ALSO INSIDE Buy Now, Pay Later Regulation E Update NOVEMBER–DECEMBER 2022
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3 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 22 14 FEATURES 14 Gen Z as a Growth Strategy Attracting Younger Members Requires Innovation and Listening 22 BNPL: The Resurgence of Installment Loans Buy Now, Pay Later Reflects Demand for Installment Payments 26 Regulation E Update Impact of Potential CFPB Changes COLUMNS 5 Conferences 6 From the Chair 8 Washington and Industry Briefs 10 The Bottom Line 12 NAFCU 2022 Accomplishments 32 Inside NAFCU Services 34 Management Insight 36 Executive Spotlight 38 Leadership Download 40 Compliance Central 42 From the President’s Desk 26 NOVEMBER–DECEMBER 2022 • VOLUME 47, NUMBER 6 The NAFCU Journal (ISSN 1043-7789) is published bimonthly every other month. Nov–Dec 2022, Volume 47, Number 6. Published by the National Association of Federally-Insured Credit Unions, 3138 10th Street N., Arlington, VA 22201-2149. Periodicals Postage Paid at Arlington, VA, and at additional mailing offices. POSTMASTER: Send address changes to The NAFCU Journal, NAFCU, 3138 10th Street N., Arlington, VA 22201-2149. The opinions and ideas appearing in this magazine are not necessarily representative of policies of NAFCU. Manuscripts and advertisements are welcome, although NAFCU reserves the right to edit manuscripts and refuse advertisements. Contact publisher for advertising information and rates. Appearance of an advertisement does not imply endorsement or guarantee of the advertiser’s claims. For subscription or advertising information, call 800-336-4644 or 703-522-4770. Email: nafcu@nafcu.org; website: www.nafcu.org. ©2022 National Association of Federally-Insured Credit Unions, all rights reserved.
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5 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 CONFERENCES 2023 Calendar of Events Spring 2023 Regulatory Compliance School Mar. 13–17, in-person in Arlington, VA Strategic Growth Conference Mar. 21–23, in-person in Nashville, TN Board of Directors and Supervisory Committee Conference Apr. 17–20, in-person in Savannah, GA CEO & Senior Executives Conference May 17–19, in-person in Charleston, SC Summer 2023 Engage 2023: NAFCU’s Annual Conference June 27–30, in-person in Long Beach, CA BSA School Aug. 15–17, in-person in Louisville, KY Risk Management Seminar Aug. 15–17, in-person in Louisville, KY Congressional Caucus Sept. 10–13, in-person in Washington, DC Fall 2023 CFO Summit Sept. 19–21, in-person in Las Vegas, NV Regulatory Compliance & BSA Seminar Sept. 26–28, in-person in Savannah, GA or Virtual Management and Leadership Institute Oct. 23–27, in-person in Annapolis, MD For more information about NAFCU’s conferences, go to www.nafcu.org/conferences. Looking for more educational opportunities? NAFCU’s Online Training Center has been redesigned to give credit union professionals easier access to the association’s training programs and library of webinars. For information and the current schedule of upcoming webinars, visit www.nafcu.org/ onlinetraining. Topics and dates subject to change. DIRECTORS Gary A. Grinnell, Chair Corning FCU (NY) Brian T. Schools, Vice Chair Chartway FCU (VA) Karen Harbin, Treasurer Commonwealth CU (KY) Lonnie Nicholson, Secretary EECU (TX) Melanie Kennedy Southwest Financial FCU (TX) James A. Kenyon Whitefish CU (MT) Frank Mancini Connex CU (CT) Keith Sultemeier Kinecta FCU (CA) Karen Rosales Arlington Community FCU (VA) Stephanie Sherrodd Sandia Laboratory FCU (NM) Eli Vazquez Bank-Fund Staff FCU (DC) EXECUTIVE STAFF B. Dan Berger President/CEO Anthony Demangone Executive Vice President/COO Meghan Burris Vice President of Communications and Media Relations Greg Mesack Senior Vice President of Government Affairs Randy Salser President of NAFCU Services Corporation MAGAZINE STAFF Haley Schmitz Editor LLM Publications Editorial Services and Design ADVERTISING sales@nafcu.org www.nafcu.org/advertise
6 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 As you navigate these changes, my number one suggestion is to reach out to your credit union colleagues. One of my favorite aspects of our industry is our ability to share ideas and help each other succeed. A great place to connect with peers on this topic can be found online in the complimentary NAFCU Networks, specifically the CEO Network and the NAFCU Human Resources Network, where you can engage in discussions about what other credit unions have found to be successful. Change can be hard. But one thing I know for sure is that credit unions have a unique way of supporting not only their members, but also their staff. I have no doubt that each credit union will find a solution that works best for their staff and ensures their members will continue to receive the best financial services and products available in the industry. Gary Grinnell is president and CEO at Corning Credit Union in Corning, NY. FROM THE CHAIR RETURNING TO WORK: THERE IS NO ONE-SIZE-FITS-ALL APPROACH By Gary Grinnell, NAFCU Board Chair How do you keep your team motivated and engaged? This is a question that I have been asked numerous times over my years as a leader at Corning Credit Union. The answer to this question varies, in part because the problems facing our team at any given moment can change. One big change over the last few years: the transition to remote and hybrid work. According to recent research by Microsoft, 50% of leaders say their company already requires, or plans to require, fulltime in-person work in the coming year. However, research by the Myers-Briggs Company shows that forcing workers to be in the office more often than they want will significantly increase the chance that they will seek new jobs. For an industry that prides itself on open doors and in-person interactions to serve our members, we have felt this challenge more than most other industries. So, the question remains: how do you keep your teammotivated and engaged during your credit union’s transition? Here are a few things I’ve found are key to managing expectations and providing flexibility, all while keeping the goal of retaining and empowering staff for success. 1. Be transparent: While we’d like to offer staff full control over their work structure, it’s unrealistic to offer this to every teammate. There are many factors that go into decisions such as this and it’s important to be open and honest with your team about the ‘why.’ Even though you may be faced with questions that have no satisfying answer, providing honest answers will be key. 2. Listen: This one seems obvious, but it is important to listen to all expectations, concerns, and potential disappointments as your team digests information about their work environment and potential plans for the future. 