INSIGHTVAULTfor Credit UnionExecutives

Q3 2017

Technology Trends

News Not Noise Research Nuggets

Operational Insights

Industry Insights

Food For ThoughtWhat’s Going On

2© 2017 Cornerstone Advisors. All rights reserved.

Q3 2017

3 What’s Going OnEnough with the AI Hype, Already!

5 News Not NoiseThe So-What of What’s Happening

25 Industry InsightsQ2 2017

1 1 Technology TrendsUsing Mobile Location Data

1 7 Operational InsightsIs Your Contact Center Future-Ready?

19 Food For ThoughtDeposit Displacement

20 Research NuggetsQuantipulation and Other Attempts at Statistical Truthiness

WHAT’S INSIDE

INSIGHTVAULT

3© 2017 Cornerstone Advisors. All rights reserved.

WHAT’S GOING ON

The hype surrounding artificial intelligence is deafening. I’ve even seen articles that claim AI will solve world hunger and poverty. That’s probably easier to do than fixing banking, but sure enough, there are people who think that can happen, too.

IS AI-DRIVEN SERVICE BETTER SERVICE?There’s a YouTube video of an AI-powered robot in a Chinese bank. In the video, a customer is bent over talking to a two-and-a-half-foot tall robot telling it she wants to open an account. The robot tells her she can do it online, but if she wants to do it in the branch, it can help her get a ticket to go wait in the line. The robot accompanies the customer to the ticket machine, where a branch manager hands the customer the ticket.

Bet you can’t wait to get robots in your branches!

Another example of over-hyped AI technology: chatbots. In one ad, a chatbot vendor shows a customer telling a chatbot he lost his debit card and needs to replace it. The conversation required about 10 statements from the customer.

A recent TV commercial from Wells Fargo, however, shows a customer opening the Wells Fargo mobile app, pushing a button, and turning off the debit card with a swipe. Which is the better user experience: Typing or talking a series of statements, or flipping a switch?

Here’s what nobody seems to be addressing: Will AI-driven customer service truly provide superior customer service? And how would we even define what “superior” service is?

AI NEEDS DATASimply providing data-driven answers to easy questions is not a demonstration of AI’s potential to provide superior service. The test has to come from making hard—and often data-starved—decisions.

And there’s the rub. AI needs data. For AI algorithms to self-correct/self-adjust over time, the tools must have access to the results of the decisions, recommendations, or prescriptions the tools previously made.

Robo-advisors can access real market results to determine if prescribed advice was good advice. But where is the data that determines how well a service interaction solved, alleviated, eliminated, or even reduced a problem captured and fed back into the AI tools?

Financial institutions don’t have that data. I don’t hear anybody even talking about how to capture it, but that doesn’t seem to stop anybody from claiming that AI-customer service is going to be the answer to all of banking’s prayers.

Ron ShevlinDirector of ResearchCornerstone Advisors

Enough with the AI Hype, Already!

4© 2017 Cornerstone Advisors. All rights reserved.

AI ISN’T ONE TECHNOLOGYFeeding the hype is the indiscriminate use of the term AI, which is not a single technology. Different types of technologies can be classified as AI, including:

1) Computer vision, which can recognize objects; 2) Speech recognition/synthesis, which can turn sounds into words; 3) Natural language processing, which can extract meaning from language; 4) Knowledge representation, which can sort information; 5) Reasoning, which can combine data to reach conclusions; and 6) Planning, which can sequence actions to achieve a goal.

The first three on this list are the sexy ones that power robots and chatbots. But they might not be the technologies that have the biggest impact on the future development of banking.

WHAT DO CONSUMERS THINK?Nearly seven in 10 consumers think that using AI to understand their shopping habits and choose products for them is creepy (FIGURE 1). A similar percentage thinks using facial recognition (another AI-based technology) to identify someone as a loyal customer and conveying their preferences to a salesperson is creepy.

