How do we know? Among the most emailed stories on the New York Times site last week was this piece about how banks are dealing with stalled revenue growth by cutting jobs. Big banks are having a hard time figuring out how to make money these days.

Credit unions are having their struggles, too. But unlike big banks, credit unions have agility – and, we think, the will to grow.

Certainly, here at CO-OP, growth (that is, your growth) has become a near obsession. This isn’t entirely new. CO-OP has a long history of working with credit unions to develop products and services that enable growth and profitability. But since the latest financial crisis hit, helping our members bring in more money, improve profitability and deepen member relationships has been our absolute priority.

When you grow, of course, we grow. But over the past few years, it’s become evident that simply offering great products and services isn’t going to make us a great partner. We’ve been listening to what members are concerned about, beating the bushes for the best strategies and innovations, and looking for new ways to deliver news that members can use. What tools will make a difference to your credit union right now? How do they apply to your organization?

On the CO-OP Growth Initiative site, look for fresh approaches to member engagement and smart ideas to boost bottom line growth. You’ll find out how to use CO-OP Member Center to drive new loans, leverage remote services like CO-OP My Deposit to keep members happy, and manage vendor relationships to maximize profits. Through white papers, webinars, case studies and a growing wealth of compelling content, you’ll find food for thought – and action.

In all the discussion we’ve had here at CO-OP about growth – internally, with our members and throughout the industry – one thing has become clear. The financial services industry has changed so substantially that the only way forward is to grow.  That isn’t bad news. With change comes opportunity. Armed with the right information and inspiration, growth is not only possible: It’s exciting.

For credit unions with under $10 billion in assets, your interchange rates are likely to show little or no decline for the remainder of 2011. For these institutions, we believe all networks will implement a two-tier system maintaining interchange at rates near the current $0.44 per transaction average. All members of the Fed expressed concern over their inability to enforce the exemption and were clearly exerting influence on the networks. In addition, a consensus item was adopted to report data regarding the exemption over the next 18 months.

For non-exempt institutions, the Fed set the interchange fee cap at $0.21 per transaction, with an ad valorem component of five basis points of the value of a transaction to reflect a portion of fraud losses. Additionally, a fraud-prevention adjustment of $0.01 is available to issuers that implement effective fraud prevention policies and procedures.

The higher cap is clearly an improvement on the proposed $0.12 cap. The Fed obviously heard our concerns expressed in the historic grassroots campaign conducted by credit unions, leagues and industry associations. We can all take pride in this and related changes found in the rules.

It was also good news that the more manageable version of the exclusivity provision was adopted, meaning that issuers will need to belong to two independent networks, such as one PIN and one signature network, as long as they are unaffiliated.

If your credit union is currently VISA-exclusive (VISA for signature and Interlink for PIN) or MasterCard-exclusive (MasterCard for signature and Maestro for PIN), you will need to add an unaffiliated PIN network (such as STAR, Pulse or NYCE). You do not need to add a second signature network to be compliant.

Thankfully, the less manageable exclusivity provision requiring two unaffiliated networks for each type of authorization (PIN and signature) was not included in the final rule.

The effective date for interchange fee caps is October 1, 2011, while the deadline for compliance with the exclusivity provision is April 1, 2012.

CO-OP is confident that our industry associations will continue to work with the Fed to improve the rule further to ensure small issuers are protected from the impact of the debit interchange limits, as Congress said they would. We will also continue to keep you informed of these developments.

Thank you.

CO-OP Financial Services

Contacting members is essential to identifying and minimizing fraud losses. An even more critical component is the ability to deny highly suspicious transactions in real time before a fraudster can complete a purchase or ATM withdrawal, thus preventing some losses entirely. Real-time Falcon accomplishes just that.

In recent months, CO-OP Financial Services has seen more credit unions jump on the real time band wagon with great success. In January 2011, 1,296 transactions were successfully denied by Real-time Falcon, saving credit unions $459,700. By May 2011, denials in real time increased to 2,504, saving Real-time Falcon participants over $950,000.

