy on such I don’t ever want to lose grassroots advocacy? I believe a grand stage. I thought to myself perspective on what credit unions advocacy truly begins at the how impressive it is to see so many do every day for members in every local level. Consider the field of credit union professionals and state. So often, credit unions are the membership for Local Government volunteers from every walk of life. I lifeline between despair and family Federal Credit Union: Our members have goose bumps just reminiscing security. We must not lose our include all municipalities, counties, about the experience. humanity and concern for others. and other local government This is what gets me out of the bed institutions in North Carolina. Q How can credit unions remain every morning. We try to get our local leaders relevant in the financial services on board with credit unions at the arena? I don’t think relevance is Q What beliefs or behaviors led beginning of their political careers. the right standard for the future of you to proudly label yourself a I can’t imagine any local politician credit unions. Credit unions should “credit union nerd”? One should not being moved by the power of aspire to be the leading financial not take oneself too seriously. the credit union spirit in his or her services provider for all consumers Look, life can be hard. So, if a own communities. And when they and businesses. Consumers are little slapstick humor can make rise to statewide and national offices, hungry for everything credit unions my message more approachable, I we remind them from whence they represent—fairness, affordability, welcome the levity. came with credit unions. inclusion, equity, and opportunity. I might not get an Olympic medal I believe we have a philosophical for credit administration. I’m sure Q What story do you tell your destiny to pursue the expansion of there is no Oscar for best ALM legislators? There are two types credit union thinking to consumers modeling. I’ve got something better. of messages we can deliver to our desperate for a fighting chance to I have the gratitude of members who representatives in Raleigh, N.C., and live better lives. tell me how we have changed their Washington, D.C. When it comes

18 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org to the inside baseball operations of and manufacturing jobs has hobbled about professional growth, credit unions, our staff is adept at many small towns. Our credit union economic development, and bringing a message. We can talk heard the cries of members and inclusion of all communities. all day about regulatory relief, fair took steps to make a difference. Let’s think about diversity as legislation that helps consumers, Five years ago, our credit union we would an investment or loan and new powers for serving singlehandedly funded an initiative portfolio. We recognize that communities. to help North Carolina communities concentration risk—when we If we want to connect with a pull themselves up by their own don’t have enough variety in our legislator on a personal level, we bootstraps. Our investment of $5 holdings—can be bad. prefer to let our members do the million in the Development Finance talking. Consumers bring a credible Initiative has been leveraged into voice to the debate. Small business an aggregate $1 billion in economic So often, credit owners and entrepreneurs know the development projects in North struggles of operating a business in Carolina communities. unions are the a stagnant local economy. These projects have created local businesses, local jobs, and local lifeline between Q What are your proudest opportunities that wouldn’t have accomplishments at your credit happened without the credit union. despair and family Maurice Smith union? I don’t like reflecting on any Don’t tell me we can’t make a unilateral accomplishments. I would difference. security. like to brag about a decision our board made a few years ago that is Q Speaking as a board member having a big impact in our state. of the African-American Credit Diversity introduces variations North Carolina has 545 Union Coalition (AACUC), to our focus. Diversity of municipalities and 100 counties. For what role can credit unions thoughts, ideals, business models, many, economic development has play in attracting and uplifting and philosophies expands our been a struggle. The young people diverse and often underserved perspective. are moving away to the urban audiences? AACUC’s contribution Our collective DNA is enriched markets for better-paying jobs. The to the credit union movement when we seek the contributions of influx of industry bypasses many focuses on bringing a diverse all audiences to further our mission communities. The flight of textile perspective to the conversation of member service. Q What does your role as a church deacon have in common with your position as CEO? Now you are going to get me to preaching. So here goes: At their core, churches and credit unions share the conviction that people deserve understanding and compassion. Both have a commitment to serving a wider community, one individual at a time. Credit unions and faith follow- ers respect people for their present conditions while working to find a better solution. For me, the credit union thinking restores and rein- forces my faith. “I don’t think relevance is the right standard...credit unions should aspire to be the leading financial services provider for all consumers and businesses,” FOR AN EXPANDED INTERVIEW, VISIT new CUNA Board Chairman Maurice Smith says.

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 19 Ted Goldwyn

20 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org (Illustration: Scott Khail) Despite competitive pressures and fraud concerns, the payments arena offers new opportunities to connect with members.

Few areas of financial services today are unique perspective among a diverse membership of changing as quickly as payments. financial institutions, associations, fintech firms, -con From the growth of person-to-person (P2P) appli- sumer groups, and government representatives. cations such as Venmo and Zelle to the advent of Deborah Matthews Phillips, managing director of mobile wallets, and the ongoing impact of regula- payment strategy at Jack Henry & Associates, served tory changes, a new form of payment or regulatory on the task force and says it set the bar high. requirement takes aim at credit unions’ credit and “The task force set a very aspirational target to debit card portfolios on a seemingly daily basis. achieve ubiquitous receipt of real-time payments by Yet, according to several credit unions and industry 2020,” Phillips says. “It’s an aggressive goal, but one experts, the payments arena offers new opportunities that is certainly within the realm of possibility, with all for credit unions as well. of the support from across the industry to get there.” Much of the chatter around payments centers on “Real-time payments will be a game changer,” says the future implementation of real-time payments Bill Hampton, senior vice president/general manag- (RTP). The Federal Reserve recently launched its Fed er of the Financial Institutions Services Division at Payments Improvement project, declaring an ambi- Worldpay (formerly Vantiv). “Financial institutions tious set of “desired outcomes” for the initiative. will need to find the value in this solution. Banks will These goals include developing an industry-wide struggle more than credit unions, which have a little solution that encompasses speed, ubiquity, security, easier path to understanding how to connect value efficiency, and an international scope. The dream of a functioning real-time payment net- work contrasts sharply with the arcane, slow batch pro- cesses that encumber financial institutions, merchants, Focus and consumers. Several countries have successfully u Real-time payments will be a game changer for implemented real-time payments, including the U.K., financial institutions. Mexico, and Japan. It represents both an opportunity u The shift to EMV technology hasn’t reduced and a threat to current payment networks. But the fraud as much as many had hoped. revolution is likely expensive, and years away. u Board focus: Credit unions face stiff competition CUNA plays an active advocacy role in the push from new payments entrants. toward real-time payments as a member of the Fed’s Faster Payments Task Force, representing credit unions’

(Illustration: Scott Khail) cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 21 to the member.” you ask someone in college whom she banks with, Among other top concerns, fraud continues to be a she might say ‘Venmo.’ If you look at the services they challenge—and it’s not getting easier for credit unions provide, they’re becoming the façade of our financial and other payment providers and card issuers. “We’re services across the board—not just to credit unions starting to see some shifting fraud trends,” says Phil- but to banks as well. lips. “The fraudsters are not resting on their laurels.” “A lot of folks in the industry are recognizing this For instance, many credit unions expected the is certainly something to be concerned with,” he says. migration to EMV (Europay, Mastercard, Visa) “I don’t think that’s going to stop anytime soon. Some chip-and-PIN cards over the past few years to have people call it the ‘uberization’ of payments.” a significant positive impact on reducing card fraud “With the expected exponential increase in adop- (“An EMV success story,” p. 23). Although security tion of various mobile payment options, credit has improvement in some respects, it hasn’t been as unions will need to figure out their true value propo- significant as some had hoped. sition for the member,” Hampton says. “With P2P, the money’s not even touching a credit union, which is frightening. ‘Our debit programs “The risk for all of us is disintermediation,” he exceed many of our adds. “That comes from not aligning the value and not understanding what makes the experience great competitors’ programs for the member.”

in use and activation.’ What about cards? Charlotte Norton Despite such competition and the potential for dis- intermediation from new payment options like P2P “We didn’t think individuals would figure out a way and mobile wallets, experts don’t see credit and deb- to get around the chip as quickly as they did,” says it cards going away any time soon (“Cards are still Diane Gerstner, executive vice president at $806 mil- king,” p. 26). lion asset InTouch Credit Union in Plano, Texas. “We “I don’t see any of these new payment types making were a little too confident that, once we rolled out a huge dent in card volumes,” Phillips says. “In the the chip, we would reduce our losses by half. We’ve case of P2P in particular, we’re talking about check reduced our losses by about 20%, and I think that’s and cash replacement more so than a disintermedia- probably about where it’s going to stay.” tion of card volume.” “EMV is doing a good job in removing some of the Davis notes that Mastercard and Visa have had to counterfeit card fraud that takes place at the point of change their business models significantly over the sale,” says Phillips. “But we expected there would be a past few years. “They, like all of us, are challenged shift to card-not-present transactions. Now, fraudsters with the interchange models,” he says. “Ever since are zeroing in on account takeover, and that can be a they both went public almost a decade ago they’ve challenge to identify in a timely manner.” had to become very different companies than when they were associations primarily controlled by finan- New entrants cial services providers. Credit unions also face stiff competition from new “The other thing to consider,” he continues, “is that entrants such as Venmo, Apple Pay, Google Pay, and many of the payment products ride on top of the Visa Samsung Pay. and Mastercard network rails. It’s still one of the best “Certainly, the fintech companies are playing on ways for our cardholders to move money because sig- the fringes,” says Tom Davis, CEO of Trellance. “If nature transactions offer limited liability protection,

22 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org which doesn’t exist on most other rails.” Davis does, however, predict an accelerating shift away from physical plastic cards toward digital cards. “Digital cards have so many advantages as opposed to a physical piece of plastic,” Davis says. “If the entire ecosystem were completely tokenized, issuers would be able to fix a breach with a push of a button, offer- ing instant reissuance. You could also reissue digital cards on a natural cycle and replace them without any impact to consumers.”