FIGURE 1: CONSUMER ATTITUDES TO RETAIL IN-STORE PERSONALIZATION TACTICS

Source: RichRelevance

The hype around AI often focuses on how it would benefit firms deploying it. The survey results demonstrate the importance of how AI is deployed, and not just how good it is in doing the analysis.

5© 2017 Cornerstone Advisors. All rights reserved.

NEWS NOT NOISEThe SO WHAT of What’s Happening

WANT A HIGHER INTEREST RATE ON YOUR BANK ACCOUNT? TOUGH LUCK. The Wall Street Journal reported that despite the increase in short-term interest rates, many banks are still paying peanuts to depositors (FIGURE 2). According to the article: “Most bankers are happy to keep deposit yields low, standing pat even as the Fed hikes short-term rates. No one is sure, though, how long customers will tolerate that.”

FIGURE 2: TOTAL DEPOSITS AT U.S. COMMERCIAL BANKS

Source: Federal Reserve

SOWHATThere are a couple of things going on here. The first is that rates on deposits aren’t rising because financial institutions feel little pressure to compete for deposits. Look at the chart: Deposits have grown from roughly $10 trillion in 2015 to nearly $12 trilion in mid-2017. That’s happened with no increase in deposit rates. The second reason has to do with consumers’ behavior. Consumers aren’t demanding higher rates because their deposit-keeping behavior has changed (see the Food For Thought section in this issue of the Insight Vault for a deeper discussion of this changed behavior).

6© 2017 Cornerstone Advisors. All rights reserved.

ASK AND YOU SHALL RECEIVE—BUT ONLY IF YOU’RE A BUSINESS. Consumers might not be demanding higher deposit rates, but businesses are—and they’re getting them. Across the largest U.S. banks, the average interest paid jumped by about a third in Q2 2017 to 0.34% from 0.26% a year ago, the highest level in four years. Bankers said business depositors are behind the rise (FIGURE 3).

Source: The Wall Street Journal

FIGURE 3: BUSINESS DEPOSIT INTEREST RATES

Source: Autonomous Research

SOWHATBuilding on our point from the last item, it’s about competition. Rates are rising because FIs are competing more aggressively for business deposits.

7© 2017 Cornerstone Advisors. All rights reserved.

THE LESS-CASH SOCIETY. Visa said it would give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, if the businesses pledged to start what Visa called a “journey to cashless.”

Source: The Wall Street Journal

SOWHATTechnology isn’t the speed bump on the “journey to cashless”—interchange is. Visa’s offer came in July, but we checked to make sure the calendar didn’t say April Fool’s day, because this offer really is a joke. What’s $10,000 going to do for a mid-size restaurant or food vendor with any level of revenue that would benefit Visa? Nothing. The $10K might be a nice gesture for a small merchant, but at a 2.5% interchange rate, a restaurant would have to convert $400,000 in sales from cash to cards to compensate Visa for that investment.

YOUR MARGIN IS JEFF’S OPPORTUNITY. Shares of several auto parts retailers sputtered after one chain reported disappointing second-quarter sales gains. The chain, O’Reilly Auto Parts, blamed poor weather in the period for its lackluster revenue. An executive at a rival chain, however, said the entire sector has been under pressure from newly armed online rivals like Amazon.

Source: New York Post

SOWHATOnline sales now represent approximately 20% of the do-it-yourself auto parts market. Amazon represents about half of the online market, which this year will generate around $11 billion in sales. The network effect of Amazon’s platform—as it increasingly brings in more consumers, more merchants, and more types of merchants—is steamrolling industry segment after industry segment. When it comes to banking, please don’t blame it on the weather. For more on the new business model of platforms, see the Q3 2016 Insight Vault.

8© 2017 Cornerstone Advisors. All rights reserved.

SOWHATLet’s put this in historical perspective, shall we? Yes, the charge-off rate has risen five straight quarters. But the most current rate—a little more than 3%—is still far below the range it has been for the 10 years preceding the financial crisis of 2008. Following the recession, as both issuers and consumers scaled back on credit cards, the charge-off rates fell to all-time lows. The recent rise should have been anticipated and accepted as normal.