While many debit card issuers initially saw limited value in adding Real-time Falcon for monitoring PIN activity and chose only to use real time decisioning for signature-based transactions, ever-changing fraud trends has resulted in many credit unions reconsidering this position. With the recent data compromise of card numbers and PINs from a national chain of arts and crafts stores, several credit unions that use Real-time Falcon for reviewing both PIN and signature-based activity have saved thousands of dollars by preventing fraudulent ATM withdrawals.

Based on the continued success of Real-time Falcon, CO-OP Financial Services is reaching out to several credit unions currently monitoring both PIN and Signature activity in Falcon to migrate from Online to Real-time. If your credit union uses Falcon to monitor Signature or PIN activity for case management only, the moment is now to re-address this issue as fraud continues to grow in both the PIN and Signature transaction environments.

CO-OP Financial Services has seen success with Real-time Falcon from the very large to the smallest of credit unions. As fraudsters get more sophisticated in committing fraud, we also have to evolve with the times to identify and prevent fraud more effectively.  If your credit union is not taking advantage of real time decisioning today, I urge you to reconsider adding Real-time Falcon to your credit unions arsenal of fraud tools.

Editor’s Note: You can learn more about Real-time Falcon at a series of webinars sponsored by CO-OP Financial Services on Tues., July 12 at 10 a.m. Pacific time; Thurs., July 14 at 1 p.m. Pacific time; and Thurs., July 21 at 8 a.m. Pacific time. More details will be available soon here.

The impact of the Durbin interchange amendment to the majority of credit unions depends on how the $10 billion exemption is handled within the Fed rules, and the requirements for network implementation. The task now falls back on the Fed to finish the rule-writing process.

Fortunately, there is some clarity to the path forward. We expect final rules from the Fed within the next two weeks. That will provide a very short time frame in which to implement by July 21; in fact, the time frame may be too short to adequately perform end-to-end testing within the payments system. Regardless, the Fed will have to deal with this.

We believe all networks will implement a two-tier system maintaining interchange at rates near the current $0.44 per transaction average for financial institutions under $10 billion in assets. Although this pricing is probably not sustainable long term, there is likely to be little or no decline for the remainder of 2011. Your interchange revenue will not fall off a cliff the day after July 21.

All of the large banks have either re-priced their checking accounts or will shortly. There will be a window of competitive advantage for credit unions under $10 billion to move market share.

In addition, it is now clear that the network exclusivity provision will become effective October 21.  Credit unions for which this is a consideration will need to move forward quickly. The TCF lawsuit will have standing effective July 21 and it will begin to move through the courts. We doubt there will be an injunction or stay.

CO-OP Financial Services is committed to helping you prepare for the changed regulatory environment, whatever form it may take. We urge you to continue to call upon us as a strategic resource in your planning for the Fed rules.

If this question is difficult, so is the task before us. Wednesday morning’s final THINK 11 session brought together “Got Milk?” creator Manning; banking trends expert Brett King, author of “Bank 2.0;” Nancy Hill, president and CEO of the American Association of Advertising Agencies; and Caroline Lane, Senior Vice President, Business Development and Marketing, CO-OP Financial Services. The objective: sussing out the story credit unions need to tell the world, then finding a way to sell it.

It was a morning of provocative ideas. King argued – not unconvincingly – that the entire future of banking is virtual. Google-literate consumers are knowledgeable, choice-driven and unsentimental. If you think technology is optional and unlikely to catch on, consider that in present-day Kenya mobile banking is already the mode of the day, and features we only dream about here (mobile-to-mobile money transfer, for example) are already commonplace there. For kids and college students, paper checks and visiting the branch are strange, exotic notions; mobile banking is as natural as picking up a new video game.

Message to credit unions: Deliver what consumers are already demanding or become obsolete.