The preferred choice Positioning your card as members’ preferred payment choice begins with understanding members’ individ- ual concerns and then educating them on how you can solve their specific needs, Phillips says. “The conversation is not the same across your member base,” she says. “Some members are more concerned about security and might want to learn about your cardholder controls program and how it provides peace of mind,” because members control when to turn their cards off or on. AN EMV SUCCESS STORY In other cases, the conversation might center In such a fast-moving environment, credit unions on cardholder benefits, such as rewards programs. must stay ahead of the curve to face significant, Rewards are an important component in capturing ongoing challenges such as card fraud. long-term loyalty. But loyalty programs that stand The introduction of EMV (Europay, Mastercard, out from the pack are becoming increasingly rare in Visa) technology, when coupled with an experienced a crowded marketplace. and diligent fraud-mitigation team, has paid off for “Everybody wants cash back,” says Davis. “Now, some credit unions. issuers are offering redemption at the point of sale. Case in point: A data breach at a national food You have to look at offering multiple program ben- chain that affected 10,000 members at Randolph- efits because cardholders expect it, and it’s so easy to Brooks Federal Credit Union in Live Oak, Texas. switch cards now. “Typically, we would need to reissue all 10,000 cards in a case like this,” says Charlotte Norton, “Credit unions need to understand what a competi- senior vice president, central operations, for the tive product looks like in their marketplace, and they $8.6 billion asset credit union. “However, our fraud need to make sure their third-party providers can team determined that all of the fraud coming in on support that,” he adds. these counterfeit cards was from fallback activity, Randolph-Brooks Federal Credit Union in Live Oak, meaning those transactions bypassed the EMV chip. Texas, has offered robust debit card rewards for years. Once we blocked the fallback transactions, the fraud “In 2007, we introduced our ‘Earn a Dime Every stopped. Time’ rewards program,” says Charlotte Norton, “It’s a fabulous example of the success of the EMV senior vice president, central operations, for the $8.6 chip card,” she adds, “because now we don’t have to billion asset credit union. “We pay 10 cents every reissue thousands of cards and disrupt the payment time a member uses their debit card. We don’t distin- experience for those members.”

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 23 guish between PIN and signature transactions. We’re management of the credit and debit card portfolio committed to paying out the 10 cents because we feel takes consistent monitoring and oversight, requiring it’s a huge differentiator. resources and expertise that all but the largest coop- “Our debit programs exceed many of our competi- eratives don’t have. tors’ programs in both use and activation,” she con- “If a cardholder wants to apply for a card online, tinues. “So, even when we hit the $10 billion asset can you deliver it?” asks Davis. “Can you do KYC threshold and lose half of our interchange income [know your customer] for them? Can you give them due to the Durbin Amendment, we plan to continue an electronic card they can start using right away? to give back to the membership.” The answer for many credit unions is ‘no.’ That’s not because they don’t want to, but because their third- party provider can’t support it.”

Digital cards have Opportunity knocks many advantages Beyond these challenges, industry experts say the future is bright for credit unions in the payments realm. over plastic cards. “I’ve been in payments for a long time, and this is Tom Davis the most exciting time in the industry I can remem- ber,” Phillips says. “Between real-time payments and P2P, there’s a lot going on. Credit line management is another area where Phillips cites a press release from Zelle that stated many issuers fall short. “You have to constantly at the end of 2017, the P2P network averaged close review the creditworthiness of your member,” Davis to 100,000 new token enrollments per day. says. “If you issue a card and never look at the credit “I thought that was exciting, especially considering line for years, you will at some point see the transac- it’s in the early stages,” Phillips says. “Zelle is live with tion volume drop. The member will receive a mailer 20 financial institutions of all sizes, which indicates from a competitor that offers a higher credit line or an appetite for these types of payments. better terms, such as lower rates or balance transfers.” “Payments that are convenient, that remove fric- Without the right technology and third-party part- tion, and that align with members’ lifestyles and nerships, credit unions will be hard-pressed to keep desire to use digital devices represent tremendous top-of-wallet position with their members. Hampton opportunities for credit unions,” he adds. advises credit unions to inventory their legacy technol- ogy and seek opportunities to optimize and simplify. “The relationship with the member is a credit union’s guiding light,” Hampton says. “This has led Resources to the acquisition of many different technologies u CUNA Advocacy: cuna.org/advocacy/priorities/ over the past 15 or 25 years. Credit unions have been faster-payments among the earliest adopters of technology, and there u CUNA 2018-2019 Environmental Scan resources: have been a lot of starts and stops in this business. cuna.org/escan Credit unions need to rationalize some of this tech- u Jack Henry & Associates: jackhenry.com nology on the back end.” Having strong, collaborative relationships with u Trellance: trellance.com third-party partners is critical to the long-term u Worldpay: worldpay.com/us success of credit union payment programs. Proper

24 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org Stand strong against cyber threats

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CYBER_Flyer_Magazine.indd 1 1/24/18 10:09 AM CARDS ARE (STILLRon) Jooss While digital payment options generate the most buzz, credit and debit cards still drive the competitive payments market.

For years, payments observers have fore- Debit card payments registered the second high- cast that mobile wallets, person-to-person est growth rate by number (6%) from 2015 to 2016, although this rate was down from an average annu- payments, and other forms of digital pay- al growth rate of 7.2% from 2012 to 2015. ments threaten the long-term viability Many consumers believe mobile payments are of credit and debit cards. That day still still at a stage that’s similar to the “poke and hope” appears to be a long way off. era credit cards experienced during the advent of According to Federal Reserve statistics from online payments: Consumers follow the prescribed December 2017, total card payments increased at process and hope the payments go through, says an annual rate of 7.4% by number of transactions John MacAllister, principal of the payment consult- and 5.8% by value from 2015 to 2016. ing firm Dorado Industries. Credit card payments registered the highest “With mobile payments, there are still a couple growth rate by number (10.2%) among the core of steps we don’t have with plastic cards,” he says. payment types from 2015 to 2016, up from 8.1% “And you still can’t be sure which merchants accept average annual growth from 2012 to 2015. mobile payments. Until we’ve got merchant accep-

26 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org tance and issuers that are going along with one or cation,” says Brian Ziff-Levine, First Tech’s senior two prescribed varieties of mobile payment, mobile director of cards and payments. “We’re smaller than won’t gain traction as an alternative to plastic.” the big banks, so when members call us, more often Of course, mobile payments are tied to consum- than not they can get their problem fixed straight ers’ debit and credit cards, and processed on the away. That’s our value proposition.” card payment rails. That speaks to the greatest area Ziff-Levine warns, however, that credit unions of growth for plastic: card-not-present transactions. have to be able to live up to that service promise. Remote payments represented 22.2% of all gener- “The instant they have a bad experience, your card al-purpose card payments in 2016, up from 20.7% is going to go to the bottom of the member’s wal- in 2015, the Fed reports. By value, remote payments let,” he says. “In the end, they’re going to reach for represented 44% of all general-purpose card pay- the one that gives them better service.” ments, up from 42.9% in 2015. Ultimately, consumers will rely on the card—and That represents the opportunity and challenge the financial institution—they trust the most, says for credit unions. Many, if not most, of these pay- Eric Bahl, director of product and channel develop- ments are tied to recurring payments (i.e., Netflix) ment at $23.5 billion asset at PenFed Credit Union or popular retailers such as Amazon Prime or Zap- in Tysons, Va. continued u pos. Becoming the card of choice for these transac- tions is critical because once consumers make that choice, they rarely bother to change it. Focus Shape your message u Offer card choices that meet the needs of each Credit unions can tailor that message—and the segment of your membership. underlying reasons to tie credit union cards to u Card rewards are one of the top factors affecting recurring payments—to their strengths. members’ card use. At $11.3 billion asset First Tech Federal Credit u Board focus: While new payment types get the Union in Mountain View, Calif., part of that mes- most press, credit and debit cards still drive the pay- sage is the service the credit union offers. ments market. “Keep service at the forefront of any communi-