LATE AGAIN? The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years (FIGURE 4). The quarter was the fifth consecutive period of year-over-year increases.

Source: The Wall Street Journal

FIGURE 4: CREDIT CARD CHARGE-OFF RATES

Source: Fitch Ratings

9© 2017 Cornerstone Advisors. All rights reserved.

SOWHATSounds to us like a good opportunity for a community-based financial institution to associate itself with and become one of the “crowd.” Who said that a financial institution issuing a mortgage to someone had to provide all of the funding?

CROWDED HOUSES. A new start-up is using the crowdfunding model to help people buy a house within cities. Fundrise has begun selling shares in funds dedicated to building and remodeling single family housing in urban locations, calling the new vehicles “eFunds.”

Source: Fast Company

CROWDED BUSINESS LOANS. A number of credit unions have partnered with a new equity crowdfunding platform to build their small business loan portfolios. GrowthFountain is providing each of the credit unions with a white-labeled website that lists local businesses seeking funding for their startups. GrowthFountain manages the websites, and businesses simply upload their information to the sites, advertising their business plan and needs.

Source: CU Today

SOWHATSounds to us like a great way for credit unions to build their business lending volume. And we don’t see why community banks wouldn’t jump on the same bandwagon.

10© 2017 Cornerstone Advisors. All rights reserved.

RENTERS COME AGAIN. In 2016, roughly 37% of household heads rented their homes, virtually identical to the percentage that rented in 1965. The Pew Research Center reported that over the past decade, the number of households headed by owners remained relatively flat while households headed by renters grew by nearly 10%.

Source: CU Today

SOWHATThis should come as no surprise. It’s a generational thing. The number of Millennials entering adulthood skyrocketed over the past 10 years. You didn’t think they’d all own homes right away, did you?

11© 2017 Cornerstone Advisors. All rights reserved.

TECHNOLOGY TRENDSUsing Mobile Location Data

The mobile channel is critical to the marketing success of financial institutions. Their digital ad spending exceeded $8 billion in 2016, with 62% of that going to the mobile channel. By 2020, digital spend will surpass $12 billion (FIGURE 5).

FIGURE 5: FINANCIAL INSTITUTIONS’ DIGITAL AD SPEND

Source: eMarketer

WHAT ABOUT CUSTOMER DATA?Despite the importance of the mobile channel, many financial institutions aren’t investing in—or using—mobile-related consumer data. Bank marketers admit that they don’t make good use of the data they have. No more than one in four bankers said they excelled in using data in any of the eight areas asked about (TABLE A). Two problem areas in particular are:

• Delivering targeted and personalized communications. While 14% of banks say they excel at using data to deliver targeted and personalized communications, nearly a third are struggling to do it, and almost four in 10 are experimenting with it (and presumably not achieving great success). Why is this so hard to do? For all the data that marketers say they incorporate in their marketing efforts, they don’t have the right data to deliver targeted and personalized communications.

• Journey mapping/analysis. Just 6% of banks believe they excel at mapping and analyzing customer journeys. One in four are struggling with it, and roughly three in 10 are beginning to experiment in this area. Why is this so hard to do? Despite the explosive increase in shopping behavior that occurs in digital channels, much of it occurs offline, as well, and that data isn’t available to marketers attempting to map and analyze customer journeys.

12© 2017 Cornerstone Advisors. All rights reserved.

SOWHATBank marketers that acquire, and effectively utilize, consumer mobile data—and, in particular, mobile location data—can improve marketing results and gain a competitive advantage.

TABLE A: FINANCIAL INSTITUTIONS’ ABILITY TO LEVERAGE DATA

Q. How well does your organization leverage customer data to do the following?

We Excel At It

We Struggle With It

We’re Experimenting

With ItSegment audience 25% 28% 29%

Understand customer needs/behaviors 24% 30% 32%

Optimize and allocate marketing budget 22% 35% 27%

Deliver targeted/personalized communications 14% 32% 39%

Marketing automation 9% 26% 28%

Map and analyze customer journey 6% 25% 31%

Performance lookalike modeling 6% 20% 21%

Predict future needs and behaviors 5% 29% 23%

Source: Digital Banking Report

Why do so few FIs effectively leverage data captured from mobile devices?

