NAFCU Journal November December 2023

November–December 2023 ALSO INSIDE AI Enhances Service and Supports Growth SCOTUS Hears Case Against CFPB Instant Payment Services THE CREDIT UNION INDUSTRY A BRIGHT FUTURE AHEAD

November–December 2023 • Volume 48, Number 6 16 13 30 FEATURES 13 AI Enhances Service and Supports Growth Consider compliance, staff and member needs before implementation 16 SCOTUS Hears Case Against CFPB Constitutionality of funding and rulemaking authority questioned 18 Instant Payment Services as a Competitive Advantage Small businesses and some individual members may prefer real-time payments 30 A Bright Future Ahead COLUMNS 5 Conferences 6 From the Chair 8 Washington and Industry Briefs 10 The Bottom Line 22 Inside NAFCU Services 24 Management Insight 25 Executive Spotlight 26 Leadership Download 28 Compliance Central 18 The NAFCU Journal (ISSN 1043-7789) is published bimonthly every other month. Nov–Dec 2023, Volume 48, 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. ©2023 National Association of Federally-Insured Credit Unions, all rights reserved. 3 THE NAFCU JOURNAL November–December 2023

CONFERENCES DIRECTORS Gary Grinnell, Chair Corning FCU (NY) Brian Schools, Vice Chair Chartway FCU (VA) Karen Harbin, Treasurer Commonwealth CU (KY) Lonnie Nicholson, Secretary EECU (TX) Whitney Anderson Elements Financial (IN) Melanie Kennedy Southwest Financial FCU (TX) 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 Small 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 2024 Calendar of Events Spring Strategic Growth Conference March 11–13, in Savannah, GA Regulatory Compliance School March 18–22, in Arlington, VA Board of Directors and Supervisory Committee Conference April 15–18, in Newport RI CEOs and Senior Executives Conference May 8–10, in Key West, FL With the approved merger of CUNA and NAFCU to form America’s Credit Union, members of both associations will have the opportunity to participate as members as we begin harnessing our combined power into one strong national organization. More information will be provided as this transformative journey unfolds! 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. 5 THE NAFCU JOURNAL November–December 2023

FROM THE CHAIR more of? Where are there opportunities to improve? The goal of any association is to serve the industry it sets out to protect and represent. Reaching that goal is only possible if the leaders of this new organization are able to hear honest, constructive feedback as the process moves forward. This kind of cooperation and coordination is foundational to the credit union movement. I know you will heed this call and help to make this new era of our industry the best it can be. Throughout my time on the NAFCU Board, I have been amazed by what we can do when we unite and let the power of our joint efforts shine. From hundreds of credit unions showing up for the industry through grassroots advocacy, to living the credit union difference in all that you do, and now supporting the industry in a new way as America’s Credit Unions takes this huge step forward. I am excited for the future, and I hope you are, too. Gary Grinnell is president and CEO of Corning Credit Union in Corning, NY. THE POWER OF A UNITED VOICE By Gary Grinnell, NAFCU Board Chair It’s official—members of NAFCU and CUNA have made their voices heard and have approved the merger into America’s Credit Unions. Jan. 1, this new organization will be legally established and begin the journey of transformation into one, strong national trade association for all credit unions. This historic moment also means my time as NAFCU Board Chair will soon come to an end. I am grateful for the opportunity to serve the industry in this capacity and am excited to continue to advocate for the industry as a member of America’s Credit Unions Transition Board. We have a tremendous task ahead of us— ensuring the best of both organizations continue and finding opportunities to be even better. I am confident that my colleagues on the America’s Credit Unions Transition Board—which will be led by current NAFCU Vice Chair Brian Schools—will steer the process fearlessly, helping to guide Jim Nussle and the team he puts together toward a path of accountability, responsiveness and what’s best for the future of the credit union industry. I am honored to be writing my last column for The NAFCU Journal as NAFCU Board Chair and would like to take this opportunity to recognize some of the hard work that went into this new and exciting transformation. Earlier this year, NAFCU President and CEO Dan Berger announced his resignation, effective Dec. 31, 2023. Dan is a passionate leader who helped transform NAFCU’s commitment to its members and ensure a strong culture of extreme member service. I cannot thank him enough for all that he has accomplished for our industry and his support throughout this entire endeavor thus far. To Dan, Jim and the entire staff at both NAFCU and CUNA: thank you for your continued dedication to the credit union industry. I know that there have been many long hours and late nights that have gotten us to this point—and the true task of becoming America’s Credit Unions really begins now—so I hope you know that your work on behalf of our industry is incredibly appreciated. I’d also like to thank my colleagues on the NAFCU Board, who have shown tremendous leadership throughout this process. I am honored to have worked alongside each of you. And finally, thank you to the NAFCU members who have supported the association over the years. NAFCU’s wins have also been your wins and they could not have been achieved without your support. There are many great things in store for the industry. But I also know that change can be challenging. There are many times in life that we find ourselves in the position to persevere through unforeseen changes and situations. But one thing is for sure: change is inevitable. Time and time again, the credit union industry has proven itself to be resilient and extraordinary in times of change. We are always there to accept the call. I strongly encourage you to fully embrace the future of our industry, and my advice is to continue to be involved. Now, more than ever, your voice is needed. The stewards of this major transformation want and need to hear from you about the things you value most from your association. What do you want to see 6 THE NAFCU JOURNAL November–December 2023

