PORTLAND, Ore. — Natural person credit unions aren't the only ones struggling to pay for increased compliance and technology costs–corporates are feeling the strain, too.
In fact, these rising expenses were the straws that broke Northwest Corporate Federal Credit Union's back, finally forcing the $1 billion institution to merge with $12 billion Southwest Corporate Federal Credit Union, effective this December.
"The additional staff and systems we've had to add during the last two years, in order to comply with new requirements like the BSA, OFAC and Patriot Act, convinced the board that we're not big enough to absorb these costs without increasing our price to our members," said Kathy Garner, Northwest president/CEO.
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"Finally, during the strategic planning process at the end of 2005, the merger option became more realistic; whereas before, the board just wasn't interested. The cost of compliance and technology is expensive–it's very costly to convert from a paper to electronic platform, for example–and like many credit unions, we got to the point where it became apparent that we could give better value to our members if we had greater economy of scale."
Northwest's list of insurmountable expenses is familiar to any credit union manager: additional IT and operational staff to complete extra steps in daily work, so it meets new compliance standards; a full-time security officer; a full-time compliance officer; independent auditors; system monitoring software; system logging software; internal and external intrusion detection testing; off-site duplicate systems…all the typical new "must-haves" in the financial services industry.
Given all these requirements, is there a future for small corporates?
Garner says yes. Northwest could have continued to survive on its own if it would have changed its
business model and discontinued item processing services, she said.
"At the end of the day, the board was not comfortable shrinking our business down, because we've been in item processing forever, and it's a critical service our members expect from us," Garner said.
The CEO added that Northwest had considered partnering with another corporate to share item processing costs, but discovered that two small corporates don't produce enough transactional volume to result in economy of scale savings.
Ironically, because corporates are usually required to meet new regulatory requirements a couple of years before natural person cooperatives do, the burden has created business opportunities for corporates.
"A lot of us are becoming experts in compliance and business continuity, and our members know that," Garner said. "We're getting more and more requests to share how we're managing our own programs. We don't have an official product or pricing structure, but we're doing more consulting on the side, and I think corporates will be asked to do more of it in the future."
In fact, consultative services are an area in which the 25-year corporate pro sees potential for new corporate revenue streams. Risk assessment, information security, business continuity planning and vendor management programs are all topics in demand by members, she said.
On the products side, Garner said item processing will continue to be a hot offering, and predicted corporates will also enhance their ACH and remittances products, to keep up with demands for electronic services by young consumers and new immigrants.
Northwest's CU Business Group, the CUSO that pioneered member business lending, is still going strong, with eight corporate owners. Garner said member business lending services will continue to grow, most notably on the funding side.
"Definitely, enhanced business lending services hold potential for corporates," she said. "I think we'll see them get into more business loan funding, making participation loans more widely available. Southwest has that today–it's still evolving–but it's great for credit unions of all sizes to be able to participate on a member business loan, instead of just the usual pool of auto loans."
Garner said corporates will also enhance financial products, as demand for funds management and
ALM risk assessment and advisory services
continue to increase.
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