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 27 “Consumers want to ‘set it and forget it,’” Bahl in making their experience with services such as says. “If they use our card, it’s a win-win.” Netflix and Amazon Prime seamless. PenFed sent a communication in January remind- “If something goes wrong on a billing state- ing members the credit union works on their behalf ment, we’re here to look at that transaction, work with the merchant, and work through the network to resolve any issues,” Bahl says. “We’re moving CASH PREFERRED FOR toward a subscription-based economy. It’s critical SMALL PAYMENTS to communicate that message and help members Even as debit cards become make that transition.” a more common form of Embrace rewards payment, statistics indicate consumers still prefer cash for Card rewards are another factor affecting members’ small payments, although that may choice of cards, says Chris Joy, principal consultant slowly be changing. with PSCU’s Advisors Plus division. According to a 2017 study He cites Visa statistics indicating 80% of U.S. by payment processor TSYS, credit cards have some form of rewards tied to consumers prefer to use cash them. “We’ve done a good job of conditioning indi- 33% of the time for fast-food viduals to get something for their spend loyalty. purchases, compared with It’s vital to a competitive reward offering. The key 30% for debit cards, and 21% for question for our credit unions is how to differenti- credit cards. In 2015, however, ate themselves from the rest of the market.” consumers preferred cash for Joy suggests building rewards around a total rela- 43% of fast-food purchases. tionship. Still, experts say cash isn’t “Perhaps you get an enhanced award if you have going anywhere soon. “Even multiple relationships with the credit union, or if though use might shift downward slightly, I don’t think it’s going to get you have a cash-back card and you redeem it in anywhere near zero,” says Chris a credit union account, you get a bonus. You can Joy, principal consultant with offer annual and longevity bonuses,” he says. PSCU’s Advisors Plus division. “All of these options differentiate you from the “Consumers nationwide want market a little bit beyond price and a base reward,” freedom of choice in how they Joy adds. pay, and they want to use all of the In January, PenFed introduced its PenFed Path- tools at their disposal, cash being one finder American Express Card Rewards card. The of them.” card seeks to combine the best attributes of travel Joy says cash has “universally and rewards with no cap on rewards, no annual accepted stored value” and fee, and a variable annual percentage rate as low is virtually guaranteed to be as 11.99%. accepted everywhere. “The ubiquity The card also offers members benefits for a deep is hard to replace,” he says. relationship with the credit union. Cardholders Plus, some small merchants will earn four points for every dollar spent on travel always accept and prefer cash, says purchases and 1.5 points per dollar on all other John MacAllister, principal of the purchases when they have an Access America payment consulting firm Dorado Industries. “I don’t see us being checking account with the credit union or are able to walk away from it.” active or retired military. Cash provides a level of anonymity Bahl says PenFed listened to its members when that both merchants and developing the card. consumers prefer at certain times, “All the signs pointed to utility,” he says. “How MacAllister says. “A $20 bill is both do I get the best bang for my buck on travel spend- anonymous and self-settling—there ing with a product I can also pull out of my wallet are no chargebacks.” for any purchase? The common, ultimate goal for card issuers is always working to get their card to

28 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org ‘MEMBERS WANT CONTROL OF THEIR EXPERIENCE.’ Brian Ziff-Levine

be top of wallet and be the card their members use come to our branches less frequently. They expect for most or all of their purchases.” to be able to serve themselves. If they can do that The credit union also offers the PenFed Cash through a mobile device, they want that option.” Rewards Visa Signature Card, which has no annual Segmentation also is crucial to the success of fee, 1.5% cash back on all purchases, or 2% cash credit and debit cards, although there’s no “one- back for PenFed Honors Advantage Members. size-fits-all” approach, Joy says. “Typically, we seg- The PenFed Platinum Rewards Visa Signature ment around spending behavior, revolving behavior, Card, another no-fee card, offers extra rewards and credit quality.” points for gas and supermarket purchases. James Guild, managing partner of the credit “For folks who care about rewards, they’re the union consulting firm CU Engage, suggests seg- differentiator, plain and simple,” says Ziff-Levine. menting transactors and revolvers. “The differences among cards are what causes them “The transactors are looking for rewards,” he says. to sign up for one card versus another. That’s an “They generally pay their balance off on a monthly immutable law of credit cards.” basis. They use their card for convenience because they’re getting points. Usage Growth Rates 10.2% “The revolvers are out to get as good a rate as they can, because they’re going to carry a balance ,” Guild continues. “In some cases, credit unions will 8.1% do a balance transfer to entice a current or poten- 7.2% tial member, close their credit card with another institution, and bring it over at a lower rate.” 6.0% Bahl concurs that price can drive participation. “Certain segments of the membership value price over high yield, and that’s where we aim our non- rewards products,” Bahl says. “Typically, in a non-rewards scheme you get a better price,” he adds. “For example, if members Debit card payments Credit card payments want to do a balance transfer, we offer an attrac- tive option for that. It’s a matter of creating value in different ways.” 2012-2015 (average) 2015-2016 Guild likes to ask his credit union clients which Source: Federal Reserve Payments Study, 2017 credit cards they use personally. “The point is, if the staff isn’t using your own Segmentation credit card, it’s probably not as robust as it should Growing in tandem with rewards is the need for be for the membership,” he says. both convenience and segmentation. The latest advancement in convenience for both debit and credit cards is card controls. This function allows members to literally turn their cards on and Resources off, as well as set alerts, transaction limits, and other u CUNA Lending Council: cunacouncils.org controls. u CU Engage: cuengage.com Ziff-Levine says these types of conveniences are almost “table stakes” with today’s card programs. u Dorado Industries: doradoindustries.com “Members want control of their experience,” he u PSCU: pscu.com says. “As time goes by, they call us less and they

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 29 Banking on its Way

Glen Sarvady

30 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org Prepare for the impact open banking will have on member relationships and competitive positioning.

Open banking is coming to the U.S. Many credit unions are buying into open Although this claim is now approach- banking’s potential, perceived risks notwith- standing. ing conventional wisdom, the consensus “We understand the need for open banking,” extends no further. says George Rudolph, senior vice president of Diverging views abound on how soon it will operations and technology for $8.2 billion asset arrive, its effect on traditional financial institu- Alliant Credit Union in Chicago and a member tions, and, in some cases, even what “open bank- of the CUNA Technology Council executive com- ing” means. mittee. “Our members are probably best served But one thing is certain: Credit unions must when they have access to best-of-breed front-end prepare for open banking’s impact on member services, and some of those might not necessarily relationships and competitive positioning. be provided by us.” Broadly defined, open banking is the ability for Alliant’s online-centric service model heightens outside parties to access banking information to the stakes for the credit union to stay ahead of the deliver services to shared customers. Precursors curve in its digital offerings. have existed for decades—think of products like “We’re lucky that we do a lot of our own devel- Quicken and Mint, which requested consumer opment,” says Al Pitcher, Alliant’s vice president login credentials and/or resorted to screen scrap- of technology. “We develop customer-facing tools ing to populate their data-dependent offerings. ourselves because of our small branch footprint.” More recently, Venmo and PayPal have lever- Such data access often is made possible through aged bank account capabilities to craft front-end application programming interfaces (APIs), which experiences that some consumer demographics— are standardized conduits through which informa- particularly millennials—find highly appealing. tion can be provided in a prescribed format. Now, extend this concept to a “plug and play” “We can get insights through APIs on which landscape in which nonbank fintech firms or services our members are and aren’t using,” Pitcher competing banks can link into financial institu- explains. continued u tion data systems to extract information, com- bine it with other sources, and create products addressing all manner of consumer and small- business needs. Focus This prospect is both exciting and scary. u History has shown app developers are capable Open banking is the ability for outside parties to access banking information to deliver services of spurring customer engagement far greater to shared customers. than members have ever adopted with banking apps. Such hybrid solutions—addressing needs u This approach has the potential to create we might not yet even be aware exist—have the closer member relationships, but credit unions potential to foster more intimate relationships could get disintermediated in the process. with members. u Board focus: Incorporate planning scenarios in But you also have the offsetting fear that finan- which fintech firms present both greater revenue cial institutions could become distintermediated potential and risk. in the process, relegated to back-office “plumbing.”

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11 11 00 00 1 00 11 00 00 00 11 11 00 N A 00 00 11 1 11 00 00 11 11 N 00 11 0 11 11 00 K 11 00 I Companies like Plaid have emerged to support face. For instance, customers might face confusion libraries of published APIs enabling this process. as to whether the bank or service provider should N The credit union member experience carries address a support issue. G personal resonance for Zach Perret, Plaid CEO/ More important, some banks have expressed co-founder. He grew up in North Carolina using concern that their valued role as customers’ finan- a credit union “and I loved it. But when I entered cial stewards could be compromised. the working world I had to switch to a big bank In theory, once a customer has issued instruc- because I found that my credit union account tions to share data, the financial institution should didn’t work in the places I needed it. be absolved of responsibility. But consumers’ ten- “When building Plaid, we made a big push to dency to accept contractual terms and conditions ensure consumers don’t have to make that same with a cursory reading (at best) is well documented. tradeoff,” he continues, “and can still access the Consider a scenario where a consumer accepts financial products they need no matter where they the terms and conditions for a limited solution choose to bank.” that, in fact, confers far greater data rights. Does

YOU NEED AN OPEN SYSTEM FOUNDATION FOR FUTURE GROWTH.