Manning’s observations were less technology-centered but no less urgent. In order to win consumer attention – and, more important, action – credit unions must deliver their message over and over in various media and formats. “People need to hear a message 30, 40, even 50 times before they can process it and consider taking action,” said Manning.

Even more fundamentally, though, Manning wanted to know what that message might be. Belonging to a credit union doesn’t create the kind of immediate, desperate desire one feels for milk with cookies. So, how do credit unions create that desire?

When Hill and Lane joined the conversation, the topic expanded to the possibility of creating a national campaign to promote credit union awareness. Can 8,000 credit unions join together to find a unified, compelling message – as milk producers did with “Got Milk?” Lane admitted that bringing the movement together on this kind of initiative is a huge challenge, but she also said it was one worth considering.

“We aren’t an industry; we’re a movement,” said Lane. “We bring an extraordinary amount of passion to helping our members.” If fulfilling that mission means doing the hard work of adapting to new realities and figuring out how to tell the world just how plugged-in we are, then credit unions will rise to the challenge. Because, while we might imagine a world without credit unions, we wouldn’t want to live there.



Walking in your members’ shoes was precisely what customer experience expert Jeanne Bliss advocated in her idea-packed presentation on becoming a beloved company. Bliss believes in the unifying power of customer experience, and to that end she had a few recommendations for credit unions that want to take their customer approach to new levels of excellence:

• Put member voices in your executives’ ears. Bliss recommends having executives talk directly to unhappy or departing members. This isn’t punishment: It helps company leaders understand at the gut level that members are human and trustworthy, and that each has a story to tell. What faster way to identify where your credit union needs to improve?
• Hire employees you trust. Instead of focusing entirely on skill sets, consider hiring employees who share core values. If your whole team works with integrity, humanity, judgment and heart, your members can’t help but be wowed.
• Bring together cross-functional teams. Find out which touch points are most important to members, then work together to make the member experience seamless, memorable and – to every extent possible – joyful. Your members interact with your credit union across silos; your team should come together to deliver the best experience as well.

When organizations bring the full force of their talent and passion to the task of serving members, only then do they earn raves from their members. Bliss notes that only high levels of enthusiasm register in word of mouth or social media.

And yet, Porter Gale offered a shining example of turning rave reviews into massive buzz. As vice president of marketing for Virgin America Airlines, Gale has the fun task of promoting an airline that everyone loves. But she also presented the very real challenge of creating excitement, capturing stories and maintaining a constant social media presence on a budget.

In Gale’s presentation and the THINK IT OUT session with Bliss and Coleman Morris that followed, it was clear that Gale has an extraordinary bank of material to work with. In one photo, she showed Virgin America planes being accompanied into San Francisco International Airport by Virgin Galactic spacecraft. In another, a social media intern poses with rap-pioneer-turned-reality-star MC Hammer. Virgin America hosted a gathering of YouTube stars, who broadcasted in flight from their plane.

These stories may sound a little more, er, glamorous than what happens at your credit union each day. Yet, Gale encouraged attendees to mine their own organizations for stories that capture the human element: “A friend was telling me recently about her five year-old daughter taking money to the bank, and how the people at the bank (or credit union, I don’t know) make a big deal about it. It’s a sweet story and there are probably others like it at your credit unions.”

CO-OP’s Caroline Lane, senior vice president of business development, and Samantha Paxson, vice president of marketing, made the case for a new focus. Instead of fixating on the bottom line – or even product lines – how about recasting your goals in terms of member satisfaction? “The product at Disneyland is happiness; that’s what they create every day,” said Lane, who, like Paxson, is a Disneyland alum.

Paxson agreed: “Disneyland doesn’t think in terms of operations. Keeping up with technology is never the goal. Making people happy is the goal; operations and technology are simply a means.”

Making your members happy is an excellent ideal, but in a rapidly changing, increasingly complex world, getting there requires innovation. Sir Ken Robinson, one of the world’s leading experts on creativity (see his brilliant 2006 TED speech here), argued that creativity is neither rare nor exotic: “If you’re a human being, creativity comes with the kit.”