3. Understand differences: Your team is most likely made up of both introverts and extroverts, people who thrive in a remote work environment and those who crave in-person connections. There is no one-size-fits-all approach in this case. Different solutions may work for different teams or teammates, and that’s okay. 4. Try and try again: Finding the right solution for your credit union may take time. An open line of communication with your team will be needed as you assess and implement new work structures. It may be beneficial to tell your team that the new plan will only be for a trial period, and they can come to you with suggestions or recommendations. This “new normal” will constantly evolve the workplace, so it’s important to get comfortable trying new solutions if your current structure isn’t working. The average employee at any organization hopes for fairness, transparency, flexibility, and a sense of purpose from their work. I am sure your credit union’s mission provides a worthwhile and exceptional purpose already—but it’s up to you as the leader of the organization to ensure the right amount of fairness, transparency and flexibility are provided.
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8 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 WASHINGTON AND INDUSTRY BRIEFS What have you done for me lately?” This seems to be the biggest question facing service providers daily—be it a credit union, car insurance company or internet provider. In today’s world, with sky-high inflation and every dollar stretched to its maximum, we have to prove the value we provide. For NAFCU, it is no different. We expect our members to ask us what we have done for them lately and we are prepared to answer. NAFCU’s advocacy team is constantly at work fighting for our members in Washington, D.C. and we are proud of what we have done to help credit unions grow. As you will see below, NAFCU covers all facets of advocacy. From the basics of educating key policy makers about the benefits credit unions provide to their members and communities, to fighting off attacks from banking trade groups, to securing the passage of legislation to help credit unions better serve their members, NAFCU is constantly working for the credit union industry. Nearby in this issue of The NAFCU Journal is NAFCU’s 2022 Accomplishments piece, which lists some of the many advocacy achievements in the past year. We are proud of what our team has done, and I’d like to highlight a few of those wins to show what we are doing to help not only our members, but all credit unions. In Congress, one of our biggest wins involved putting a stop to legislation that would require credit unions to report almost all member account transactions to the IRS on a yearly basis. This incredibly burdensome requirement would have been an unprecedented intrusion on the financial privacy of all Americans and would have been an operational nightmare for credit unions. However, NAFCU launched a widespread grassroots effort to involve credit unions in the fight against the legislation, worked hard to build relationships with key lawmakers and coordinated with a powerful coalition of trade groups to stop the bill in its tracks. Our focus wasn’t only on stopping burdensome legislation, but also advocating on behalf of bills that would provide credit unions with meaningful relief. We shepherded into law the Credit Union Governance Modernization Act (CUGMA), which updates the Federal HOW NAFCU WORKED FOR YOU IN 2022 By Greg Mesack, NAFCU SVP of Government Affairs Credit Union Act’s member expulsion provision so that a credit union’s Board of Directors can vote to expel problematic members that are a risk to the credit union, its employees and its members. CUGMA was signed into law this spring and we are working with the NCUA to ensure it is quickly implemented. Of course, NAFCU is always on guard to fight back against baseless attacks from the big banks and their trade associations. These misguided attacks are relentless. In late 2021, NAFCU launched the award winning “Big Bank Bullies” campaign to show policymakers the hypocrisy of the big banks, with their billions of dollars in fines and stock buy backs, attacking not-for-profit credit unions. This digital campaign targeted key policy makers on Capitol Hill and in the Administration. We have also fought back against the banks’ misleading attacks on credit unions merging with community banks. “In Congress, one of our biggest wins involved putting a stop to legislation that would require credit unions to report almost all member account transactions to the IRS on a yearly basis. This incredibly burdensome requirement would have been an unprecedented intrusion on the financial privacy of all Americans and would have been an operational nightmare for credit unions.” “
9 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 Bankers, who are closing 200 branches a month in rural and underserved communities, are fighting to keep credit unions from expanding into these areas and providing Main Street America with safe, affordable financial products. NAFCU will not stand for such a double standard, and we will continue to educate lawmakers with the facts. But we aren’t just fighting for you in Congress. We are constantly working with federal regulators to make life better for credit unions. With the NCUA, we worked to achieve real wins like expanding field of membership rules so that credit unions can serve more Americans who lack basic financial services. We also worked with the agency to provide key information in a number of areas where our members need additional guidance. Pointedly, credit unions must continue to innovate to meet the demands of a changing environment, and NAFCU worked with the NCUA to secure guidance allowing credit unions to partner with third-party broker-dealers to offer digital asset services. We also worked with the agency to secure guidance allowing credit unions to use distributed ledger technologies as they create new systems to better manage their members’ assets. Finally, we recently secured guidance from the NCUA to update the interest rate risk supervisory framework so that credit unions are not unfairly punished for high levels of deposits coming out of the pandemic. There almost aren’t enough pages in The NAFCU Journal for me to list all the successes that our advocacy team has achieved with your help over the past year. We are proud every day to wake up and fight for credit unions. By serving you, we help over 133 million Americans who trust their financial well-being to credit unions. NAFCU’s Grassroots Action Center allows credit unions to easily find their polling location, search for local candidates, and more. Take advantage of this resource ahead of the upcoming election by visiting www.nafcu.org/grassroots. “We aren’t just fighting for you in Congress. We are constantly working with federal regulators to make life better for credit unions.”