WASHINGTON AND INDUSTRY BRIEFS In September, President Joe Biden nominated Tanya Otsuka to fill outgoing Board Member Rodney Hood’s seat on the NCUA Board. While Otsuka awaits Senate confirmation, here’s a breakdown of her previous work in the financial services space: Otsuka has handled the Senate Banking, Housing and Urban Affairs Committee’s work on credit union issues since 2019 and currently serves as Senior Counsel for the majority staff under Chairman Sherrod Brown, D-Ohio. When she first began working with the committee in 2019, she served on staff through the Government Affairs Institute at Georgetown University’s Capitol Hill Fellowship Program, on detail from the Federal Deposit Insurance Corporation (FDIC). Before her time with the committee, Otsuka was a staff attorney and counsel at the FDIC where she worked on a variety of financial services issues. She began her career at the FDIC as a law clerk in 2010, followed by a role as an Honors Attorney in 2011. She earned her J.D. from Boston College Law School and B.A. from the University of Virginia. In his statement of support following the announcement, NCUA Chairman Todd Harper noted Otsuka would be the NCUA Board’s first Asian-American member if confirmed. She would also be the only woman on the current board. In her time on the Senate Banking Committee’s staff, Otsuka handled credit THE PRESIDENT’S PICK FOR THE NCUA BOARD By NAFCU Government Affairs Team union issues for Chairman Brown through the pandemic, including working for additional flexibility within the Central Liquidity Facility (CLF) and credit union participation in the paycheck protection program (PPP) under the CARES Act. “NAFCU works closely with the NCUA to advocate for a healthy regulatory environment in which credit unions can thrive and effectively serve their 138 million members. We appreciate President Biden recognizing the importance of this role and we look forward to working with Ms. Otsuka to strengthen the credit union industry, should she be confirmed,” said NAFCU President and CEO Dan Berger in a statement following the announcement of her nomination. “We also thank Board Member Hood for his many years of service to the NCUA, and his efforts to modernize regulations, promote financial inclusion and tackle emerging trends.” The association will continue to work closely with the NCUA and will monitor the Senate’s movement on Otsuka’s nomination.* *This article was written in early October. By the time this article is published, the Senate may have already voted to confirm Ms. Otsuka. NAFCU Vice President of Legislative Affairs Brad Thaler with Tanya Otsuka. 8 THE NAFCU JOURNAL November–December 2023

HOUSEHOLD FINANCES FROM THE CREDIT UNION VANTAGE POINT By Curt Long, NAFCU Chief Economist and Vice President of Research THE BOTTOM LINE A mystery that has confounded economists in 2023 is that the economy appears to be objectively improving, and yet consumer sentiment remains stubbornly low. One effort to square the circle has been to argue that while aggregate data may show advances, those gains have failed to reach the median household. In particular, this argument asserts that low-income Americans— beset by inflation, rising debts, and dwindling savings—are falling further behind. Central to these debates is a lack of timely, granular data on household finances. Each side can point to supporting but not dispositive data. Rising revolving debt and delinquencies could reflect financial hardship, or it could simply be part of a normalization process as historic levels of government intervention recede further in the rearview mirror. On the other hand, there is evidence that real wage growth has actually been strongest among low-income workers1 and that while household liquid savings may have dipped in late 2022, it has since rebounded and particularly so for the lowest-income households.2 Share growth series reflect 3-quarter moving averages of quarterly growth rates, adjusted for seasonality. The bars represent the LICU growth rate minus the non-LICU growth rate. Sources: NCUA, NAFCU Research Share Growth: LICUs vs Non-LICUs 20% 15% 10% 5% 0% -5% -10% 4% 3% 2% 1% 0% -1% -2% 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 LICU Non-LICU Diff’ce: LICU minus Non-LICU (right axis) 10 THE NAFCU JOURNAL November–December 2023