1) They don’t know what data is available to them, and 2) They don’t know what to do with the data if they had it.

13© 2017 Cornerstone Advisors. All rights reserved.

MOBILE LOCATION DATAWhen you hear “mobile location data,” you might think it’s data that enables you to know where someone is at this exact moment, so you can reach her with a message or offer based on her location.

It’s more than that. Mobile location data refers to more than a single data point, and can provide a behavioral trajectory (FIGURE 6):

1) Place: Where do people go?2) Period: How long do they stay there? and 3) Path: Where do they go from there?

FIGURE 6: MOBILE BEHAVIORAL TRAJECTORY

Source: Cornerstone Advisors

SOWHATMobile location data can enhance marketing results in a number of ways, including: 1) Customer profile enhancement; 2) Customer segmentation; 3) Marketing campaign management; 4) Competitive intelligence; and 5) Branch performance.

In this issue, we’ll focus on the opportunities to gather better competitive intelligence.

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COMPETITIVE INTELLIGENCEMobile location data provides a range of benefits that improve FIs’ competitive intelligence.

• Which FIs do consumers do business with? Account aggregation services promised to give FIs the ability to know their share of a consumer’s wallet, and determine what other institutions consumers did business with. That promise has yet to be realized. Mobile location data can’t tell you which accounts consumers have at other institutions, but it can provide clues to which ones they do business with. Mobile location data provider Cuebiq discovered that 11% of Citibank customers also bank at JP Morgan Chase (FIGURE 7). Running this analysis for more specific geographic areas can help identify relationship overlaps with smaller institutions.

FIGURE 7: CROSS-BANK RELATIONSHIPS

Source: Cuebiq

• How does my FI’s branch activity compare with other institutions? You may know how often your members visit your branches, but how does that compare to other FIs? Are other FIs more successful at driving branch visits than you are? According to Cuebiq’s mobile location data, in March 2017, among a number of large U.S. banks, nearly three in 10 Huntington Bank customers made two or more branch visits. Only 18% of KeyBank customers, however, made two or more branch visits that month (FIGURE 8).

15© 2017 Cornerstone Advisors. All rights reserved.

FIGURE 8: VISITS PER CUSTOMER

Source: Cuebiq

In addition, Huntington Bank achieved the largest number of visits per store. Indexing other banks’ performance against Huntington’s revealed that the next best bank at driving foot traffic (US Bank) didn’t even reach 61% of Huntington’s visits per store metric, and that KeyBank only achieved a little more than a third the rate of visits per store that Huntington achieved (FIGURE 9).

FIGURE 9: VISITS PER STORE, INDEXED

Source: Cuebiq

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• Is my competition running promotions? Why is Huntington’s visits per store performance so far ahead of the other banks? It may be driven by the demographic composition of the bank’s customer base. It’s possible, however, that Huntington’s March performance is above average even for Huntington, and that the higher traffic is due to a promotion the bank ran that month. Seeing this data in real-time can give you clues into the promotional activity of your competitors.

CONCLUSION: IT’S TIME FOR FIs TO PLAY OFFENSE WITH DATA A recent Harvard Business Review article, titled “What’s Your Data Strategy?”, asserts that organizations must make trade-offs between “defensive” (i.e., compliance and risk-related) and “offensive” (i.e., marketing and revenue-related) uses of data.

SOWHATTo effectively compete in the market, FIs must build better data “offense” capabilities. Utilizing a new data source like mobile location data—and doing so before other FIs figure out how to do so—can help FIs make smarter marketing decisions and gain a competitive advantage.

17© 2017 Cornerstone Advisors. All rights reserved.