10 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 LENDING TO MAIN STREET By Curt Long, NAFCU Chief Economist and Vice President of Research THE BOTTOM LINE Bank lobbyists are notorious for their misinformation. In their eyes, credit unions are just like banks, only without the federal income tax burden. They often suggest that credit unions offer the same services, operate with the same motives, and in every meaningful way are simply “for-profits in disguise.” Unfortunately for these bank lobbyists, the data tells a different story. Because when it comes to serving everyday Americans and small businesses, there simply is no comparison: credit unions are the ones meeting the needs of Main Street. As compared to banks, credit unions devote a much larger share of their balance sheet toward “Main Street” loans— consumer loans, residential mortgage loans and small business loans.1 At year-end 2021, these loans constituted 57% of credit union assets compared to just 22% for banks. Not only is the bank figure markedly lower, it is trending downward. Ten years ago, 31% of bank balance sheets were dedicated to Main Street lending. Segmenting those results by asset size yields further insight. For each asset class, credit unions are more highly concentrated in Main Street loans than banks. However, the disparity grows with size. Where bank concentration in Main Street lending tends to recede with growth, the opposite is true for credit unions. This outcome speaks volumes about the credit union difference. Once achieving scale, banks tend to steer the balance sheet toward more lucrative areas. But credit unions with more resources provide greater benefits to their member-owners. Not only do credit unions make more Main Street loans, but they also lend to borrowers and communities ignored by banks. Credit unions have made tremendous efforts in recent years to extend the benefits of credit union membership to areas where banks are withdrawing. Data from the Home Mortgage Disclosure Act illustrates this best and shows that, despite operating within the confines of field of membership restrictions and regulatory obstacles, credit unions are eager to reach disadvantaged communities. The list of cross-sections that credit unions are expanding into is long and varied. Since 2011, credit unions have increased their share of loans to Black, Hispanic, Female, and Low-to-Moderate Income (LMI) borrowers.2 In terms of geographies, they have also increased lending to Minority neighborhoods3 and LMI census tracts.4 These trends are markedly different from those of banks, which have sharply cut their lending share to LMI borrowers over the past decade, and which have raised their share of loans in the remaining categories by a more modest amount. As a result, credit unions rank ahead of banks in all six categories. That was true of only one category (LMI census tracts) in 2011. Banks include mutual savings institutions. Data as of June 30, 2022. See Footnote for Main Street Loan calculation. Sources: NCUA, FDIC, NAFCU calculations Main Street Loans as Share of Total Assets, by Institution Type and Asset Class 80% 60% 40% 20% 0% Banks Credit Unions $10B+ $1B-10B $100M-1B <$100M
11 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 References 1. For banks, Main Street Loans are calculated as the sum of residential real estate loans, loans to individuals and small business loans. For credit unions, Main Street Loans are calculated as total loans minus the non-small business loan portion of total commercial loans. Credit unions do not report small business loans directly, therefore NAFCU applies the ratio of small business loans to commercial loans observed at community banks. Based on past NAFCU surveys of distribution of credit union commercial loan size, this is likely a conservative approach. 2. “LMI” refers to low-to-moderate income. LMI borrowers are those with incomes less than 80% of area median family income (AMFI). 3. “Minority Neighborhood” refers to a census tract in which the racial/ethnic minority share of the population is greater than or equal to 50%. 4. LMI census tracts are those with median family incomes less than 80% of AMFI. These results argue strongly for many of NAFCU’s legislative goals, such as allowing credit unions greater freedom to move into underserved areas and not subjecting them to the excessive and unjustified burdens of Community Reinvestment Act compliance. NAFCU will continue to impress upon public officials the unique features of credit unions and their distinctive record of providing affordable financial services to those policymakers’ constituents. Notes: (1) Data reflect shares of annual owner-occupied purchase + refinance loans originations. (2) "Banks" include mutual savings institutions. (3) See footnotes in text for definitions of LMI and Minority Neighborhoods. Sources: Home Mortgage Disclosure Act data (FFIEC, CFPB); NAFCU calculations Black Borrower % 2011 Credit Unions Banks 2021 12 10 8 6 4 2 0 Female Borrower % 24 22 20 18 16 Minority Neighborhood % 20 18 16 14 12 10 8 6 Hispanic Borrower % 2011 2021 12 10 8 6 4 2 0 LMI Borrower % 40 35 30 25 20 LMI Census Tract % 20 18 16 14 12 10 8 6
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Every credit union marketer knows that the best way to sustain growth and financial viability of the organization is to attract new members who will stay loyal to the credit union throughout their life. This strategy has worked well, but as members age, the challenge is to attract younger generations that are looking for different types of products than existing members. Attracting Younger Members Requires Innovation and Listening By Sheryl S. Jackson Enhanced technology, new products, educational offerings and convenient services are all important to younger members but reaching the Gen Z market is not easy due to their age, stage of life and influence, or lack of influence, from parents. Members of Generation Z—or Zoomers— were born between the mid- to late-90s and 2010. They are the first generation to be considered “digital natives” because they have had access to the internet and portable digital technology since birth. Generally, they are concerned about academic success and job prospects, and they are willing to delay gratification more than previous generations.1 They do, however expect to use technology in all areas of their lives. Reaching Gen Z members is part of business-as-usual for credit unions with ties to universities. While these institutions also serve faculty, staff and alumni of the schools, a key part of their marketing efforts are directed at students aged 17 to 25. 14 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022