References 1. Autor, David, Arindrajit Dube, and Annie McGrew, “The Unexpected Compression: Competition at Work in the Low Wage Labor Market,” NBER Working Papers 31010, 2023. 2. O’Trakoun, John, “Savings Still High, but Not for All Households,” Macro Minute, Federal Reserve Bank of Richmond, June 2023. 3. In order to qualify for a low-income designation, the majority of a credit union’s membership (50.01 percent) must meet certain low-income thresholds. “The question of how low-income Americans are faring financially remains an open one. Credit union data is suggestive but not robust enough to settle the issue.” The last item is of particular interest to a credit union industry that is still experiencing low share growth. The competition for deposits is fierce, and households have spread liquid savings beyond banks and credit unions. Yet savings growth within the credit union industry may help shed light on the question of how low-income households are faring. If low-income households are truly seeing higher real wage gains than average and growing liquid deposits, that could result in relatively higher share growth among low-income designated credit unions (LICUs).3 In general, share growth among LICUs is remarkably similar to that of non-LICUs. But since the onset of COVID a wedge has developed, with LICU share growth outpacing that of non-LICUs. That gap peaked in early 2021, likely as a result of pandemic stimulus, before subsiding over the remainder of that year. Since 2021, the wedge has grown again, with share growth at LICUs outpacing growth at non-LICUs by over 2 percentage points. That supports a narrative that low-income credit union members are disproportionately benefitting from a tight labor market and seeing real wage growth. Alternatively, the difference in share growth experienced by LICUs as compared to non-LICUs could simply be the result of a greater willingness to pay in order to attract deposits, but cost of funds has been moving in the opposite direction. From the beginning of 2022 through June 2023, LICU cost of funds has risen by a smaller amount than for non-LICUs, providing further evidence that underlying share growth dynamics are stronger at LICUs. The question of how low-income Americans are faring financially remains an open one. Credit union data is suggestive but not robust enough to settle the issue. In the fourth quarter, the Federal Reserve will release results from the triennial Survey of Consumer Finances, which is the highest-quality data on the topic. Until then, let the debate continue. Sources: NCUA, NAFCU Research Cost of Funds: LICUs vs Non-LICUs 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% 0.20% 0.15% 0.10% 0.05% 0.00% -0.05% -0.10% 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 LICU Non-LICU Diff’ce: LICU minus Non-LICU (right axis) 11 THE NAFCU JOURNAL November–December 2023

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Artificial intelligence (AI) is woven throughout everyone’s daily life. It is so prevalent that most people don’t think about AI as our navigation systems propose new routes based on real-time traffic, offer grammar and spelling suggestions as we write or create hilarious—and sometimes embarrassing—texts with autocorrect. As technology has evolved, the opportunities for AI adoption to increase efficiency and productivity in all industries have grown, including the financial industry. “One of the most obvious benefits of AI is the ability to automate underwriting to support credit decisions,” said NAFCU’s Director of Regulatory Compliance Nick St. John, NCCO, NCBSO. Predicting borrowers’ likelihood to repay the loan is a critical component of underwriting. “While credit scores based on reports from the different credit bureaus have been used to quantify that likelihood, AI-based underwriting programs claim to be better able to pinpoint, or more accurately predict, borrower repayment behavior,” he said. “AI can expand the underwriting process to include a number of data sources, far more than a human can handle in a timely manner, which could make the process more efficient and less risky.” AI ENHANCES SERVICE AND SUPPORTS GROWTH Consider compliance, staff and member needs before implementation By Sheryl S. Jackson 13 THE NAFCU JOURNAL November–December 2023

Although HFS Federal, like many credit unions, opted to use a third-party partner with expertise and experience in credit union lending for the software, the credit union is still responsible for regulatory compliance, said St. John. “Regulators are consistent in their guidance for all AI products. They want human beings involved in the process,” he said. For example, Regulation B requires an adverse action notice that ensures there is no discrimination in the determination. “If an AI program is approving or denying loans, regulators want an employee to review all denials and provide the applicant with the specific reasons for the denial. Simply saying that the algorithm denied the application is not enough.” Another caution when introducing AI in the loan origination process is the potential presence of flawed data and a lack of understanding as to how the AI model can result in unintentional discrimination. A process that not only reviews denials, but also randomly audits decisions can identify potential changes needed to avoid discriminatory decisions. Other AI Uses “AI can also be helpful in generating fraud alerts based on algorithms that identify an individual’s pattern of behavior,” said St. John. The alerts may help credit unions ensure compliance with Bank Secrecy Act requirements and generation of Suspicious Activity Reports. Chatbots or automated messages on websites and in credit union apps are a convenience for members who want to ask questions outside traditional business hours or during the day when they are unable to make a phone call to Streamlining the underwriting process to speed up decisions and provide more automatic approvals without increasing risk was the goal of Donn Mende, loan manager at HFS Federal Credit Union in Hilo, Hawaii, when his organization added AI assistance to their underwriting processes. “AI has been a buzzword for a while, but we spoke to other credit unions about their experience with it in their loan origination systems, and everyone said it was a good tool,” said Mende. “We use AI for personal, credit card and vehicle loans.” Mende and his organization worked on the evaluation and testing of the program for a year before implementation. “During the testing phase, we ran the program with information from loans we previously made, then compared the results of the AI program’s decisions against the decisions made by our employees,” he explained. The results of these tests were used to tweak the program to reflect needs and requirements that are unique to HFS Federal. HFS Federal’s goal is to increase automated approvals by 25%, to provide a quicker response to members and to allow loan officers to focus on more complex decisions, said Mende. “This is a cultural shift for our loan officers, so we had to reassure them that they did not need to go back and doublecheck every automated decision.” The combination of testing results before implementation and experience will lead to more confidence in the system, he added. “We have always conducted internal audits on lending decisions, and we’ll closely monitor the decisions as well as delinquencies related to the automated approvals.” “ One of the most obvious benefits of AI is the ability to automate underwriting to support credit decisions. AI can expand the underwriting process to include a number of data sources, far more than a human can handle in a timely manner, which could make the process more efficient and less risky. ” NICK ST. JOHN, NCCO, NCBSO, DIRECTOR OF REGULATORY COMPLIANCE, NAFCU 14 THE NAFCU JOURNAL November–December 2023