OPERATIONAL INSIGHTSIs Your Contact Center Future-Ready?

In Cornerstone’s 2017 What’s Going On in Banking study, financial services executives rated the future-readiness of various functions at their institution. Contact centers were ranked the second-least future-ready function (for more on this see the Q1 2017 Insight Vault).

To better understand why, Cornerstone conducted a survey of senior FI execs to understand the state-of-the-union in contact center operations and technology deployment. The survey was designed to assess FIs’ contact center future-readiness, and each respondent was scored and assigned to a level in Cornerstone’s Contact Center Future-Ready model (FIGURE 10).

FIGURE 10: CONTACT CENTER FUTURE-READY MODEL

Source: Cornerstone Advisors

Not surprisingly, few (5%) FIs are at the Innovating level, with about a quarter qualifying for the Leading level, a little less than half falling in the Managing category, and about one in five at the Reacting level.

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What distinguishes the FIs at the Innovating and Leading levels (which we consider to be “future-ready”) from other institutions? A few strategic differences worth pointing out include:

• Referrals. Making seamless referrals to other departments (including investments and mortgage) is a future-ready best practice. Overall, a little more than four in 10 FIs reported either no formal referral activity or manual email/Excel referral tracking. At many of the FIs at the bottom two levels of the future-ready model, referral programs focused on services like e-statements, online banking, and bill pay. At the future-ready FIs, referrals were focused on lending and investment products, and were sent to other departments.

• Outbound calling. About two-thirds of FIs have no outbound calling efforts, or limit outbound calling to following up on calls and issues. Future-ready FIs, however, deploy a proactive, sales-focused outbound calling program that includes following up on partially completed or abandoned loan apps, pre-approval lists, and credit triggers.

• CRM. At FIs at the lower two levels of the future-ready model, contact notes are documented in a core field if critical, in an ad hoc fashion otherwise, or documented in a CRM system that is not used enterprise-wide. At future-ready FIs, CRM is integrated with call management software (e.g., CRM screen “pops” when the phone number is recognized).

• Fraud. Future-ready FIs are redesigning processes and implementing tools to stay one step ahead of ever-changing fraud tactics. They utilize layered questions (e.g., “What is make/ model you have financed with us?” Or “Which branch did you last visit?”) for authentication, and use supplementary fraud detection tools (e.g., to identify suspicious call patterns, numbers, etc.) or plan to implement them in the near future.

Although there is some correlation between total assets, total call volume, and future-readiness level, it’s not a strong correlation. What we observed, however, is that a monthly call volume of at least 10K calls is the “hurdle” to making it to the top levels in the model. Rationale: An FI can’t put in routing or specialized skills with volumes lower than 10K calls per month.

SOWHATGETTING YOUR CONTACT CENTER FUTURE-READY• Improve contact employee retention. As contact center hours get longer, focus on

perks to increase employee retention. Include flexibility on scheduling, opportunities to earn the ability to work remote, and establish incentive plans that balance departmental and individual goals and align with service level agreements and strategic targets.

• Core/CRM integration. Integrate core apps and CRM to enable reps to pull profiles and expedite authentication.

• Fraud management. Maximize technology currently available and then jump on biometrics and other technologies as they become available and prices come down.

For more information on this topic, contact Ryan Brogan at rbrogan@crnrstone.com.

19© 2017 Cornerstone Advisors. All rights reserved.

FOOD FOR THOUGHTDeposit Displacement

Deposits at banks and credit unions have grown steadily from 2015 through the middle of 2017. Happy days are here again, eh?

At the risk of sounding like Chicken Little, running around screaming about how the sky is falling, there is a longer-term trend that will hamper FIs’ efforts to keep up the recent pace of growth. We have a name for this trend: deposit displacement.

Here are four examples of how deposits are being displaced, or redirected away from the traditional banking system:

• Health savings accounts. Devenir Research projects that deposits in health savings accounts will approach $45 billion by the end of 2018, up from less than $14 billion in 2012. Where’s that money coming from? It’s siphoned away from consumers’ primary checking accounts and into HSA accounts that are probably not held at the same bank as the primary checking account.