15 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 The age breakdown, by generation, for members of the MSU Federal Credit Union is: ■ 26% Gen Z ■ 29% Gen Y (millennials) ■ 21% Gen X ■ 20% Baby Boomers ■ 4% Silent Generation The 341,691-member credit union includes students, faculty, staff and alumni from Michigan State University, Oakland University and select employer groups throughout the state of Michigan. “We see different behavior in each generation of members,” said Deidre J. Davis, MSUFCU chief marketing officer. “For our overall membership, 36% use mobile deposit but for those who joined as students, the mobile deposit usage is 53%.” The convenience of not having to visit a branch to transact business is just one way MSUFCU appeals to the younger generation. Research shows that while Gen Z has the lowest financial literacy of each of the five generations, 52% of Gen Z respondents to one study say that they are focused on improving their knowledge.2 “We offer Financial 4.0®, a free financial education program to all members but the topics are geared toward younger members who are still in school or about to begin their careers,” said Davis. The program is offered online via MSUFCU’s website as well as the Financial 4.0 for MSUFCU mobile app as a series of videos, podcasts, infographics and blogs and in-person or virtual seminars. “There are five neighborhoods, or residential areas, on the MSU campus, and our financial education team hosts seminars in all of them, offering students information on topics relevant to them,” she said. These topics address all stages of the college student’s journey from initial budgeting tips, ways to establish credit and the value of internships for students in their first years to housing considerations, investment basics and networking advice for students in their later years. “To help encourage attendance, we sometimes have prize drawings for attendees or give all attendees a free gift,” she adds. “Focusing on loyalty is important. It allows us to create long-term members by developing a trusting relationship with students early in their college experience,” said Donna Dickerson, vice president of brand and marketing for the University of Michigan Credit Union (UMCU), a 115,000-member credit union serving University of Michigan, Eastern Michigan University, Washtenaw Community College and nearby communities. The credit union demonstrates its commitment to serving students with relevant product packages crafted specifically for students that include free checking accounts with university-branded debit cards. “Students also want technology that is easy to use,” said Tiffany Ford, president and CEO of UMCU. Based on feedback from students, UMCU converted its mobile and online services to a new platform that is more intuitive, robust and simpler to use. “ Focusing on loyalty is important. It allows us to create long-term members by developing a trusting relationship with students early in their college experience. ” DONNA DICKERSON, VICE PRESIDENT OF BRAND & MARKETING, UNIVERSITY OF MICHIGAN CREDIT UNION
16 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 Practical Giveaways are Important “We are where the students are, meeting them before school begins at welcome and orientation events, at sports events and on the social media platforms they use,” said Ford. Credit union staff also show up at coffee shops and smoothie stores. Pop-up events promoted on UMCU’s social media invite students to specific locations where they find credit union staff with educational information and giveaways. “They can use QR codes from our social media for t-shirts and other items, in fact, we hosted a free smoothie day at one location that is popular with students.” Ford pointed out that it’s important to be flexible with offerings—especially giveaways—based on student feedback or type of event. For example, with ice hockey, gloves are a fan favorite in the ice arena but on a sunny football Saturday, sunglasses are welcomed, she said. “Our university-branded sweatshirt is given with each new account, and the students love them. We see students wearing them to classes, sporting events and around town.” At Duke University Federal Credit Union (DUFCU), giveaways are chosen for practicality, said Jennifer Sider, MBA, director of marketing. “We’ve found that college-student-aged members are not interested in decorative items, but want practical items,” she said. “Our most popular giveaways are pens, water bottles, adhesive hooks to use in dorm rooms and key chains with rubber basketballs—a very popular Duke item.” “ We are where the students are, meeting them before school begins at welcome and orientation events, at sports events and on the social media platforms they use. ” TIFFANY FORD, PRESIDENT & CEO, UNIVERSITY OF MICHIGAN CREDIT UNION