customer service. While the service can help better serve members by providing timely answers to questions, there are compliance issues that can arise. Although some chatbots are limited to a set menu of questions or categories of information, others can be more complex and mimic conversation. These more “free-flowing” interactions between a member and chatbot can create potential for compliance risks. “If a member using a chatbot notifies the credit union about a transaction error with a debit card or a service such as Zelle, Regulation E requires that the credit union begin an investigation within 10 days of the notice of error, even if it is in a chatbot,” said St. John. To ensure compliance, organizations must set up a monitoring program for the chatbot that captures specific words or phrases such as “unknown transaction” or “error” and sends the information to a person who can review the conversation and take appropriate action. The other issue that the Consumer Financial Protection Bureau has reported are complaints from consumers about chatbot “doom loops” that send consumers in circles without resolving a problem, answering a question or offering to connect them to a human. “It is always a good idea when using technology to communicate with members to offer them the ability to call a human being,” said St. John. Not only does the pathway to a person help the credit union avoid creating a negative image of its service to members, but it reinforces the industry’s commitment to “people helping people.” “ Chatbots or automated messages on websites and in credit union apps are a convenience for members who want to ask questions outside traditional business hours or during the day when they are unable to make a phone call to customer service. While the service can help better serve members by providing timely answers to questions, there are compliance issues that can arise. ” 15 THE NAFCU JOURNAL November–December 2023

SCOTUS Hears Case AGAINST CFPB Constitutionality of funding and rulemaking authority questioned By Sheryl S. Jackson 16 THE NAFCU JOURNAL November–December 2023

The Supreme Court of the United States (SCOTUS) heard oral arguments in October for a case that challenges the constitutionality of the Consumer Financial Protection Bureau’s (CFPB) funding structure. While the case involves a payday lender and not a credit union, the outcome of the case—which may not be released until June 2024—may have implications for credit unions. SCOTUS heard the case after a lower court vacated a payday lending rule issued by the CFPB in 2017 determining the rule exceeded the agency’s authority. Lawyers for Community Financial Services Association of America (CFSA) argued that funding the CFPB through transfers from the Federal Reserve, rather than annual appropriations through congressional activity, is unconstitutional and makes regulations such as the payday lending rule unconstitutional. “It seemed that CFPB attorneys made some strong arguments that the CFPB is not the only agency funded through standing appropriations, including agencies that have had similar enforcement authorities,” said Ann Petros, NAFCU’s vice president of regulatory affairs, following the SCOTUS oral arguments. A prime example was the Customs Service, which was created in 1789 with standing appropriations, but then switched to annual congressional appropriations 130 years later. “An interesting argument by CFSA is that when the Dodd-Frank Act, which created the CFPB, was enacted, legislators intended to insulate the agency and protect it from future congressional actions by funding it through standing appropriations,” said Petros. “CFSA argued that it is difficult to claw back the grant of authority from standing funding unless the president agrees to it, or Congress has enough votes to override a presidential veto.” This difficulty results in a lack of accountability for the agency, and a lack of checks and balances on its actions, she added. NAFCU and CUNA filed an amicus brief that supports the payday lenders’ argument that Congress violated the Constitution when it passed the law in 2010 that created independent funding for the CFPB. However, NAFCU wants SCOTUS to rule narrowly on the question of the payday lending rule rather than calling all CFPB rules into question. If all CFPB rulemaking is called into question, it might affect rules that credit unions have complied with for years, said Petros. “Credit unions have put a lot of time and money into compliance with mortgage origination and servicing requirements, and they rely on safe harbor provisions included with these rules,” she said. “There should be room and time for Congress to review, ratify and adjust CFPB rules if necessary so we don’t have to undo everything that has been put into place to comply.” The CFPB’s scope of authority over credit unions and accountability is an ongoing concern for credit unions. “Credit unions are regulated by the NCUA, which is funded by the organizations it regulates through fees and is overseen by a bipartisan board,” said Petros. The source of funding and oversight ensures greater accountability, which is lacking with the CFPB, she added. In a NAFCU survey of credit union members about the performance of the CFPB in relation to the protection of consumers, especially small businesses and underserved communities, responses showed that: ■ 60% believe the CFPB does not act with consumers’ best interests in mind. ■ 75% indicated that the financial services space is less safe or no safer for consumers than it was in 2010. “The CFPB should be about consumer protection not about bank or credit union enforcement,” said Greg Mesack, NAFCU’s senior vice president of Government Affairs. Credit unions are regulated by the NCUA, but they often find themselves competing with under- regulated fintechs that are not subject to NCUA or in many cases, CFPB rules, he said. “Ninety-two percent of members believe that the CFPB has not leveled the playing field and has actually made the problem worse, not better,” he said. “The majority of members with assets below $500 million report feeling the regulatory burden more acutely every day.” NAFCU’s advocacy efforts related to the CFPB cover a wide range of issues that include the rule-making process, funding, accountability and scope of regulatory and enforcement authority. These efforts can be strengthened with help from credit unions, said Mesack. “Having data from frontline credit unions helps us make the case to reform and improve the CFPB,” he said. “We all want the agency to be what it was meant to be when the Dodd-Frank Act was passed.” “ The CFPB should be about consumer protection not about bank or credit union enforcement. Ninety-two percent of members believe that the CFPB has not leveled the playing field and has actually made the problem worse, not better. ” GREG MESACK, SENIOR VICE PRESIDENT OF GOVERNMENT AFFAIRS, NAFCU 17 THE NAFCU JOURNAL November–December 2023