Al Pitcher

OBI in the U.K. the financial institution have the ability or obliga- The‘ first practical experiment in systemic open tion to refuse release to suspected bad actors? banking is currently underway in Europe under Initial interpretations of PSD2 seem to leave the auspices of the European Union’s Payment Ser- financial institutions with disproportionate liability vices Directive (commonly referred to as PSD2) paired with limited power to serve as gatekeeper. and the U.K.’s Open Banking Initiative (OBI). One must assume these details will be worked out. In both cases, governing bodies determined Perret suggests the risks aren’t as dire’ as they they could accelerate financial services innovation might sound, however. “ ‘Open banking’ is actually by creating a clear path for fintechs to access bank- a bit of a misnomer,” he says. “There are no truly ing data. Regulators also adopted the stance that open APIs in financial services. Due to security, banking data was the property of the customer, regulatory, and privacy concerns, it’s essential to and as such should be made available to service properly vet each developer and use case.” providers with their permission. Most experts agree it’s highly unlikely the U.S. These experiments remain in their early stages. will see a regulator-driven approach such as PSD2 The first phase of OBI merely required British for several reasons. Stateside culture favors mar- banks to provide sortable access to nonsensitive ket-driven solutions over regulatory mandates. information such as ATM and branch locations. With at least 20 times more financial institutions As the playing field expands in 2018 to include than most countries, both paths are more com- transaction data and personally identifiable infor- plex in the U.S. Arguably, however, the endgame mation, complicating factors will rise to the sur- is similar under either scenario.

32 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org 00 11 00 00 11 00 00 00 00 11 00 11 00 11 11 00 00 00 11 11 00 11 00 00 11 00 00 00 11 00 11 00 00 00 11 00 11 00 11 11 00 11 11 11 11 11 11 11 00 11 11 11 11 11 11 11 11 11 00 11 11 11 11 11 11 11 11 11 11 00 11 00 11 11 11 11 00 11 00 00 11 00 00 00 00 11 11 11 00 11 11 00 00 00 11 11 00 11 00 00 11 11 00 00 11 00 11 00 11 00 11 11 11 00 00 11 00 00 11 00 00 00 00 11 00 11 00 11 11 00 00 00 11 11 00 11 00 11 11 11 00 00 11 00 11 00 11 11 11 11 11 00 00 11 11 00 11 00 00 00 00 11 11 00 11 11 00 00 00 11 00 00 11 00 11 11 11 00 00 11 00 11 00 11 00 11 11 11 00 11 00 00 11 11 11 11 11 11 11 00 00 11 00 1010 11 11 11 11 11 00 00 11 11 00 11 11 11 11 11 00 11 00 11 11 11 11 11 00 00 11 11 11 11 11 11 11 00 11 11 00 11 11 11 11 11 00 00 11 11 11 00 00 11 11 00 11 11 00 00 00 11 11 11 11 11 11 00 11 11 11 11 11 11 11 00 00 11 00 1010 11 11 11 00 00 00 00 11 11 00 00 11 11 11 11 00 00 00 11 11 11 11 11 00 11 00 00 11 00 00 00 00 11 00 11 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0 0 1 1 1 1 00 11 00 00 00 00 00 00 00 00 0 11 00 11 00B 00 00 00 00 0 11 10B10 11 00 00 11 00 11 11 00 00 0 11 0 11 11 00 P 11 1B1 11 1 1 1 0 1 1 1 1 1 1 1 0 0 1 0 10 1 1 1 0 0 0 0 1 1 0 0 1 1 1 1 0 0 0 1 1 1 1 1 11 11 00 11 11 00 00 00 11 00 0 P 1 00 00 11 00 00 00 00 00 0 11 1010 11 00 00 11 00 00 11 B 00 0 00 0 11 11 00 11 11 11 1 0 0 1 0 1 0 0 0 0 0 1 0 0 0 10 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 1 1 1 1 0 00 00 11 11 00 O A E A 1 E A 00 11 11 00 00 00 11 00 0 11 1010 11 00 00 00 00 0O0 11 00 0 00 0 11 11 00 11 00 11 0 1 0 1 1 0 1 1 1 1 1 1 0 1 1 0 1 1 1 0 1 0 0 1 0 0 1 1 1 0 1 0 0 1 1 1 0 1 1 00 11 11 P N N N 0 A N N 00 11 00 00 00 00 11 1010 11 00 11 00 00 00 11 00 00 11 11 11 11 00 11 0 0 0 1 0 1 0 0 0 0 0 1 1 0 1 1 0 0 0 1 1 0 1 0 0 0 1 0 0 0 0 0 1 1 0 1 0 0 11 00 E K K 0 P N K 00 00 00 11 11 11 00 0101 11 11 00 11 00 11 11 00 11 00 11 00 11 0 1 1 0 1 0 1 1 1 1 1 0 1 1 0 01 1 1 1 1 1 0 1 1 1 1 0 1 1 1 1 1 0 1 1 0 0 1 1 N I I 0 E K I 11 00 11 11 00 00 11 00 11 00 11 00 00 11 00 00 1 1 1 1 0 1 1 1 1 1 1 1 1 0 01 1 1 1 1 0 1 1 1 1 0 1 1 1 1 1 0 0 0 0 1 1 0 1 N I 00 N 11 11 00 0N0 00 11 00 00 00 00 1N1 00 1 1 0 1 0 1 1 1 1 1 0 0 1 0 0 1 1 1 0 1 1 0 1 1 0 0 1 0 1 1 0 0 1 1 0 1 0 1 00 G 11 00 00 0G0 00 00 N 00 00 00 G 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 0 0 1 1 0 0 1 0 1 0 1 0 1 0 1 11 11 00 11 11 00 00 G 00 11 00 1 1 1 1O 1 1 1 1 1 1 1 0 0 1 10 1 1 1 0 1 0 0 1 1 1 1 1 0 1 1 1 1 1 1 0 0 1 1 00 00 11 11 00 1 0 1 1P 1 1B 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 0 1 1 1 0 0 0 1 1 1 1 1 1 1 1 0 1 1 00 11 11 0 1 1 0E 0 0A 0 0 0 0 1 1 0 0 01 0 0 0 1 1 0 1 0 1 1 1 1 1 1 0 1 0 1 1 1 0 1 0 11 00 0 1 1 0 1 0 0 0 0 0 1 1 1 1 1 0 0 0 1 1 1 1 0 1 0 1 1 1 1 0 1 1 1 1 1 0 0 1 0 0 1 0N 0N 0 0 0 1 1 1 1 1 0 0 0 1 1 1 0 1 0 1 1 1 0 1 1 1 1 1 0 0 0 1 1 0 0 0 0 0 0 0 1 1 0 01 0 0 0 1 1 1 1 0 1 1 1 1 1 1 0 1 0 0 1 1 0 Finding partners tion for future growth,” says Pitcher. K 0 1 0 1 0 0 0 0 0 0 1 1 1 0 0 0 1 1 1 1 0 1 0 0 1 1 0 1 1 0 1 1 0 0 This process has already begun in the U.S., with The ability to leverage APIs—whether through I the largest banks striking agreements with indi- custom development, as large credit unions are 1 1 0 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 0 1 1 1 1 0 0 1 1 1 vidual nonbank financial service providers. doing, or via a service provider—provides an ave- 1 0 1 0N 0 0 0 0 1 10 1 0 0 1 0 1 1 0 0 1 1 1 0 1 1 1 In late 2017, Intuit announced the aggregation nue to level the playing field. 0 0 1 0G 0 0 0 0 1 10 1 0 0 1 0 0 1 0 0 1 1 0 1 1 1 of the data assets behind its Mint and TurboTax Open banking has clear implications for the products under the single banner “Turbo.” In branding and control of financial services. As mar- 0 1 1 0 0 0 1 0 1 10 1 0 0 0 0 0 1 0 0 1 1 0 1 0 1 doing so, Intuit invited banks and credit unions kets evolve, fintech firms have dropped some of 0 1 0 0 0 0 1 10 1 0 1 0 0 0 1 0 0 1 1 1 1 0 1 to partner with them to leverage these assets—a their initial swagger, looking to be friends rather 0 0 0 1 1 1 0 01 1 1 0 1 0 1 1 0 1 0 1 0 1 likely harbinger of things to come. than foes of financial institutions. 1 0 1 1 0 1 0 1 0 1 0 0 1 0 0 Ben Morales, chief technology and operations While lingering trust issues are inevitable, an 1 1 1 0 0 1 0 1 0 0 0 1 0 0 officer at $2.7 billion asset WSECU in Olympia, undeniable symbiosis exists. Financial institutions 0 1 1 0 0 0 1 0 0 0 0 1 0 Wash., has a similar perspective: “The ability to are a natural source for a base of financial services 0 1 0 0 0 0 0 0 0 0 access your data is the key to being nimble and customers, and they have the expertise and infra- 1 1 0 1 1 0 0 0 1 0 getting your innovative solutions to market quickly.” structure to address regulatory requirements. Morales advises credit unions to embrace exten- Fintechs bring demonstrated skill in developing 0 0 1 1 0 sible APIs to push/pull data from the likes of Face- applications that resonate with consumers, and are 0 1 1 book and Microsoft—and ensure their service 1 0 providers can support such capabilities. “In some sense, CUFX [Credit Union Financial OPEN BANKING: Exchange] was the precursor to open banking,” 5 TOP TAKEAWAYS he says. CUFX is an open, vendor-agnostic, broad integration standard designed by leading credit 1. Assess the ability of current systems (both inter- unions and vendors to reduce the time and cost nal and third-party providers) to enable data shar- of systems integration. ing via APIs or other methods. Negotiating an enormous number of permuta- 2. Research current/prospective members’ inter- tions of financial institution/fintech agreements est in various integrated financial service offerings will be a laborious and lengthy task, and fintechs and willingness to engage via nonbanks. Be sure will prioritize large financial institutions to quickly growing segments (i.e., millennials) are sufficiently represented in the sample. achieve critical mass. With few exceptions, individ- 3. Catalog the offerings of competing institutions, ual credit unions lack the scale to strike these deals. paying special attention to announced partnerships At the same time, it’s critical for credit unions with fintech firms. to participate in open banking opportunities to 4. Scan the landscape of data-intensive nonbank keep pace with large bank competitors, especially financial services offerings with an eye toward for the tech-savvy younger demographic. opportunities for partnership—and notable threats Credit union service organizations and legacy to current business. service providers are well positioned to negotiate 5. Update strategic plans to incorporate scenarios collectively on credit unions’ behalf. The key is to in which nonbank fintech firms present greater ensure system flexibility. “With technology chang- revenue opportunities and risks, both leveraging ing so quickly, you need an open system founda- member data.