17 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 DUFCU is not as large as other credit unions near or affiliated with universities. The 16,000-member institution has one branch, which is adjacent to but not on campus property, and 35 team members. The credit union serves students, staff and faculty, and retirees at the university and the affiliated health system as well as their family members. “We only began offering products and services to undergraduate students five years ago, so we are still building those relationships,” said Sider. Because the credit union is only one of several larger, more traditional financial institutions that exhibit at new student orientation, an ambassador program was used to differentiate the credit union from others this year. “We hired four undergraduates to work at the events to distribute information and covered the expenses of campus influencers who posted financial tips from the credit union for two weeks,” she said. “The results were positive, but we realize that to keep the momentum, it would be necessary to extend the program throughout the year.” Her future plans include evaluating the creation of a student advisory board to provide feedback, suggestions and insight into the best ways to engage students. Offer Student-specific Programs Loans that are specific to the student experience are also attractive to the younger audience. Study abroad loans as well as graduate student loans to bridge the gap between scholarships, workstudy or part-time income are popular. MSUFCU also provides a loan for students volunteering with Spartans without Borders and awards $1,000 through the MSUFCU Internship Opportunity Award to help cover out-of-pocket expenses when students are working at unpaid internships. “Gen Z members want to do business with socially responsible organizations,” said Davis. “Our employees and our organization support community and student-based organizations, and we make sure we are continually sharing that story via social media in our various communications.” DUFCU also responds to their members’ desire to be part of something bigger and give back to the community with its main charitable partner, Duke Children’s Hospital and Health Center, said Sider. Efforts to partner with organizations include the graduate student association, for whom grad-student-specific loans were created and promoted, recognition of student groups at sporting events and use of graduate students for business projects and inclusion at board meetings. Sider’s team has also found a muchneeded way to help a segment of the Gen Z audience. “International students can build U.S. credit with a share secured credit account,” she explained. Without a Tax ID they may not be eligible for a loan but can use this card to establish a credit history that will be helpful in the future. “ We’ve found that college-student-aged members are not interested in decorative items, but want practical items. Our most popular giveaways are pens, water bottles, adhesive hooks to use in dorm rooms and key chains with rubber basketballs—a very popular Duke item. ” JENNIFER SIDER, MBA, DIRECTOR OF MARKETING, DUKE UNIVERSITY FEDERAL CREDIT UNION
18 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 While recruiting new members is important and engaging them while they are at school can be accomplished with technology, educational offerings, social media and attendance at events, the real challenge is retention. With younger members, especially those who may leave your immediate area once they graduate, move away for a job or just decide they want to live somewhere else, it’s important to begin retention efforts early in the relationship—even during the recruitment phase. “Be agile and willing to invest in technology that can be personalized and be used to continue engagement throughout their lives,” said Davis. “We promote and encourage the use of our mobile app, online banking and the CO-OP ATM network, and we explain that we can go wherever they go.” References 1. Protzko, J. Kids These Days! Increasing delay of gratification ability over the past 50 years in children. Intelligence. 2020. 80 (101451). doi:10.1016/j.intell.2020.101451. S2CID 218789047. 2. Yakoboski PJ, Lusardi A, Hasler A. Financial literacy and well-being in a five generation America: The 2021 TIAA Institute-GFLEC Personal Finance Index. https://bit.ly/ 3UaVQps. “ Gen Z members want to do business with socially responsible organizations. Our employees and our organization support community and student-based organizations and we make sure we are continually sharing that story. ” DEIDRE J. DAVIS, CHIEF MARKETING OFFICER, MSU FEDERAL CREDIT UNION
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22 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 When first introduced, layaway programs offered through retailers were a popular way to purchase large ticket items and spread payments over time. The disadvantage was the requirement that the store hold the merchandise until the bill was fully paid. the 20% to 30% higher conversion from browsing to sales rate and have seen a 30% to 50% higher ticket sales.1 Fintechs have been leading the way in the BNPL adoption, and larger, traditional banking institutions are evaluating their own versions of the product, but what does this mean for credit unions? “At this point, it is uncommon to see credit unions offer a BNPL product,” said James Akin, Regulatory Affairs Counsel BNPL: THE OF INSTALL- MENT LOANS Resurgence Buy Now, Pay Later Reflects Demand for Installment Payments for NAFCU. “Some credit union service organizations are working on it, but it is primarily still in development.” In a NAFCU survey of members, no respondents indicated that they currently offer a BNPL product. When asked about plans to introduce a BNPL product: ■ 21% said they plan to introduce one in the next one to two years. ■ 15% said they considered introducing BNPL but decided not to do so. ■ 64% said they have not considered BNPL as an offering. The rapid increase in use of BNPL has caught the attention of the Consumer By Sheryl S. Jackson Buy Now, Pay Later (BNPL) has been described as the modern equivalent of layaway, but the consumer receives the item purchased immediately. Options to pay in installments rather than all at once are becoming more common, especially for items that cost more than $100. According to one report, BNPL payments made up 9% of online transactions in 2021 but are expected to account for about 24% of all global ecommerce transactions by 2026. Merchants benefit from