INSTANT PAYMENT SERVICES AS A Competitive Advantage Small businesses and some individual members may prefer real-time payments By Sheryl S. Jackson 18 THE NAFCU JOURNAL November–December 2023

In the mid-70s, the pizza chain Domino’s grew at an astonishing pace, thanks in part to a 30-minute delivery guarantee that set the company apart from competitors. Today, consumers still demand quick, reliable service—expecting one-day delivery of packages and meals ready in the time it takes to move from the drive-through intercom to the pickup window. The “need for speed” has also entered the financial arena with payment apps that move funds from one account to another and online payments that can be scheduled for overnight settlement. The July 2023 launch of FedNow, the Federal Reserve’s new instant payment service, provided a new opportunity for more credit unions to offer a competitive, increasingly popular service to members—real-time, instant payments. The demand for real-time payments is growing throughout the world, with 79 countries offering at least one instant payment service compared to 14 countries eight years ago. In the U.S., the momentum is growing among financial institutions of all sizes. The Federal Reserve announced that FedNow had reached a new milestone with 108 participating organizations sending and receiving on the network as of early October; however, some credit unions and smaller financial institutions have been hesitant to pursue instant payments due to liquidity management challenges. “FedNow is attractive to credit unions because funds flow through the Federal Reserve Bank system, and the combination of a liquidity management tool and 24-hour/365-day access to the master account streamlines the process and does not require prefunding,” said NAFCU’s Senior Counsel for Research and Policy Andrew Morris, NCCO. “Common concerns include potential fraud risk and uncertainty regarding member demand, but the Fed has alluded that upgrades will include additional tools to manage fraud and future directory functionality to improve the payment experience.” There were 13 credit unions that were identified by the Fed as early adopters that were ready and certified to use the system when FedNow launched. Results from NAFCU’s 2023 Report on Credit Unions indicate that 38% of credit unions are considering joining in a receive-only capacity and 31% are considering joining with both send and receive capabilities. Among respondents, those with $1 billion or more in total assets were more likely to consider becoming a FedNow participant. “ FedNow is attractive to credit unions because funds flow through the Federal Reserve Bank system, and the combination of a liquidity management tool and 24-hour/365day access to the master account streamlines the process and does not require prefunding. ” ANDREW MORRIS, SENIOR COUNSEL FOR RESEARCH AND POLICY, NAFCU 19 THE NAFCU JOURNAL November–December 2023

For credit unions not currently planning to become a FedNow participant, the two most commonly cited reasons for not adopting the service were lack of resources and staffing (58%), followed by lack of member demand (33%). Notably, a quarter of respondents said that liquidity management risk was a primary concern behind the decision not to adopt, despite the service offering a real-time liquidity management tool. “The benefits of an instant payment service depend on the credit union’s vision and how it fits into the overall strategy for payment services,” said Morris. “Some businesses operated by or used by members can benefit from instant payments and some consumers may like the increased control over funds going in and out of their accounts, but other credit union members may be satisfied with existing electronic payment options.” The decision to adopt FedNow requires a careful evaluation of the organization’s goals and expectations of its members, he added. Managing fraud risk will always be a challenge with real-time, irrevocable payments, but there are tools that can monitor trends or place limits on the value of funds that can be transferred, and processes that enable senders and recipients to acknowledge and verify transfers, said Morris. “Some credit unions may initially offer the FedNow service to business members, who may have a lower risk profile, as the organization evaluates the best ways to mitigate fraud risk at the consumer level.” Certification for use of FedNow includes executing an agreement to meet compliance and technical standards to securely access the payment system, said Morris. “Most credit unions will access FedNow through third party service providers,” he said. “This will allow the credit unions to focus on their core services rather than the specialized infrastructure needed to access FedNow.” The best step to take now is the education of credit union leaders, suggested 20 THE NAFCU JOURNAL November–December 2023

Morris. “NAFCU has a FedNow resource page [www.nafcu.org/fednow-resources] that includes webinars, articles and tools that credit unions can use,” he said. The next step is to determine if the organization has the operational bandwidth to implement, monitor and manage the service. Credit unions should evaluate all operational and technical aspects associated with offering the service to members, whether through online portals or mobile interfaces, he said. “Talk to credit unions members to see if introduction of an instant payment service makes sense,” said Morris. Even if members are not interested now, continue learning and evaluating their payment needs. “While members may not demand the service now, consumer expectations change over time, and demand may grow,” he said. “In other countries, where real-time, instant payments have been around for a while, studies have shown that these payments have been gaining market share.” “ The benefits of an instant payment service depend on the credit union’s vision and how it fits into the overall strategy for payment services. Some businesses operated by or used by members can benefit from instant payments and some consumers may like the increased control over funds going in and out of their accounts, but other credit union members may be satisfied with existing electronic payment options. ” ANDREW MORRIS, SENIOR COUNSEL FOR RESEARCH AND POLICY, NAFCU 21 THE NAFCU JOURNAL November–December 2023