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 33 PEOPLE WANT TO DEVELOP THEIR OWN EXPERIENCE, AND WE NEED TO ENABLE THAT ACCESS. ‘ Ben Morales

equipped to rapidly deliver such solutions. by keeping up with ’technology,” Laiwalla says. But credit unions won’t allow themselves to “After a recent town hall meeting, a 10-year-old become a mere back-office accounting system came up to me and said ‘I want to bank with you’— while ceding valuable member relationships. not because his parents did but because the tech is The key is to protect data assets—for the good of cool,” Laiwalla adds. “That’s why we do this.” both member and credit union—while seeking win/ win opportunities with fintechs offering the poten- Who’s driving? tial to enhance your credit union’s suite of member Open banking is virtually certain to arrive in the services. After all, if your credit union doesn’t meet U.S. in some form. “People want to develop their a member need, someone else will. own experience, and we need to enable that access,” Morales has a straightforward approach to this says Morales. dynamic tension. “Bring it on,” he says. “Let’s solve And while there’s no burning platform yet, “PSD2 the problem together. Good ideas can help us will become an issue the minute we find out both be better.” someone has been disadvantaged because of While many large credit unions have lack of access,” Morales says. explored how to leverage open banking, The question becomes, who will drive the many mid-sized and smaller institutions process, financial institutions or fintechs? have yet to prioritize the topic. Recent actions by Intuit relay its intentions “If I were leading a smaller credit union, I’d to play a proactive role. be looking to pair with providers with robust Data-sharing agreements by Wells Fargo, open systems that can connect to the outside Bank of America, and J.P. Morgan Chase make world, or look at whether they conform to emerg- clear the largest banks’ direction. Credit unions can’t ing standards like CUFX,” says Rudolph. afford to play catch-up. One smaller institution that has gotten ahead “Going forward, our success will depend on us of the trend is $94 million asset Platinum Federal thinking more about partnerships,” says Rudolph. Credit Union in Duluth, Ga. CEO Kabir Laiwalla “It will be less about partnering or opening up is quick to draw a distinction between open bank- access because the regulatory framework requires ing in the U.S. and overseas. it, and more about opening up because our members “I think in Europe they’re going one step fur- demand we do so.” ther in the sharing of data,” he says. “It’s going GLEN SARVADY is managing partner at 154 Advisors. Con- to take a long time—everyone wants a piece of tact him at [email protected] and follow him t h at c a ke .” on Twitter via @154Advisors. Platinum Federal recently changed mobile plat- forms for the second time to take advantage of open API flexibility. Resources “We’ve enabled APIs for shared branching and u surcharge-free ATMs,” Laiwalla says. “Right now, CUNA Technology Council: cunacouncils.org we’re working on payments.” u Credit Union Financial Exchange (CUFX): The strategy is paying off for Platinum Federal, cufxstandards.com even as it continues to provide a strong branch u 154 Advisors: twitter.com/154advisors experience for its 1,200 small-business mem- u Plaid: plaid.com bers—primarily retailers. “We’re growing at 20%

34 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org YoUr InVolVement IS crUcIAl to credIt UnIon SUcceSS

The work of a devoted credit union volunteer is never truly done. Navigate today’s complex financial and regulatory environment by staying curious about new ways to lead your credit union towards growth and success.

SchoolS & conferenceS cUnA Volunteer certification School April 30-May 4, 2018 // San Diego cUnA Strategic Planning roundtable August 18-19, 2018 // Denver cUnA national credit Union roundtable for Board leadership October 19-21, 2018 // Vancouver, Canada cUnA Supervisory committee & Internal Audit conference December 2-5, 2018 // Las Vegas cUnA Volunteer conference January 13-16, 2019 // Montego Bay, Jamaica SolUtIonS // CUNA Volunteer Certification Program // CUNA Volunteer Achievement Program // Credit Union Directors Newsletter // CUNA Credit Union Finance eSchool // CUNA Environmental Scan New opportunities for credit unions become available every day. Explore the options that fit your needs and keep your credit union moving forward. cuna.org/volunteer

John Towner © Credit Union National Association 2018 u RULES u REGULATIONS u DEADLINES

CUNA Compiles 2017 Rules, Regs CUNA’s compliance staff put include: together a new resource outlining u CFPB’s Home Mortgage Disclo- 2017’s major compliance happen- sure Act rule, finalized in August ings. The list covers major final- 2017. ized rules and amendments issued u CFPB’s Truth in Lending Act-Real last year, and highlights CUNA’s Estate Settlement Procedures Act available resources for the finalized integrated disclosure rule, updated regulations and amendments. in summer 2017. iStock The finalized rules and regulations u Mortgage servicing rule amend- are categorized. Each section links to ments, interim final rule issued in u Federal Housing Finance Agency CUNA CompBlog coverage of the October 2017. rule allowing Federal Home Loan issue, CUNA’s final rule analyses, u CFPB Regulation B/Equal Credit Bank membership for non-federally documents, and agency resources. Opportunity Act, amendments insured credit unions, effective July In the consumer lending category, issued in October 2017. 2017. the review includes: Deposit accounts coverage u NCUA safe harbor rule, effective u The Consumer Financial Protec- includes: July 2017. tion Bureau’s (CFPB) short-term, u Federal Reserve Regulation CC, u NCUA supervisory review com- small-dollar loan rule, finalized finalized amendments issued in May mittee rule, finalized in October October 2017. 2017. 2017, effective Jan. 1. u Department of Defense’s Military u Internal Revenue Service Foreign u NCUA appeals procedures, final- Lending Act credit card regulations, Account Tax Compliance Act, rules ized October 2017, effective Jan. 1. effective October 2017. and amendments finalized in Janu- More in-depth information is u CFPB prepaid accounts rule, now ary 2017. available at CUNA’s e-Guide to Fed- delayed until April 2019. Under operations, the following eral Laws and Regulations (cuna.org/ Real estate and fair lending issues are covered: compliance).

Staying Compliant With HMDA The Consumer Financial Protection Frank specifically requires. tory period. Bureau (CFPB) decided at the end Despite any eventual CFPB u Any loan terms that prevent full of 2017 it would not assess penal- changes to the bureau rule, these amortization. ties for the 2018 Home Mortgage data points will not be removed u Term in months of the mortgage. Disclosure Act (HMDA) data col- unless Dodd-Frank is repealed. u Channel through which the appli- lections, and that it plans to recon- These data points are: cation was made. sider various aspects of the 2015 u Age of applicants. u A unique identifier for the loan updates to the rule. This includes u Total points and fees of the loan. originator (lending officer). institutional and transactional cov- u Difference between the annual u A unique identifier of the loan. erage tests and the rule’s discretion- percentage rate of the loan and a u Parcel number of the real prop- ary data points. benchmark rate. erty. While the rulemaking itself is in u Term in months during which u Applicant credit score. flux—including the discretionary data any prepayment penalty may be The Dodd-Frank Act lists a 14th points that go beyond what Dodd- imposed. data point, “such other information Frank mandates—credit unions u Value of the property pledged as as the bureau requires,” which pro- should ensure they are prepared to collateral. vides the justification for the addi- collect the 13 data points that Dodd- u Term in months of any introduc- tional points.