The trick for organizations is creating a culture in which innovation thrives. Robinson suggests giving employees “permission” to share their ideas, finding ways to spark imagination in your organization (at Pixar, he notes, all employees attend four hours a week of workshops and seminars designed to present new, compelling ideas from which inspiration and discussion can begin) and allocating resources to trying out new ideas – even if they result in a few flops.

If there’s a term for creative success through persistence, that term might be “Tony Hawk.” The 12-time world champion skateboarder – famous for landing the gut-twisting, mind-altering “900” (ask your kids what this is) – shared his journey from 9 year-old mischief-maker to multimillionaire businessman. After turning pro at age 14 in an “industry” that had yet to find its footing, Hawk made many missteps. Initially delighted to be making money from licensing his name, in his own words he, “signed so many contracts that many were conflicting. It took lawyers a lot of time to get everything sorted out.”

Still, the determination that served him well on the skateboard ramp proved to be handy in business. He and a partner launched their own skateboard company, Birdhouse Projects. From there, Hawk became the driving force behind his own Boom Boom HuckJam tour, the insanely successful Tony Hawk’s Pro Skater video games, Hawk Clothing, the Tony Hawk Foundation (to promote skate parks in underprivileged communities) and Athletes for Hope. By following his gut and always being up for entertaining a new challenge, Hawk has taken his legend beyond skateboarding and into the boardroom. “My only secret,” he said, “is that I never quit.”

• Leveraging cloud computing to reduce IT costs
• Emerging technologies and trends in fraud detection
• Social CRM and loyalty marketing
• Grassroots membership growth
• New payment legislation – Durbin and beyond
• Growth through new payment trends
• Using analytics to ignite your debit program
• Uncovering hidden loan potential
• Building member loyalty from inside and out

In his discussion on cloud computing, Ongoing Operations CTO Hugh Smallwood cited virtual technology as key to keeping up with innovation while keeping costs down – particularly for credit unions that are dependent on secure and cutting-edge technology but don’t have the budget to redo their systems every time an upgrade opportunity presents itself. Where many organizations are already deploying cloud-based systems for things like email, Smallwood predicts that credit unions will shift to outsourcing for everything including core systems in the years to come.

“By 2012, Gartner predicts that 20 percent of businesses will own no IT assets,” Smallwood says. But admittedly, there’s a lag between credit unions’ interest in outsourcing and their vendors’ willingness to accommodate them. “There’s little incentive for current contractors to shift to working with cloud-based technology now,” he continues. “It may be that providers will need pushing,” possibly by CUSOs like Ongoing Operations that represent multiple credit unions.

Presenters Sue Mitchell of Mitchell, Stankovic Associates; Brandi Stankovic Rice of BLS Consulting; and Joe Schroeder of Ventura County Credit Union fired up their standing-room-only session with tales of grassroots community outreach that spanned the globe – and hit close to home. While Mitchell spoke of her travels to Africa and volunteer work with the Global Women’s Leadership Network (“Access to affordable financial services can be life-changing for a family,” she noted), Schroeder detailed Ventura County Credit Union’s efforts to reach local farmworkers in order to grow membership.

Inspired by a larger program called iBelong, which has brought mobile banking services to rural areas of Mexico, Ventura County Credit Union just launched an initiative to provide basic financial services to the county’s largely unbanked farmworkers. Though the program is only two days old – and a long way from providing conclusive results or a positive bottom line – Schroeder is effusive about its prospects.

“This isn’t going to improve our bottom line any time soon,” Schroeder says. “In fact, it’s going to divert resources from other programs. But as an industry we’re so involved with our net worth and regulators and the rest of the day to day that we’ve gotten out of kilter about the philosophy and passion behind being credit unions.”