GET TO KNOW THE 2023 INNOVATION AWARD FINALISTS By Randy Salser, President, NAFCU Services INSIDE NAFCU SERVICES It’s time to recognize this year’s credit union innovations! Our Preferred Partners consistently deliver transformational products and services for the credit union industry, and the nominees for our 2023 Innovation Awards prove just that. I’m excited to share a snapshot of this year’s award finalist solutions. DefenseStorm Cyber Risk Readiness IQ from DefenseStorm An online self-evaluation tool designed to give credit unions a view of their cyber risk readiness. DefenseStorm Fraud Fusion Center from DefenseStorm A quarterly collaborative roundtable discussion to share intelligence, coordinate efforts and take action against cybercriminals. Loan Service Desk from Dovenmuehle An application that simplifies and expedites the mortgage servicing request resolution process. Card Suite from FIS A card management application that lets credit unions compete against large financial institutions with a modern, feature-rich solution. Pre-authorized Benefit Increase from Franklin Madison A tool that lets credit unions provide a customized way for members to increase their insurance benefits. ALIRO from LendKey A loan participation platform designed to revolutionize how credit unions manage their balance sheets, minimize risk and optimize liquidity. Lenders Protection Enhanced Scorecard from Open Lending A product that expands auto lending inclusivity and improves loan decisioning accuracy. 3(16) Fiduciary Overlay Services from Pentegra A service that manages the overall operations and adminstrative tasks associated with a credit union’s retirement plan. 22 THE NAFCU JOURNAL November–December 2023

Persistent Digital Credit Union Solution from Persistent A cloud-based integratoin layer built on API Gateway that allows a bank or a credit union to go live with a digital offering in a short timeframe. Derivatives Platform from Piper Sandler A full-service, end-to-end solution for credit unions looking to build a hedging capability. Balance Sheet Efficiency Model from Piper Sandler A customizable quantitative model for credit unions to analyze multiple facets of balance sheets and identify balance sheet strategies. Q2 Innovation Studio from Q2 A marketplace-geared approach to adopt, integrate and deploy digital banking products solutions to members. CentrixPIQS Automated Risk Reviews from Q2 A solution that monitors and manages risk reviews, ACH, RDC and wire activity. Interactive Toolkit from Securian Financial Group A collection of research findings and recommendations for credit unions to improve member experiences. First Party Fraud Flags from SentiLink A solution to address blind spots in fraud detection and hard-to-detect credit manipulation scams. Digital Storefront from TruStage An ecommerce platform that provides tailored offers directly to consumers as an embedded component of digital banking solutions. Integrated Content Service Solution from TruStage An API-enabled integration that provides educational content and a provisional quote to members within their digital loan application. Auto Retail Lending from Upstart A solution that enables credit unions to expand their indirect auto lending program at higher margins using AI technology. Retail Performance Engine from Velocity Solutions A digital ecosystem that maximizes each stage of the retail checking performance and provides a 360-degree view into member relationships. OmniVault from Wolters Kluwer A solution built to handle loan origination channel diversity, eliminate complexities and reduce operational and time costs. The winners of this year’s Innovation Awards will be announced at NAFCU’s Lending Conference in November. 23 THE NAFCU JOURNAL November–December 2023

MANAGEMENT INSIGHT EMBRACING SOMETHING GREATER THAN OURSELVES By Brian Schools, Chairman of America’s Credit Unions Transition Board There are many schools of thought and approaches to leadership. But to me, holding a leadership position requires the ability to look broader than yourself and being future-focused while holding tight to the sentiment that you can make the world a better place through your efforts. It’s not about self-importance; rather, it’s making something good for all to benefit from. Within the credit union industry, this sentiment is strong. Credit unions by nature are cooperative institutions, formed by members who want the best not only for themselves, but for each other and their communities. We have the responsibility to not only lead our own institutions in a productive manner, but to also serve the greater good. At Chartway Credit Union, our motto is “People First, Always.” Everything we do is for our members, communities and each other and we are deeply committed to all three. For more than 18 years, the Chartway Promise Foundation has allowed us to expand our impact through the support of numerous charities and to provide life-changing experiences for children and their families facing medical hardships. It’s important to us and our members to let people going through tough times know they are not alone. We care for them. The credit union movement has provided the perfect opportunity for me to live out my passions of volunteerism, philanthropy and empowerment. That’s why it was important to me to volunteer to serve on the NAFCU Board of Directors and to take on leadership roles within it. It’s also why I accepted the call to serve as chair of the America’s Credit Unions Transition Board of Directors. Through the creation of this new organization, the credit union industry has tremendous opportunity to amplify its good works. America’s Credit Unions stands ready to be a stronger, innovative, more responsive and effective voice for the industry so your institutions can thrive well into the future. As I serve as America’s Credit Unions first board chair, I am humbled by the responsibility that comes with it. And I promise you I will do all I can to help lead the organization to best serve you. To do that, know that the Transition Board, made up of a group of leaders I admire immensely, is committed to combining the best of both NAFCU and CUNA while being intentional to establish a new culture and governance practices to support our vision for this new organization. We’ll be working to create a new mission statement, new values and ways to track progress throughout the merger process. We’re approaching this with a whole new mindset and the sense of credit union cooperation. I have gotten to know Jim Nussle well throughout the process leading to the merger; I’ve seen his sincere appreciation for what both NAFCU and CUNA bring to the table. He’s listening closely to all members, NAFCU and CUNA alike, and is highly committed to developing the best of the best—and so is the board. You can also count on us to support Jim and the rest of the America’s Credit Unions team and hold them accountable to serving you the right way. We also need you, as members, to embrace the credit union spirit and be engaged with us throughout. You need to hold us accountable, too. My comments would not be complete without also acknowledging all that Dan Berger has done at NAFCU for our industry—and how critical he has been to the opportunity in front of us. He has been a friend and remains a friend as he begins his next chapter. Both he and Jim have led wonderful organizations that, thanks to their fortitude and grace, are the foundations for our future. This transformation will take time. There will be challenges ahead, but I am here to ask for your trust that this is for the greater good—think big picture. Give us a shot, and we’ll do everything we can to support the creation of, and strong foundation for, a brand-new organization—America’s Credit Unions. Brian Schools is the president and CEO of Chartway Credit Union headquartered in Virginia Beach, Va. 24 THE NAFCU JOURNAL November–December 2023