36 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org u RULES u REGULATIONS u DEADLINES

Indirect Lending Changes Under MLA The Department of Defense’s (DoD) the active duty status of the service- u If the dealer is currently unable to December guidance on the Military member through either of the two fully comply, a credit union should Lending Act (MLA) has affected safe harbor methods—the DoD’s consider closing covered loans in- indirect automobile dealer lending database through the Defense Man- house that sell GAP or credit insur- programs. Certain loans must com- power Data Center or through a ance until the dealer is capable of ply with the MLA rule, and credit nationwide credit reporting agency. full compliance. unions involved in indirect lend- u Make sure the dealer has MLA u Consider asking your legal coun- ing should ensure they meet those compliant loan documents, policies, sel to review your indirect lending requirements. and procedures. agreement and revise it. Depending on what is financed, u Make sure the dealer can calculate A credit union that purchases or a creditor may find a portion of its the military annual percentage rate assumes a purchase-money vehicle loans are exempt from the MLA. for the loan prior to consummation. loan, takes the loan subject to the Loans that don’t finance GAP or u Once a specific dealer is fully able claims, or defenses a covered bor- credit insurance and don’t provide to comply, audit that auto dealer’s rower can assert against the auto additional cash-out financing that is compliance efforts on a routine basis dealer under the Federal Trade unrelated to the vehicle’s purchase to ensure continued compliance. Commission’s Holder-in-Due- remain exempt from the MLA rule. Course Rule. However, a loan that finances If a credit union’s regulator or GAP or credit insurance, or provides a court of law determines later the additional cash-out financing that is MLA rule does in fact cover a partic- unrelated to the vehicle’s purchase, ular loan and the auto dealer failed will lose its exemption and the credi- to comply, the credit union could be tor must comply with the MLA rule held liable for the auto dealer’s fail- requirements. ure to comply. Credit unions involved in indirect In certain situations involving dealer programs should: noncompliance, the agreement and u Make sure the dealer can check iStock loan may be void from inception.

Looking Closer at DOJ Rescission of Marijuana Memos With Attorney General Jeff Ses- some of those states Sessions listed u A large number of THC extrac- sions rescinding the Cole Memos, several “serious public safety viola- tion labs exploding. U.S. attorneys are left to rely on the tions” reportedly occurring in those u An increase in the number of enforcement priorities as set forth states related to the legalization of marijuana calls to the state poison by Sessions. marijuana. The examples are: center. Currently, those priorities have u Sales to minors. Credit unions might want to con- been reported as: u Employment of minors in mari- sider how such events could increase u Criminal immigration enforce- juana dispensaries. the risk of serving marijuana-related ment. u Individuals driving within three businesses if these violations are u Violent crime, including restoring hours of marijuana consumption. occuring in their states. public safety to all communities. u A large number of marijuana Credit unions should check with While these priorities might seem DUIs involving youth in the vehicle. their local U.S. attorney’s office and to divert attention away from state u An increase in fatal driving acci- see how they are planning to enforce legalized marijuana dispensaries, in dents that involve active THC in the and prosecute marijuana laws in this recent letters to the governors of driver’s blood. post-Cole Memos era.

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 37 COMPLIANCE

New IRA Reporting Requirement Separate forms indicate IRS scrutiny of late rollover contribution transactions.

Dennis Zuehlke

The Internal Revenue year, is left blank; and reason code if it is contributed to another IRA Service (IRS) now requires separate “SC” is entered in Box 13c, code. or employer-sponsored retirement reporting of any late rollover con- A separate Form 5498 must be plan within 60 days of receipt. tributions self-certified by an indi- issued to report the late rollover If the deadline is missed, the vidual retirement account (IRA) contribution if the IRA owner also distribution is taxable, and may be owner on Form 5498, IRA Contri- made a postponed contribution subject to an additional 10% pen- bution Information. because: alty. The new requirement is effective u Of service in a combat zone, For as long as IRAs have existed, on the 2017 Form 5498, which is hazardous duty area, or direct sup- IRA owners have been missing the due to the IRA owner and the IRS port area, or 60-day deadline, and for years, the by May 31, 2018. u The IRA owner is an “affected IRS took the position that it lacked taxpayer” in a federally designated authority to waive the deadline. Reporting late rollover disaster area. That changed in 2001 when contributions Timely rollover contributions Congress gave the IRS authority to Under the new reporting require- continue to be reported on Form waive the 60-day deadline where ment, late rollover contributions 5498 in Box 2, rollover contribu- the failure to do so “would be must now be reported separately tions. against equity or good conscience, from timely rollover contribu- including casualty, disaster, or tions. The amount of a late rollover Simplified waiver process other events beyond the reasonable contribution made in 2017 and Under the tax law, a distribution control of the individual subject to self-certified by the IRA owner is from an IRA or employer- such requirement.” reported on Form 5498 in Box 13a, sponsored retirement plan quali- In 2003, the IRS issued Revenue postponed contribution; Box 13b, fies for tax-free rollover treatment Procedure 2003-16 that outlined the process for applying for a waiv- er of the 60-day deadline and pro- vided instances where an automatic waiver of the deadline is available. Unless taxpayers are eligible for an automatic waiver, they must apply for a waiver using the same procedure used for IRS private let- ter rulings. A private letter ruling is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s specific set of facts. The procedures and user fees for obtaining a letter ruling are pub- lished annually in the first revenue procedure published each calendar year. Over the years, thousands of tax- payers applied to the IRS for pri- vate letter rulings and many—but not all—were granted waivers. In 2016, the IRS increased the user fee for private letter rulings to iStock $10,000, making the option imprac-

38 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org tical except in the case of very large u Financial institution error. tification is not a waiver by the IRS distribution amounts. u Distribution check was mis- of the 60-day rollover requirement. Under Revenue Procedure 2016- placed and never cashed. A taxpayer may report the contri- 47, in lieu of obtaining a private u Distribution was deposited into bution as a valid rollover unless the letter ruling, taxpayers may self- and remains in an account that the IRS says otherwise. certify that they qualify for a waiver taxpayer mistakenly believed was If in the course of an examina- of the 60-day rollover requirement, an eligible retirement plan. tion, the IRS determines that the using the IRS model certification u Taxpayer’s residence was severely requirements for a waiver were not letter in the revenue procedure, or damaged. met, the taxpayer may be subject to a letter that is substantially similar u Member of the taxpayer’s family additional taxes and penalties. to the IRS model. died. Credit unions would be well- u Taxpayer or a member of the advised to recommend to members taxpayer’s family was seriously ill. who miss the 60-day rollover dead- Self-certification u Taxpayer was incarcerated. line to seek competent tax advice u Restrictions were imposed by a to determine the options available isn’t a waiver foreign country. to them. u Postal error. In some cases, requesting a pri- of the 60-day u Distribution occurred because vate letter ruling may be a better of a levy under Internal Rev- option, as it provides certainty as rollover enue Code Section 6331 and the to the tax treatment of the trans- proceeds of the levy have been action. If the taxpayer does not requirement. returned to the taxpayer. qualify for an automatic waiver u Party making the distribution or self-certification, it is the only delayed providing information option. Taxpayers may self-certify only required by the receiving IRA or If an IRA owner chooses to self- if: employer-sponsored retirement certify a late rollover, it is essential u The IRS has not previously plan to complete the rollover, that the requirements for a waiver denied a waiver request with despite the taxpayer’s reasonable are met, and documentation is respect to the distribution in efforts to obtain the information. maintained to substantiate the IRA question. Revenue Procedure 2016-47 ben- owner’s position, in case the IRS u The deadline was missed for one efits credit unions offering IRAs to challenges the transaction. or more of the reasons listed in the their members because of its safe This is especially true in light of revenue procedure. harbor provision. the separate reporting requirements u The contribution is made to the As an IRA trustee or custodian, that send a not-too-subtle signal IRA or employer-sponsored retire- credit unions can rely on the IRA that the IRS intends to carefully ment plan “as soon as practicable” owner’s self-certification that they monitor these transactions. after the reason or reasons that the have met the conditions for a waiv- taxpayer missed the deadline no er of the 60-day rollover require- DENNIS ZUEHLKE is compliance man- ager for Ascensus. He can be reached at longer prevent the taxpayer from ment, unless the credit union has [email protected] or 608- making the contribution. actual knowledge contrary to the 229-1875. The revenue procedure provides self-certification. taxpayers with a 30-day safe harbor It also benefits credit union to meet the “as soon as practicable” members who miss the 60-day requirement. rollover deadline and would not be For purposes of self-certification, able to afford the cost of requesting Resources the revenue procedure lists the a private letter ruling. u Internal Revenue Service: following reasons for missing the That said, it is important for tax- irs.gov/retirement-plans deadline: payers to understand that self-cer-

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 39 u OPERATIONS u TRENDS u SOLUTIONS