• P2P payments. Between 2014 and 2016, JPMorgan Chase grew its P2P payment volume by $10.6 billion, while Venmo grew its P2P payment volume by $15.6 billion. The other important aspect to focus on is the money left in Venmo accounts. A personal source tells us that Venmo has $2.2 billion of funds sitting in users’ accounts—money that isn’t sitting in banks’ accounts. Displacement through P2P payments will only increase, as Apple has announced that its P2P payment tool will park users’ funds in an Apple prepaid debit card, and not in the users’ checking accounts.

• Retailer mobile apps. In 2016, The Wall Street Journal reported that Starbucks had $1.2 billion in deposits on customers’ loyalty cards. As other retailers copy Starbucks’ approach to mobile apps, deposits held in retailers’ mobile apps will continue to grow.

• Robo-advisor tools. Consulting firm AT Kearney estimates that assets held in robo-advisor tools will reach $2.2 trillion by 2020. While this might point to a business opportunity for financial institutions, it’s also a threat. Kearney believes half of those assets will come from currently non-invested assets—in other words, bank deposits.

SOWHATMid-size banks and credit unions have seen much of Millennials’ deposits flow to the large banks over the past few years. Deposit gathering for all FIs will become more difficult over the next five years, as this trend toward deposit displacement accelerates.

20© 2017 Cornerstone Advisors. All rights reserved.

RESEARCH NUGGETS

THE AMAZON EFFECTCornerstone recently surveyed 2,000 U.S. consumers (between the ages of 18 and 72, with a checking account, and with a smartphone) to learn about their banking attitudes and preferences. We asked them what they would do if Amazon offered a checking account, bundled with other services, for a monthly fee. About a third said they wouldn’t open it (or be likely to), a little more than a third said they’d consider it, and nearly three in 10 consumers said they would open the account (FIGURE 11).

FIGURE 11: ATTITUDES TOWARD AN AMAZON CHECKING ACCOUNT

Source: Cornerstone Advisors

SOWHATThe data suggests two things: 1) Amazon has achieved a position in many consumers’ minds where the firm would be considered for almost any consumer-related product; and 2) Consumers would be willing to pay for a checking account if value-added services were bundled into it.

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THE AMAZON PRIME EFFECTIn the survey referenced above, we asked consumers if they were Amazon Prime subscribers, and if they would open the checking account bundled with the value-added services if their bank or credit union offered it. Nearly one in five Prime subscribers would, in contrast to 7% of non-Prime subscribers. More than half of non-subscribers said they would probably or definitely not switch, compared to a third of Prime subscribers (FIGURE 12).

FIGURE 12: ATTITUDES TOWARD AN AMAZON CHECKING ACCOUNT FROM A BANK OR CREDIT UNION

Source: Cornerstone Advisors

SOWHATIn our survey sample, nearly six in 10 respondents are Prime subscribers. Their attitudes toward a bundled checking account from their bank or credit union demonstrate the impact Amazon has on consumers’ perceptions toward subscribing to services, and paying for bundled services when consumers perceive value from the package.

22© 2017 Cornerstone Advisors. All rights reserved.

AI’s IMPACT ON MARKETINGThere’s near-universal agreement that AI will have a big impact on retail marketing (not just financial services). An overwhelming majority of executives believe that AI will make marketing more efficient, more effective, more strategic, and, well, simply revolutionize the role of marketing altogether (FIGURE 13).

FIGURE 13: EXECUTIVES’ VIEWS ON AI’S POTENTIAL IN RETAIL MARKETING

Source: Forrester Consulting

SOWHATHow AI is going to do all this is a bit of a mystery to us. Bank and credit union CEOs should ask their chief marketing officers to attend an upcoming executive team meeting and be prepared to discuss how AI would (and will) impact efficiency, effectiveness, and strategic contribution.

23© 2017 Cornerstone Advisors. All rights reserved.