EXECUTIVE SPOTLIGHT Q: What led you to the credit union sector, and to USALLIANCE Financial? A: I stumbled into the credit union sector by chance. I saw the local telephone company credit union at my university job fair. I hoped my fast-food cashier experience would translate to a teller opening, and they gave me a chance. I was surprised during my onboarding to learn that I was already a member. My parents (who had both worked at the phone company) had set up a savings account for me when I was young. The $300 savings account felt like a windfall to me at the time. Years later, while working at NCUA, I got the opportunity to join an innovative, fast-paced, growing credit union in USALLIANCE, and I’m really happy I took the chance. Q: What’s your leadership style? How do you lead an engaged team? A: I work to support an environment focused on growth, core values and opportunity. I strive to help others unlock their growth potential through encouragement and coaching, and I am big on listening and working to get each person’s buy-in to their goals. That two-way process of sharing and listening goes a long way to support accountability and success. My job is to make sure we’re thinking years ahead, and I’m fortunate BRETT WHEELER Interim CEO of USALLIANCE Financial to work with a team that is bought in to that growth mindset. Q: What are some of the ways USALLIANCE gives back to the communities and members it serves? A: At USALLIANCE, we’re hitting our stride and expanding the ways we give back. Over the years, we have taken a lot of steps to increase our impact in low-income or underbanked communities, including a lot of fee reductions and eliminations in 2022, efforts to boost first-time-homebuyers and more. Some really innovative examples include launching Dora, a cooperative neo-credit union with native, Spanish-language functionality, and launching the Live Life Fully Foundation, which has helped support people and organizations within our communities. After the Maui wildfires, we worked with contacts inside one of our Select Employee Groups (SEGs), Marriott International, to offer aid and financial assistance to members in the affected area. Q: What advice do you have for leading teams and organizations through a transitional time? A: We’ve been in transition since the beginning of June when our CEO took another opportunity. Transitional periods are tough. Feelings of uncertainty can be elevated by a change, especially at the top. We have focused on strategy alignment and transparent communications with teams. We’ve had great support from our board as well. We have shared more at all levels of the organization, keeping staff informed with details about the CEO search process, talking with them about our board’s commitment to our strategic direction and giving them the opportunity to ask questions. We’ve also kept our foot on the gas with our goals and plans, rolled out new culture initiatives and much more. Q: How can credit unions handle the current lending and liquidity environment? A: It’s really important for credit union leaders to stay dialed in to the environment. We knew in early 2022 that rising rates would slow everyone’s loan prepayment speeds dramatically. We put together a plan to pivot early, based on where we thought things might go throughout the course of 2022. One critical element was getting the right people involved. It was an important experience, and it was one that helped us stay on track. We also evaluate different scenarios often. When Silicon Valley Bank collapsed, we looked at that and asked, “What’s our capacity to deal with that scenario?” We take those exercises seriously, and we often find opportunities to enhance policies or practices. 25 THE NAFCU JOURNAL November–December 2023