8 Predictions for Cybercrime Adrian Nish, head of threat intel- ransomware has occurred in recent ligence at BAE Systems, a CUNA years, partly enabled by online Strategic Services alliance provider, criminal malware marketplaces and has identified eight predictions for partly due to the popularity of Bit- cybercrime in 2018: coin and other cryptocurrencies. 1. The General Data Protection 4. Market manipulation via hack iStock Regulation reality will hit. Many or Twitter bot. There haven’t been to risk. Securing information has U.S. firms processing European many cases of criminals looking for become less about having firewalls Union (EU) citizens’ data might not ways to target and exploit the stock and policies, and more about com- have understood that they, too, will market system online. plex interactions between people and be affected by the EU regulations. 5. The ‘battle of the bots’ will machines. 2. Malware authors will get emerge. It’s inevitable that attackers 8. IDN homograph domain smarter. A big trend in the anti- will begin to incorporate machine spoofing. The internationalized malware market has been the use learning and artificial intelligence domain name (IDN) homograph of machine-learning algorithms (AI) at the same rate as network technique uses characters in non- in detection engines that rely on defense tools. Latin alphabets that appear simi- features extracted from known bad 6. Supply chain woes. 2017 was a lar to the targeted Latin alphabet samples. These bad samples include huge year for supply chain attacks. domain. Although it has been a metadata values, exported function This will continue as criminals view proof of concept and used sparingly names, and suspicious actions. this type of attack as an increasingly for a number of years, attackers can 3. Extortion through ransom- viable option. use a vast amount of subtle letter ware hack-and-leak. A rise in 7. Sociotechnical approaches swaps using this technique.

Commercial Loan Fuels Energy Plant A consortium of credit unions led by was the lead loan participation agent Snapshot $563 million asset Jefferson Financial for the deal. The loan will be ser- Frequency of Security Federal Credit Union in Metairie, viced by Greater Commercial Lend- Effectiveness Testing by La., recently funded a $112.6 million ing, a CUSO owned by $825 million Businesses loan through a U.S. Department of asset Greater Nevada Credit Union Agriculture (USDA) program—the in Carson City, Nev. 17% 24% Don’t know/ More than once largest to date through the agency. The loan recipient, Ryze Renew- not sure a year The USDA’s Rural Development ables Reno LLC, will use the funds Biorefinery, Renewable Chemical, to convert distillers’ corn oil from and Bio-based Product Manufac- ethanol plants into renewable diesel turing Assistance program aids in fuel. The loan will fund a new plant the development, construction, and that is scheduled to open in the sec- 15% 30% Once a year retrofitting of new and emerging ond quarter of 2019 that will create Never technologies for advanced biofuels, almost 70 jobs in the Silver State. renewable chemicals, and bio-based “This loan would not have been 13% products. funded without participation from Less than once a year CU Capital Market Solutions credit unions,” says Jeremy Gilpin, (CMS), an Atlanta-based credit Greater Commercial Lending execu- Note: Totals do not equal 100% because of rounding. Source: 2017 U.S. State of Cybercrime Survey union service organization (CUSO), tive vice president.

40 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org u OPERATIONS u TRENDS u SOLUTIONS

Digital Sign Makes a Big Impact Signage is a basic but often over- a community bulletin board. both accounts and loans. We’ve had looked aspect of marketing. “We’re located down the street a number of students, parents, and White Rose Credit Union in from the local middle and high teachers become new members, York, Pa., recently turned new schools, so we regularly use the sign and we’ve also opened accounts for signage into a strategic home run to communicate our support to stu- school clubs and organizations.” when it established a new branch in dents and athletes,” she says. “We Dallastown, Pa. also run important community event Jen Swanner, marketing vice presi- messages and reminders, and the dent for the $73 million asset credit borough has even asked us to com- union, enlisted a local sign company municate road closures.” to design an 18-foot tall pylon sign White Rose’s visible support of the with the credit union’s logo and community via its LED sign not only name illuminated on top, and a full- supports the organization’s mission, color LED display. it also has been good for business. Not only does Swanner share mes- “Our ROI on the sign increases sages about the credit union’s prod- almost daily,” says Swanner. “We ucts and services, she uses the sign as have seen a substantial increase in $ Follow the path $ to higher yield. $ Connect directly with more than 3,000 institutions in the largest online Marketplace for CD investing. $ Gain more yield on your CDs and enjoy: • QwickTools™ for a fast, easy process $ • Automated accruals and month-end reporting • No third-party or broker fees • Exceptional service by chat, phone or email $

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cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 41

Pg_41_QwickRate.indd 13 3/5/18 2:09 PM TOOLS OF THE TRADE

An ‘Arms Race’ Against Card Fraud Identify the best solutions to protect members and the credit union. Patrick Totty

Moore’s Law, which says that oriented culture. Think of how many Missing the mark the number of transistors in a circuit Amazon transactions we’ve all made When it comes to protecting against doubles every two years, can now over the past year and compare it card fraud, Ruden defines different apply to a new category: credit card to going downtown or to a mall degrees of sophistication. fraud. to physically shop. As debit cards “There are some solutions that “How serious is it? Every three take more of the transaction load, aren’t as comprehensive as they months we see almost quantum fraudulent use or breaches of them could be,” he says. “Credit unions leaps in fraudsters’ capabilities,” says increases.” often accept the degree of security Chaya Hendrick, president/CEO The top credit card vulnerability, that their processors offer. The dis- of Smart Metric. “So Moore’s Law says Hendrick, is the card verifica- advantage here is that they can’t applies to them, too. We’re in an tion date code, which is a card’s recruit the top anti-fraud talent that arms race between legitimate and authorization to conduct an online big banks can afford. Because they illegitimate card use, and sometimes or point-of-sale transaction. “Finan- lack the resources of large banks, the it seems like we’re putting our thumb cial institutions have an overreliance fraud solutions offered to them are into a hole in the dike only to see 10 on it as a fraud-stopping feature.” not at the same level.” more open up.” The likeliest locations for credit Many credit unions fail to use Seth Ruden, financial crimes and card fraud “are sketchy places where member data to detect problems, risk consultant for ACI Worldwide, a card user does many transactions,” a task that became more crucial in sees the same. says Ruden. “‘Sketchy’ in this case the wake of several high-profile data “Payment and credit card fraud go means not well-protected against breaches at large retailers. up every year,” he says. “Some of the fraud.” “One response has been machine increase is from changes in society. Ruden calls fuel pumps “a peren- learning,” Ruden says, “where an We’re increasingly an e-commerce- nial fraudster target” because the automated process adjusts a credit information gained can be sold on union’s anti-fraud strategy by detect- the black market. “One basic way to ing anomalies in members’ purchas- thwart fraudsters at the pump is to ing behaviors: ‘Why is this man ask for a ZIP code—a simple precau- buying women’s shoes in a part of tion because a fraudster isn’t going town he’s never bought anything to know that particular five-digit from?’” number.” The worst practice in countering “The current biggest fraud risk fraud is “being an ostrich—hiding is with EMV [Europay, Master- your head in the sand,” says Hen- card, Visa] cards,” particularly with drick. “Understand that the threat card-not-present fraud, says Alyssa is constant, akin to an arms race, Arredondo, director of marketing which requires the best current tech- solutions, financial, at Entrust nology to counter.” Datacard. Perhaps even more important Sometimes, she says, it’s as simple than monetary losses from card as getting a member’s card number fraud is the threat to your reputa- over the phone through fraudulent tion, Hendrick says: “People’s trust ‘Payment and credit phone calls stating there has been in credit unions is extremely high, suspicious activity on the card. and each breach they experience is a card fraud go up With a card number in hand, a chink in credit unions’ reputational fraudster can immediately go out armor. every year.’ and commit fraud. “After a publicized data breach, Other ways to finagle card num- one in four people who receive a iStock Seth Ruden bers include phishing, text message replacement card place that card at verification hacks, and data breaches. back of wallet,” she continues. “That’s