WHAT, OMNI-CHANNEL ISN’T IMPORTANT? When asked what the most important attributes of their brand experiences are, consumers said that omni-channel related attributes—like recognizing interaction history at every touchpoint, and having multiple touchpoints that add value to the experience—were among the least important attributes (FIGURE 14).

FIGURE 14: THE MOST & LEAST IMPORTANT ATTRIBUTES OF CUSTOMERS’ BRAND EXPERIENCES

Source: SAP Hybris

SOWHATWe like consumer survey data as much as the next guy, but we know there’s potential peril in taking results at face value. Asking consumers to rank order attributes produces interesting, and sometime surprising, results. But it ignores a very important thing to remember about consumers’ attitudes: Consumers want what they want, when they want it, and wherever they are. If a consumer is dealing with a brand, and if having access to interaction history across touchpoints would be helpful to successfully executing that interaction, then consumers will tell you that that attribute is “most” important at that moment. Asking consumers about things like channel prefererences and attribute importance outside of the context of specific interactions may be less helpful to your decision making than you think.

24© 2017 Cornerstone Advisors. All rights reserved.

LIFE AFTER STUPID SALES CULTUREFollowing the Wells Fargo crisis of 2016, many mid-size financial institutions have wrestled with the extent to which they should incentivize sales, and foster a sales culture in their organizations. Research conducted by professors at Harvard Business Review may help FI executives better understand the nuances of high-pressure sales tactics.

The research identified two types of sales pressure: aggressive and directive. According to the study:

“Aggressive tactics include: rushing the consumer, an inability to browse, and early close attempts. Directive sales tactics include: asking the consumer what benefits/features they seek, understanding the needs being met by the purchase, suggesting products that can meet those needs, and providing advice as to which product may be best.”

The authors developed and tested a scale to measure consumer perceptions of sales pressure. The scale included seven factors, split across the two types of pressure:

Aggressive Sales Pressure:

1. The salesperson used high pressure sales tactics.2. The salesperson forced me to make a decision before I was ready.3. The salesperson attempted to close the sale before all of my concerns were addressed.4. I felt like I had been “played” by the salesperson.

Directive Sales Pressure:

1. The salesperson kept pushing me toward one product when I was interested in another.2. I felt pressure to buy what the salesperson insisted on, as opposed to what I originally

wanted.3. The salesperson was more interested in selling me his/her recommendation than the product

I wanted.

The results of the study showed that aggressive tactics had negative influences on both trust and satisfaction, while directive tactics did not. According to study authors:

“It may be that directive sales pressure is perceived as a salesperson’s attempt to help the consumer find a product that will better meet their needs. While not necessarily positive, directive pressure is much less damaging to the salesperson and the firm.”

SOWHATThe knee-jerk reaction to the Wells scandal was to scale back sales incentives and any association with a “sales” culture. Understanding the different types of sales pressures will help FIs better fine-tune their sales culture efforts.

25© 2017 Cornerstone Advisors. All rights reserved.

INDUSTRY INSIGHTS

CREDIT UNION ASSET SIZE

<$500M $500M - $1B >$1B ALL

Q2 2017 Metric Values

Profitability Ratios

ROA 0.53 0.71 0.99 0.84

ROE 4.96 6.83 9.58 8.02

Operating Ratios

NIM 3.57 3.51 3.23 3.35

NII/Assets 1.36 1.49 1.33 1.36

Loan/Deposit 69.22 81.02 83.64 79.57

Efficiency Ratios

Efficiency Ratio 80.59 75.85 65.45 70.79

NIE/Assets 3.57 3.44 2.74 3.04

Risk RatiosNPA/Equity 5.50 4.86 4.48 4.79

NCO/Average Loans 0.51 0.52 0.56 0.55

Q2 2017 Year-Over-Year Change

Key Metrics

Loan Growth 6.60% 10.05% 11.91% 10.43%

Deposit Growth 4.39% 6.35% 7.42% 6.48%

Operating Revenue 4.91% 7.27% 11.06% 8.88%

Net Interest Income 5.68% 8.72% 12.37% 10.04%

Noninterest Income 3.17% 4.19% 7.20% 5.73%

Noninterest Expense 3.36% 5.08% 7.00% 5.62%

Net Income 8.09% 9.85% 14.98% 13.26%

Q2 2017

26© 2017 Cornerstone Advisors. All rights reserved.