One of the most critical aspects of maintaining a competitive edge is the ability to turn ideas into action. This is not just about innovation but about execution—transforming strategies into tangible results. Here are five things that credit unions must focus on to ensure effective execution. Set Clear Expectations The first step in turning ideas into action is setting very clear expectations. This involves defining each project or initiative’s scope, timeline and deliverables. Even the most talented teams can veer off course when expectations are ambiguous. It is one of my favorite sayings, “ambiguity breeds mediocrity.” Clear expectations act as a roadmap, guiding teams toward the desired outcome. Provide Tools and Resources Once expectations are set, the next step is to equip your team with the tools and resources needed to meet them. This could range from advanced software for data analysis to training programs that enhance customer service skills. In a credit union, where community and member service are paramount, investing in the right tools is not just an operational need but a strategic imperative. LEADERSHIP DOWNLOAD TURNING IDEAS INTO ACTION: A BLUEPRINT FOR CREDIT UNIONS By John Spence Without the right resources, even the best ideas remain just that—ideas. Communicate a Clear Vision A well-articulated vision serves as the North Star for any organization. It’s not enough for the leadership to know where the organization is headed; this vision must be communicated clearly and consistently to every team member. In a credit union, this vision could be as simple as “empowering our community through accessible financial services.” When everyone understands the bigger picture, individual efforts align more naturally with organizational goals, making the journey from idea to action smoother. Assemble the Right Team A well-rounded team combines various skills, from financial expertise to customer relations. But beyond technical skills, look for team members who share the organization’s values and vision. When the right people are in place, the team’s collective intelligence often exceeds the sum of its parts, making the execution of ideas more efficient and effective. Remember: The quality of the people that you can get, grow and keep on your team determines the long-term success of your credit union. Foster Personal and Mutual Accountability Finally, accountability is the glue that holds everything together. Personal accountability ensures that each team member takes ownership of their tasks, while mutual accountability ensures that the team as a whole is responsible for the outcome. In a credit union, where community trust is a valuable currency, high levels of accountability are non-negotiable. Regular check-ins, transparent reporting and constructive feedback loops can help maintain this accountability culture. To bring this idea into sharp focus, I want you to visualize “Turning ideas into action is a multidimensional challenge that requires a well-thought-out approach. For credit unions, the stakes are high, as the financial well-being of their community members often hangs in the balance.” 26 THE NAFCU JOURNAL November–December 2023

your worst-performing employee. Now realize that that person sets the standard of excellence for your entire organization. When you don’t hold people accountable, the ripple effect can be devastating to your credit union’s culture. Turning ideas into action is a multi- dimensional challenge that requires a well-thought-out approach. For credit unions, the stakes are high, as the financial well-being of their community members often hangs in the balance. John Spence is widely recognized as one of the top business and leadership experts in the world. He has been working in the credit union industry for more than 20 years and serves as one of the lead instructors for NAFCU’s Management and Leadership Institute. To find out more about John, go to www.johnspence.com. Allied Solutions Website: alliedsolutions.net..................... C3 DefenseStorm Website: crriq.defensestorm.com............29 FIS Website: fisglobal.com............................... C4 Index to Advertisers Gallagher Website: nafcu.org/gallagher..................... 7 SentiLink Website: sentilink.com................................... 4 Triad Website: triadfs.com/lenders-investors...9 TruStage Website: trustage.com/life....................... C2 27 THE NAFCU JOURNAL November–December 2023

On July 28, 2023, NCUA issued a Letter to Credit Unions 23-CU-06 which included an addendum to the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management highlighting liquidity risks and the importance of depository institutions to maintain actionable contingency funding plans that consider a range of possible stress scenarios. NCUA Chairman Todd Harper stated in the letter that the “events of the first half of 2023 have further underscored the importance of liquidity risk management and contingency funding planning.” This statement was in reference to a few financial institutions whose level and speed of deposit outflows caused liquidity and funding strains at those institutions— and ultimately led to their failures According to the addendum, credit unions should maintain an actionable contingency funding plan that includes assessing the stability of their funding, maintaining a broad range of funding sources, and awareness of the operational steps required to obtain funding from contingency funding sources. NCUA suggests that as part of a credit union’s readiness plan, it should regularly test any contingency borrowing lines to ensure they are functioning as planned and include a range of reliable funding sources in the event a borrowing line becomes unavailable. Additionally, a credit union should “review and revise COMPLIANCE CENTRAL NCUA HIGHLIGHTS THE IMPORTANCE OF CONTINGENCY FUNDING PLANS FOR CREDIT UNIONS By Judy Dahn, NAFCU Regulatory Compliance Counsel contingency funding plans periodically and more frequently as market conditions and strategic initiatives change” to address any potential liquidity risks. The updated guidance also encourages credit unions to incorporate the discount window as part of their contingency funding plan to help manage liquidity risk. If a credit union includes the discount window in their funding plan, then it should establish and maintain operational readiness to use the discount window using the following guidelines: ■ Establish borrowing arrangements; ■ Ensure collateral is available in the amount appropriate for the funding needs; ■ Be familiar with the pledging process for different collateral types; ■ Be aware that pre-pledging collateral can be useful if liquidity needs arise; and ■ Conduct small value transactions at regular intervals to ensure familiarity with discount window operations. Lastly, the addendum discusses NCUA’s liquidity and funding plan regulation, explaining that federal and state-chartered credit unions can access the Central Liquidity Facility as a contingent federal liquidity source which can be used as a backup when a credit union’s liquidity and market funding sources prove inadequate. Specifically, section 741.12 of NCUA regulation provides guidance for credit unions to have liquidity and contingency funding plans, which vary by credit union size. For example, credit unions with assets greater than $250 million must, among other things, establish and document access to at least one contingent federal liquidity source (i.e., membership in the Central Liquidity Facility or access at the Federal Reserve Discount Window). Alternatively, credit unions with assets less than $50 million must maintain a basic written policy that provides a framework for managing liquidity and includes a list of contingent liquidity sources that can be employed under adverse circumstances. Additional information for Liquidity Risk Resources is available on NCUA’s website, including information about the NCUA’s Central Liquidity Facility and the Federal Reserve’s Discount Window. 28 THE NAFCU JOURNAL November–December 2023

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