42 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org if malware affects one app, it can’t jump to other apps. “Mobile devices will continue to offer new security technology,” says Byrnes, citing cardless ATM trans- actions. “A member walks up to an ATM and clicks on ‘cardless trans- action.’ The member scans his QR code and sends it to the ATM. The machine creates a one-time digital certificate and sends it back for him to enter.” At the other end of fraudulent transactions are members whose credit cards have been hacked. How burdensome is the process for get- ting replacement cards? iStock Arredondo calls the availability of

iStock instant card issuance a powerful tool. If a member believes their card has the equivalent of losing 25% of your verification,” he says. “There are ways been compromised, they can go into potential business.” around it, but it protects against a branch and get a new card issued Hendrick adds that ATM and most attempted data hijacks. Two- on the spot. point-of-sale machine codes can be factor authentication is constantly This capability, says Arredondo, is hacked remotely. “All those vulner- evolving in response to two factors: the mark of a credit union that offers able locations can be reprogrammed staying ahead of the fraudsters and a unique member experience as well without fraudsters having to travel reducing member ‘friction’—any- as a “we care about you” vibe. from machine to machine,” she says. thing that makes the transaction “Why do fraudsters steal from “Networks are similar to the net- experience cumbersome.” credit cards? Because they can,” says works of veins in the human body: Biometrics offer the most effective Hendrick. “If a group of bank rob- Once you find a way into the circu- resistance to credit card fraud. bers can find their way into a bank latory system, you can push a thin “The field is steadily advancing,” vault by coming up through the wire almost anywhere you want it to says Byrnes. “In addition to current thinner floor, that’s the route they’ll go. Hackers perform the equivalent.” methods, such as fingerprint, retina, take. Think of credit card fraud as and voice identification, the field has thieves who have found that thin Tightening security advanced to the point that we can floor. The goal here is to reinforce The biggest barrier to security is the monitor how members touch their the floor.” idea that security is a necessary evil, screens and how they swipe—it can says Mike Byrnes, senior product even tell if a member is left- or right- marketing manager, authentication h an d e d .” solutions, at Entrust Datacard. “But He adds that such sophisticated when credit union leaders see that techniques work best on smart- Resources well-implemented security positively phones, and are accessible on u ACI Worldwide: aciworldwide.com affects their earnings, they’re more desktop computers and laptops. likely to take it seriously.” Smartphones are more secure u Entrust Datacard: entrustdatacard.com Most breaches are the result of than desktop computers or laptops u Smart Metric: smartmetric.com bad security measures, Byrnes says. because each app on them is sur- “What we use now is multifactor rounded by a security layer. Even

cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 43 u DEVELOPMENT u SERVICE u EDUCATION Reaching Displaced Communities in Colombia World Council project improves financial inclusion. Eleni Giakoumopoulos and Oscar Guzman For decades, rural populations have been caught in the u Increase delivery mechanisms for financial services middle of conflicts in Colombia. Activities of military using mobile banking, field agents, and other methods. and paramilitary groups, narcotics traffickers, natural u Support financial literacy activities to improve savings disasters, and turmoil with neighboring Venezuela have mobilization and financial services knowledge. all contributed to people in rural areas becoming u Link small businesses, entrepreneurs, and farmers with “desplazados”—the displaced ones. local groups that can train them on income-generation Since 2008, the World Council has been working with activities and connect them with financial institutions. credit unions in Colombia to serve the underserved, har- The main project goals are to: ness the power of technology, and provide a means for u Reach 210,000 people, 100,000 of whom are not cur- the displaced ones to provide for their families. rently participating in the formal financial system. Like many others, Henry Valencia was displaced. He u Educate 70% of the population about basic financial fled to the municipality of Curumani, which had no ser- literacy. vices, utilities, or houses. As a refugee, he lived in a “cam- u Deliver training to 12,200 individuals in rural areas. buche” (tent) with 200 other people. Changing traditional paradigms, credit union agents He had no opportunity to easily access a loan to move through rural areas—often zones of conflict—on improve his conditions—no land, house, or fixed assets. motorcycles or pickup trucks to provide financial services High transactional costs presented another barrier to in person and on-site where rural residents live and work. access financial services. This approach, first piloted in Mexico in 2002 and now The cost to travel to the nearest city is 40,000 Colom- being implemented in Colombia and Haiti, organizes bian pesos (U.S. $14). Considering his monthly average groups in each community to meet with credit union capacity to save was 50,000 pesos (approximately U.S. agents at a set time each week. Credit unions reduce $18), he had no incentive to save. transactional costs for rural and vulnerable populations by World Council is working with Banca de las Oportuni- allowing them to open financial accounts and access loans dades on the “Inclusión Financiera en zonas de frontera or manage their savings without leaving their villages. con Venezuela” (financial inclusion at the border with Field agents with mobile devices (cell phones and por- Venezuela), which aims to: table printers) complement correspondent agents (usually u Implement financial methodologies and products a store owner) to bring the credit union to members. for credit unions, banks, microfinance institutions, and Through the work of a field agent and an affordable insurance companies to connect the adult population loan, Valencia turned his family’s life around. As he con- with financial institutions based on market research. tinues to grow with his credit union, so does the oppor- tunity to improve his life with the financial products and services designed to meet his specific needs.

Semilla Rural Group receives financial literacy and financial services assistance in Amanaven, a village near Venezuela. Semilla field agent Liliana Coronado (center) works with the credit union coordinator, Haider Nobles (near right), and member Henry Valencia (back right).

44 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org OFFICE EQUIPMENT SPECIAL SERVICES CHICAGO LEGAL REPRESENTATION Walinski & Associates P.C. represents EQUIPMENT SALES & SERVICE BLANKET BONDS credit unions for collections, bankruptcies New and used bank equipment, teller cabi- Directors’ and officers’ liability for credit and foreclosures in Cook, Will, Dupage, nets, locks, cash handling. Maintenance ser- unions (most areas) since 1974. Control Kane, Lake and McHenry Counties. Email vice supplies and parts. Safe, vault and ATM, costs with our three-year-rate guarantee. [email protected] or call Robert J. rigging service. Moving and storage, short Also, GAP, single interest, etc. All insurance Walinski (312) 985-7214. and long term. Business relocation services. needs for a credit union. L A Blanchette Warner Industries serving the upper mid- Agency, 15 Briarcliff Professional Center, cuSchool.com west for over 30 years. Call 414-803-4043 Bourbonnais, IL 60914; 815-932-6256. Visit The Internet Credit Union Training facility or email at [email protected] & www.insuranceforcreditunions.com. for staff & volunteers. please visit www.warnerindustries.com.

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cuna.orgt APRIL 2018t CREDIT UNION MAGAZINE 45 BRANCHING OUT

Have Fun With Your IT Exam

Have an IT problem? Go talk to Bob.

James Collins (Illustration: Carrie Doyle)

Ironically, our annual security patches to workstations on cannot answer that as it would violate information technology (IT) exam a routine basis? We used to, but we our confidentiality agreement. and April Fool’s Day coincide haven’t seen any patches for our PCs. Q: Do you have a formal media this year. Never one to let such an That’s probably because we’re still on destruction policy? We routinely opportunity go unnoticed, I thought Windows XP. trash CNN, Fox, ABC, and the local it might be fun to fill out the “CEO Q: What email system does your paper (affectionately known here as questionnaire” with a bit of flair. organization use? AOL, because the “Daily Fishwrapper”). Is this what Here’s what we’ve done thus far: “You’ve got mail!” never gets old. you mean? Q: Do you have designated cyber- Q: Does the organization store Q: Are unscheduled/surprise security personnel? We have Bob. backups off-site? Yes, they’re housed audits performed? Yes, with two Q: Do you have a cybersecurity in the trunk of the CEO’s car. weeks’ notice. user education and awareness pro- Q: Does the organization encrypt Q: When an employee is found gram? Bob goes around and random- its backups? Yes, we put a sticky label to be in noncompliance with secu- ly harps on people, so I’d say yes. on the backups reading, “This is not a rity policies, do you take appropri- Q: Does your firm have a com- backup.” Clever, eh? ate disciplinary action? Of course. puter incident response team with a Q: Does the organization have a Around here, we call it “unemploy- formal process to respond to cyber- hot recovery site? I’m unsure why the ment.” attacks? Yes. Bob likes to run around temperature of a recovery site belongs Q: What is the process by which and scream, “the sky is falling, the sky in this questionnaire. you report and handle software mal- is falling.” Management takes that as Q: Are computer rooms protected functions? This usually begins with our “formal process.” against fire and flood? At the same swearing and complaining followed Q: When you share sensitive infor- time? This is a silly question. by emails to Bob and anyone else who mation with other companies, do Q: Do you allow wireless access in will listen, only to have it documented you require them to follow cyberse- your organization? Only the wireless as a “user issue” because, as we all curity policies and procedures based remote for the break room TV. know, Bob doesn’t work very hard. on industry standards? Yes, unless Q: Which software did you use? Q: Does your organization those places are ungodly inexpensive. Core system, something from the Fed, enforce “complex” passwords? Yes. Then it’s a “recommendation.” Halo 3. We require at least eight characters Q: Does the organization have a Q: Are personal devices (includ- and upper and lower case—whatever written password policy that details ing cell phones) hardened to reduce fits on a 3x5 Post-it note. their required structure? Yes. It must the risk of unauthorized access? Two Q: Are passwords required to be “password” followed by a number. words why this means nothing to us: expire after 90 days? Ours might be This leads to fewer lockouts. flip phones. a typo, but I see it’s set to 900 days. Q: Do you have a formal change Q: When was the last time you Perhaps that’s why nobody has ever control process for IT changes? updated your disaster plan? The last complained. Yes, the minute there’s a change and time you guys came and told us to. JAMES COLLINS is president/CEO at something breaks, we yell for Bob. Q: Are all users required to sign O Bee CU, Tumwater, Wash. Contact him Q: Do you apply system and a confidentiality agreement? We at 360-943-0740 or at [email protected].

46 CREDIT UNION MAGAZINE u APRIL 2018 u news.cuna.org

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