23 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 “ With the Bureau signaling a shift toward increased supervision of BNPL fintechs, credit unions can begin to feel that the BNPL market has more certainty and that they are no longer at a competitive disadvantage. ” JAMES AKIN, REGULATORY AFFAIRS COUNSEL, NAFCU Financial Protection Bureau (CFPB), said Akin. “The CFPB has three areas of concerns related to BNPL: ease of accumulating debt by acquiring installment loans from multiple sources at one time, regulatory arbitrage where BNPL providers may skirt consumer protection laws and data security issues related to data harvesting and protection of buyer’s information.” In mid-September, the CFPB released its report summarizing its findings from the inquiry into the BNPL market, “Buy Now, Pay Later: Market trends and consumer impacts.” Simultaneously, the CFPB announced that it would begin bringing BNPL fintechs in line with consumer financial protection laws and subjecting them to supervisory examinations. Troublingly, the CFPB found that some of these BNPL products appear to be intentionally designed to avoid application of certain federal and state laws. “With the Bureau signaling a shift toward increased supervision of BNPL fintechs, credit unions can begin to feel that the BNPL market has more certainty and that they are no longer at a competitive disadvantage,” said Akin. Tarik Camurdes, Buy Now Pay Later/ Installments executive at FIS, does not believe that credit unions will face compliance challenges because most already offer loans and have the compliance structure in place. “An additional benefit of offering the product through the credit union is that member’s ability to monitor and manage loans in one place through an online dashboard or mobile app,” he said. This may help to address the CFPB’s concern that consumers may unknowingly take on significant debt due to BNPL loans offered by multiple providers with no central application to monitor the loans. There are two types of BNPL products. One takes place at the point of sale online or in person, and the other occurs post-purchase. The point-of-sale product is targeted to merchants and is where fintechs have found success—setting up platforms and signing agreements with merchants to offer the installment plan. Based on fragmented payment systems infrastructure, it is hard for banks and credit unions to set up a point-of-sale product offering because it means establishing agreements directly with “ In the U.S., larger financial institutions are providing BNPL or installment services by offering to convert specific purchases made on a consumer’s credit card to an installment payment plan. This is the easiest way to offer the service because it is not a new product, the credit union can set eligibility requirements to minimize risk and it lives in your own environment so you maintain the member relationship. ” TARIK CAMURDES, BNPL/INSTALLMENTS EXECUTIVE, FIS
24 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 merchants or working with merchants through a third party, said Camurdes. “In the U.S., larger financial institutions are providing BNPL or installment services by offering to convert specific purchases made on a consumer’s credit card to an installment payment plan,” he said. “This is the easiest way to offer the service because it is not a new product, the credit union can set eligibility requirements to minimize risk and it lives in your own environment so you maintain the member relationship.” The offer to convert can be made to members with good payment history and the offer can be limited to purchases over a certain amount, he added. Adding a BNPL feature to the credit union member’s existing card or through a new product specifically designed for short-term installment loans is a low risk service for existing members, said David Javitch, vice president of product management at Mastercard. “This is also a product that can be used to attract new members,” he said. “We’ve found that as the popularity of BNPL grows, over 60% of people interested in it prefer to use it through their financial institution versus another organization.” “ It’s a challenge to develop new and innovative digital services, but there are tools and technology providers who can bring partners together to create the product more easily. The goal is to demystify the process so credit unions of all sizes can offer a BNPL experience over time. ” DAVID JAVITCH, VICE PRESIDENT OF PRODUCT MANAGEMENT, MASTERCARD “ Passing up the opportunity to offer this innovative product runs the risk of losing members and revenue to fintechs or other institutions offering it. We tell credit unions to evaluate it carefully to decide if it is right for their organizations. ” PAUL DAVIS, DIRECTOR OF MARKET INTELLIGENCE, STRATEGIC RESOURCE MANAGEMENT Reaching a new audience is a benefit of BNPL. Younger shoppers appreciate the flexibility, with 44% of Gen Z and 37% of millennials expected to use BNPL in 2022, compared to 23% of Gen X and 9:4% of baby boomers.2 In spite of the greater interest in BNPL by younger people, the product can also be attractive to previously underbanked persons as well as older, affluent members who are purchasing big ticket items, said Paul Davis, director of market intelligence, Strategic Resource Management. “Passing up the opportunity to offer this innovative product runs the risk of losing members and revenue to fintechs or other institutions offering it,” he said. “We tell credit unions to evaluate it carefully to decide if it is right for their organizations.” In addition to providing a new revenue source from individual members, Davis foresees a potential opportunity in the business-to-business space. “Purchasing office equipment, construction tools and other big-ticket items via BNPL can be a significant benefit to small business members.” The demand for BNPL will continue to rise consistently over the next three to four years, said Javitch. “It is a challenge to develop new and innovative digital services, but there are tools and technology providers who can bring partners together to create the product more easily,” he said. “The goal is to demystify the process so credit unions of all sizes can offer a BNPL experience over time.” Doing your homework is important to evaluate what members want, how risk can be mitigated and how it can support a credit union’s growth. Camurdes recommended that credit unions talk to existing credit and debit processing partners first. “Everyone’s working on BNPL now, so the simplest first step is to find out what your existing, trusted partners are doing that can work for your credit union.” References 1. Global Payments. 2022 Commerce and Payment Trends Report: 5 seismic trends shaping the future of commerce. 2. Ibid.