The THINK 11 sessions for Monday, May 16, will focus on broader issues facing the industry – including creativity, vision and how Tony Hawk’s awesome skateboarding skills translate into good business. For the first day, attendees found plenty to discuss simply talking about credit unions.

CO-OP Financial Services joins CUNA President/CEO Bill Cheney in urging all credit unions to take the next step – engage your members and encourage them to “Call on Congress.”

This grassroots campaign is designed to help you educate your members on the importance of the interchange issue to them as credit union members and consumers; promote the campaign to your members, and equipment them with the means to “Call on Congress.”

By clicking here, you can access the following helpful materials:

• Poster for your branches with a toll-free number.
• Copy of script credit union members will hear when they call the toll-free number.
• “Save Our Free Checking” cards for members.
• Suggested plan of action for your credit union in this campaign.
• Sample letter to tellers explaining the campaign.
• Talking points to help tellers speak to members about this issue.
• Key points for a credit union member letter to their Senators and Representative.

There is no time to lose! Again, please click here to getting your members calling on Congress!

Ms. Jennifer Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Re:         Docket No. R-1404 and RIN No. 7100 AD 63

Dear Ms. Johnson:

CO-OP Financial Services (CO-OP) is the largest debit processor Credit Union Service Organization.  CO-OP serves 3,400 credit unions for Debit Issuer Processing, Credit Issuer Processing, ATM Processing, ATM Network, Shared Branch, and Call Center services.  In 2010 we processed over 2 billion transactions.  We have followed Dodd-Frank closely with special interest in the Durbin Interchange Amendment and its potential impact on our credit union participants.

Thank you for the opportunity to comment on the draft rules.  We opposed the Durbin amendment because we believe it will lead to increased costs to consumers with the beneficiary being large retailers.  The Board asked for our comments on the proposed rules, not the merits of the amendment, and we will focus accordingly.

Interchange Fee Standards

The proposed rules and commentary suggest two alternatives.  We believe Alternative 2, the $.12 cap, is the most practical to implement operationally and administratively, especially given the time frame.   We believe the safe harbor and range would present many systems, reporting, and record keeping issues that would be prohibitively time consuming and costly to implement.

Network Exclusivity and Routing

CO-OP believes Alternative 1, one signature brand and one unaffiliated PIN brand, is the only workable approach.  Alternative 2 requiring two signature and two PIN brands is not practical.  The network rules, system routing, adjustment processing, marketing, brand equity, and consumer confusion issues presented by Alternative 2 would be insurmountable.  Even implementation of Alternative 1 will cause a compression of projects in June and July of 2011.  It would be prudent for the Board to establish a temporary delay/waiver process that would allow institutions sufficient time to minimize risk in executing associated projects.

Fraud Prevention

CO-OP strongly supports the Board’s effort in gathering additional information on fraud and fraud prevention costs.  This is a major area of debit program cost and one that needs to be better understood by all parties.  Specific to the questions raised in the draft rules and staff commentary:

• Technology-Specific vs. Non-prescriptive Standards – We believe the Board should engage in defining non-prescriptive standards appropriate to be included in the examination process.  CO-OP and CUNA Mutual Insurance Services worked jointly to establish fraud best practices that could be incorporated in the insurance/bond underwriting process.  Building upon this exercise for guidelines within the examination process seems prudent recognizing that these guidelines and standards will evolve over time.  Having the Board set technology-specific standards appears problematic.  In our opinion the board would be better served leaving technology mandates and vendor decisions to market forces between the various issuers, acquirers, networks and processors.  We also must recognize that we are part of a growing global payments system and interoperability must be maintained.
• Setting Non-prescriptive Standards – A great deal of payments industry infrastructure exists in the form of committees and standards boards.  Any such standards need to be set with the full input of all payments industry participants.  Where appropriate, the work product of existing standards boards and committees should be considered. 
• Fraud Protection Efficiency – The Board should commission studies from time to time to evaluate fraud protection efficiency recognizing that this will very quickly evolve.  Fraudsters are nimble with great technological prowess. 
• Fraud Protection Re-imbursement Not Specific to Debit Cards – Specific to fraud, and the problem it creates for all parties in payments system, it seems the broadest array of fraud prevention services should be reimbursable.  This is a fundamental matter of insuring consumer confidence in the debit payments system.
• Fraud Protection and Data Security Reimbursements – There are industry standards and best practices relating to fraud prevention.  Clearly any activity to fulfill these standards and best practices should be reimbursable.  The differences between signature and PIN are narrowing, however there is sufficient difference that a different reimbursement amount for each may be appropriate.
• PIN Fraud Reimbursement Only – Approximately1/3 of merchant locations are PIN capable.  Restricting fraud reimbursement to PIN only is very limiting.
• Fraud Adjustment Only for Activities That Lessen Chargebacks to Merchants – Consumer confidence in debit payments is the core issue.  Large data breaches within the merchant community have been devastating.  We would encourage the Board to take the broadest view of fraud prevention activities as being reimbursable as a matter of consumer protection.
• Would Issuers Scale Back Fraud Prevention If Costs Are Not Reimbursable – Possibly, but the more likely scenario as with all other elements of the amendment, is that issuers will raise fees to consumers in order to cover the costs and a reasonable return on investment.   

ATM’s

The amendment does not reference ATM transactions or fees therefore they should not be in the scope of the rules. 

Emerging Payments

Emerging payments systems are exactly that, emerging.  Any extension of the definition of payment card network would undoubtedly retard innovation and growth in an emerging environment.  The amendment did not reference emerging payments therefore they should not be within the scope of the rules. 

Prepaid Cards

The proposed rules contain a strong theme of preventing circumvention.  Reloadable prepaid cards have many functional similarities to debit cards.  We do not understand why a prepaid card issued or distributed by a large merchant would not be subject to the same rules as a debit card issued by a non-exempt financial institution.  Why should a prepaid debit card distributed by WalMart be treated differently under the rules than a debit card issued by Bank of America? 

General Comments

Similarity of Debit to Checks – The premise of the amendment is that a debit transaction is functionally equivalent to a check.  A debit transaction is the functional equivalent of a guaranteed check since debit transactions are authorized and subject to good funds settlement.  Merchants pay anywhere from 2% to 5% of face value to have a check guaranteed versus 1% to 3% for Debit.  Furthermore many merchants have stopped accepting checks due to payment risk.

Cost – The overall approach to cost is flawed.  While we understand the process the Board followed in gathering cost information as well as the wording of the amendment, it seems that a more inclusive interpretation of cost could be made.  Forcing a producer to sell a product below their average cost with no profit or allowance for recovery of investment is fundamentally wrong.  We recommend the board seek cost information from exempt parties in addition to the information already gained from non-exempt.   

Exemption Threshold – One of our credit unions is non-exempt and one is on the cusp of becoming non-exempt.  Why should a few additional dollars in assets cause a 73% decline in interchange income for an institution crossing the exempt/non-exempt threshold?  This matter of equity and fairness needs to be addressed.

Exemptions – Unfortunately the amendment did not specifically define exempt.  It is clear from the amendment’s author that his intent was that current interchange income would be maintained for exempted issuers.  Commentary from staff suggested that pricing for exempted parties would be determined by the various networks.  Market economy principles would suggest that disequilibrium exists if 80% of homogenous volume receives a price 73% less than the remaining 20% of volume.  Over time market equilibrium will be restored.  To protect current interchange income to issuers below $10 billion, we believe the board will need to interpret exempt as was intended by the author and further provide some means of enforcement within the rules. 

We are participants in and supporters of the Credit Union National Association (CUNA) and the Electronic Funds Transfer Association (EFTA).  We have contributed to and are fully supportive of their comments as well.  We hope through all of these channels to engage in additional dialog on behalf of our 3400 participating credit unions. 

Sincerely,

Stanley C. Hollen

President and CEO
CO-OP Financial Services