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26 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 REGULATION E UPDATE Impact of Potential CFPB Change By Sheryl S. Jackson
27 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 There is no doubt that consumer behavior changed over the course of the last two years, with more people becoming comfortable with app-driven financial transactions, online banking and digital communications. Along with the convenience of innovative ways to conduct financial business, technology also provided another avenue for fraudsters to take money from credit union members. While Regulation E provides a basic framework that establishes the rights, liabilities and responsibilities of participants in electronic fund transfer systems, it was not designed with some of the new technologies in mind. “The regulation was passed in the 1970s to protect consumers and financial institutions as relatively new technologies like credit cards and ATMs gained prominence,” said Andrew Morris, senior counsel for research and policy for NAFCU. Although interpretations of the Regulation have been updated through FAQs to address questions related to new technologies, the speed and dynamic nature of peerto-peer (P2P) transactions via thirdparty platforms poses new challenges, he said. “We are also hearing that the Consumer Financial Protection Bureau (CFPB) is working on new interpretive guidance that could place a greater burden on credit unions by requiring them to assume an even greater share of the liability associated with fraudulent transactions.” Existing Regulation E guidance already presents its own set of challenges in the P2P context. “Under the current CFPB interpretation of Regulation E, a depository institution can be responsible for pass-through transactions, even if another company’s platform—such as an app-based P2P service—was used by the consumer to withdraw funds from their credit union account,” said Morris. “In these pass-through situations, a consumer can choose which organization to contact in case of error or fraud.” This is problematic for credit unions because members may find it more difficult to receive human assistance from a large technology company, and the credit union’s commitment to relationship banking often means members rely on their credit union to untangle the error. Credit unions will do everything they can to help the member, but they might not have detailed transaction information to investigate error or fraud involving P2P services because relevant information resides with the P2P service’s platform, explained Morris. “Our advocacy efforts are focused on encouraging the CFPB to explore a hierarchal response to consumer reports of error or fraud in “ Our advocacy efforts are focused on encouraging the CFPB to explore a hierarchal response to consumer reports of error or fraud in the pass-through transactions by requiring P2P providers to respond first since they have the information necessary to investigate. This issue needs to be resolved as soon as possible because more consumers are joining these P2P platforms and the opportunity for fraud or error increases with volume. ” ANDREW MORRIS, SENIOR COUNSEL FOR RESEARCH & POLICY, NAFCU pass-through transactions by requiring P2P providers to respond first since they have the information necessary to investigate,” he said. “This issue needs to be resolved as soon as possible because more consumers are joining these P2P platforms and the opportunity for fraud or error increases with volume.” New Technology; New Challenges Emerging innovations in payment options, such as the FedNow Service, present new opportunities for credit unions to deliver faster payments, but also present additional challenges related to managing fraud risk. One recent survey of NAFCU members revealed that a majority of respondents expected future availability of FedNow to “accelerate adoption” of faster payments. However, the irrevocable nature of real-time settlement could mean that early engagement with the service may correspond with conservative transaction value limits, and focus—at least initially—on business use cases.
28 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 “Real-time payments in which transactions are settled instantaneously and irrevocably create a much more difficult type of fraud to unwind and resolve,” said Morris. “Although we don’t know what the CFPB will change in current guidance, we are concerned that the guidance will be expanded to place more of the burden on credit unions as more responsibility is removed from consumers and greater liability is placed on financial institutions.” As the financial industry provides information to the CFPB to advocate for guidance that is fair to consumers and financial institutions and does not unintentionally set the stage for even more fraudulent activity, credit unions still face a number of challenges managing fraud risk today, said Mark Thomson, vice president of compliance for BECU. These challenges include: ■ Keeping up with the increasing number of Regulation E disputes and fraud claims that our members are submitting for our investigation and resolution with existing resources. ■ Keeping up with the fraudster’s complex use of systems, sophisticated social engineering methodologies and speed of operations, and the seemingly ever-increasing resources they have at their disposal to target our members. ■ Balancing the need for effective software and hardware tools to validate the identity of the member against the members’ desire for easy and quick sign-in to apps and systems. ■ Understanding when an investigation into disputed transactions is thorough and sufficient to conclude that the transactions are authorized. ■ Understanding what the standard of proof is for an investigation into disputed transactions and a determination that the transactions were authorized. ■ Maintaining consistency in investigations and outcomes across all members, across all products and through time. One of the most difficult challenges is managing the moral hazard problem in the Regulation E dispute process, said Thomson. “The moral hazard problem arises in economics when one party in a transaction takes on excessive risk because they know that any resulting negative consequences will be borne by the other party to the transaction,” he said. “In the context of Regulation E and electronic funds transfers, Regulation E’s limitations on member liability for fraudulent transactions can reduce the member’s incentive to take precautions against fraud, leaving credit unions to bear the losses.” Currently, Regulation E language assigns limited liability to a consumer in some cases. One example is a caller who identifies themselves as a representative of the credit union telling the member that their checking account has been hacked, and they need to go to a website provided by the caller to update access credentials. Once the fraudster has obtained log-in information via the “imitation” website, “ Regulation E’s limitations on member liability for fraudulent transactions can reduce the member’s incentive to take precautions against fraud, leaving credit unions to bear the losses. ” MARK THOMSON, VICE PRESIDENT OF COMPLIANCE, BECU
29 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 GET THE LATEST NEWS ON COMPLIANCE TOPICS The NAFCU Compliance Team regularly writes about different Consumer Financial Protection Bureau topics, including Regulation E, in the compliance blog located at www.nafcu.org/compliance-blog. Select “Accounts,” in the “Categories” menu at the right of the page to find CFPB-related articles. EFTs are initiated using the access credentials for the real account. In this case, the member did not authorize the EFTs and received no benefit from the transaction, Regulation E limits liability to the member. However, if the member agrees to deposit a check for someone, withhold some funds for their own benefit, and send another amount back to the person, the member is responsible for the full amount because the transaction was authorized by the account holder and anticipated gain from the transaction. “If the CFPB changes the language of Regulation E and significantly undermines the language in the definition of an unauthorized EFT in a manner that weakens the bulwark this language provides against the moral hazard problem, this will significantly degrade a credit union’s ability to manage fraud risk associated with EFTs,” said Thomson. “It may significantly increase the amount of fraud experienced by the credit union and undermine the economic viability of offering EFT and P2P payment systems.” Member Involvement Essential “We cannot address fraudulent activity alone,” said Doug Wright, chief financial officer for Mission Federal Credit Union. “Consumers must be our first line of defense by reviewing their statements and evaluating transactions and potential recipients carefully.” It’s also important for members to be aware of potential fraud, understand that credit union staff will not call for personal information including access credentials and take steps to prevent access to their accounts. “However, if CFPB changes the language to remove liability for their actions, there is little incentive to be vigilant,” he said. “P2P investigations will continue to be challenging because credit unions have no visibility into the transactions, and we do not know what steps services such as Venmo take to mitigate risk.” Mission Fed has taken steps to minimize fraud loss while still providing excellent member service. “We have invested in better tools, using artificial intelligence and machine learning to review transaction activity, and we’ve hired more staff,” said Wright. Over the years, Mission Fed staff involved in fraud monitoring and investigations has grown from one or two people 20 years ago to 10 to 12 people in recent years. “You must have human intervention to monitor and review flagged transactions to determine if it is suspicious. It’s part of balancing the need to provide reasonable, quality member service with the need to protect the credit union from fraud loss.” While NAFCU and other industry associations are actively advocating for reasonable updates to guidance that reflect the risks for increased fraud with new technology and minimization of consumer liability, it is important for individual credit unions to act as well, suggested Wright. “We need to educate our employees and our members to make sure our side of the story is told, and we need to take the message to the community as well,” he said. “As fraud risk increases and if CFPB guidance changes, credit unions may have to spend more money on tools and staff to monitor transactions, and we may have to tighten controls to stop some transactions. This could impact our members, which none of us want to happen.” “ Passing up the opportunity to offer this innovative product runs the risk of losing members and revenue to fintechs or other institutions offering it. We tell credit unions to evaluate it carefully to decide if it is right for their organizations. ” DOUG WRIGHT, CHIEF FINANCIAL OFFICER, MISSION FEDERAL CREDIT UNION
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32 THE NAFCU JOURNAL NOVEMBER–DECEMBER 2022 INSIDE NAFCU SERVICES The NAFCU Services Innovation Awards gather dozens of transformational solutions for credit union leadership. Five independent judges comb through each solution looking for the most novel approach, magnitude of impact, and suitability to credit union needs. I’m proud to share the details of the six innovations recognized as 2022’s best of the best: Amazon Web Services, for CUSO Partnerships: The freedom and flexibility of cloud computing solutions bring with them complexity. How can resource-limited IT departments thoroughly validate the many similar-seeming providers of on-demand storage, hosting, and computing power? Amazon Web Services has partnered with two technology CUSOs to provide a managed path to the cloud, leaning on Thinkstack for cloud infrastructure and Arkatechture for conversions of siloed data storage to a single managed data lake. The combinations can ease the evaluation and transition processes for credit unions ready to move data, analytics, or applications to the cloud. This solution is expected to add cloud-native digital branching and contact center capability shortly. Blend, for Underwriting Automation Platform: As members reach for a broader range of borrowing options and lenders hope to attract non-traditional borrowers—who nonetheless represent a balanced credit risk—alternative sources CREDIT UNION INGENUITY STRONGER THAN EVER: THE 2022 INNOVATION AWARD WINNERS By Randy Salser, President, NAFCU Services of data on creditworthiness are welcome. Blend’s underwriting solution casts a wide net to assess income and employment status, including on-time rental payment data. The automation platform seeks to reduce manual data entry and verification steps for borrowers and underwriters alike, helping credit unions streamline the application and funding process, which may be unfamiliar to firsttime borrowers. CUNA Mutual Group, for CuneXus: A variety of loans and value-added products from a credit union doesn’t impress members much if the experience doesn’t feel integrated with the everyday flow of services they already use. CuneXus delivers e-commerce convenience in a consistent storefront for new loans and other digital products. The service, which includes data-driven lending approvals tailored to the institution’s risk tolerance, is already used by 210 institutions and annually funds over $25 billion in loans. SentiLink, for IDTheft Score: Designed to crack down on fraudulent accounts during the application process, SentiLink’s IDTheft Score provides a quantitative model of stolen identities informed by a machine learning model trained on hundreds of millions of financial applications and third-party ID insights. These factors, combined with other fraud signals derived from how a potential customer makes contact and uses language, generate a fraud score that can be used to divert an application for further manual review. Exploits including misused family relationships and J1 visa fraud are also covered. The need for novel and effective solutions like this will only continue to escalate. Upstart, for AI Lending Platform: Credit unions looking for a solution to quickly expand lending options without heavy staff burden should consider this solution, which pairs a referral network and direct-to-member credit marketing backed by an artificial intelligence approval engine. The AI model is built upon 20 million repayment data points and responds to over 1,000 variables. First launched in 2014, the solution generated over $11 billion in personal loans in 2021, 70% of which were approved without employee intervention. Velocity, for Velocity Score Consumer Liquidity Engine: Overdraft management is a hot topic, and Velocity offers a paired solution to change the conversation. The Velocity Score Consumer Liquidity Engine pairs the related solutions: Intelligent Limit System, which tailors overdraft access according to ability to repay, and CashPlease, which implements small-dollar short-term loans based on credit factors and account cash flow. Please join me in celebrating these winners, as well as the 20 other standout finalists from this year’s program.
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