CREDIT UNION INDUSTRY INCOME STATEMENT

% OF AVERAGE ASSETS Q2 2015 Q2 2016 Q2 2017

Net Interest Income (Before Provision) 2.79 2.83 2.94

Provision for Loan and Lease Losses (0.30) (0.36) (0.41)

NET INTEREST INCOME 2.50 2.47 2.52

Total Noninterest Income 1.38% 1.36% 1.36%

Total Noninterest Expense 3.10 3.08 3.04

NET INCOME 0.84 0.79 0.84

Loan to Deposit Ratio 74.66 76.72 79.57

Net Worth to Assets 10.93 10.85 10.81

SOWHAT• Loans. Credit unions have seen 13 straight quarters of double digit loan growth.

In Q2, the industry reported the highest ever percentage of indirect loans (as a percentage of all outstanding loans).

• Deposits. Slowest YoY deposit growth since Q3 2015. Deposits actually decreased 1.79% QoQ, the first quarterly decline since Q3 2014.

• Non-interest Income/Operating Revenue. Operating revenue up 8.88% YoY, driven by net interest income growth of 10.04%. Net interest income growth was the largest YoY growth since Q2 2010 (seven years), and likely resulted from rate hike and investment performance.

• Investment Income. This was the largest YoY growth in income from investments since Q3 2007. Credit union investments have benefited recently from record stock market performance as the last two quarters have shown strong growth in investment income.

• Loan Interest. This was the largest YoY increase since Q1 2008. Credit unions have benefited from recent rate hikes as interest on loans increased at the fastest rate since Q1 2008.

27© 2017 Cornerstone Advisors. All rights reserved.

ABOUT CORNERSTONE ADVISORSAFTER 15 YEARS IN THIS BUSINESS, Cornerstone Advisors knows the financial services industry inside and out. We know that when banks and credit unions improve their strategies, technologies and operations, improved financial performance naturally follows. We live by the philosophy that you can’t improve what you don’t measure. With laser-focus measurement, financial institutions can develop more meaningful business strategies, make smarter technology decisions, and strategically reengineer critical processes.

Our comprehensive advisory services include:

STRATEGY

• Strategic Planning; Board & Executive Facilitation; Strategic Execution; Organizational Alignment

CONTRACT NEGOTIATIONS

• Core & Ancillary System Negotiations; Merger Contract Negotiations; Debit & Credit Card Contract Negotiations; Data & Voice Contract Negotiations

PERFORMANCE SOLUTIONS

• Benchmarking & Process Improvement; Branch & Call Center Performance; Consumer, Commercial & Mortgage Lending; Revenue Generation

TECHNOLOGY

• Technology Assessments & Planning; Vendor Evaluations, Implementations & Utilization; Vendor Management; IT Governance & Risk

MERGERS & ACQUISITIONS

• Transaction Advisory Services; Merger Integration Services; Merger Contract Negotiations

PAYMENTS

• Payments Growth Initiative; Credit Card De Novo Program; Payments Stress Test; Credit Card Selection; Contract Negotiations

RISK MANAGEMENT

• ERM Model Definition and Roadmap; Risk Assessments and Remediation; Risk Audit and Testing; Risk Systems Selection

SYSTEM SELECTION & IMPLEMENTATION

• Core & Ancillary System Selection; System Conversions; System Implementation; Vendor Evaluations

DELIVERY CHANNELS

• Delivery Channel Planning; Branch & Contact Center Transformation; ATM & ITM Deployment; Digital Banking Selection & Implementation

INSIGHTS & KNOWLEDGE SHARING

• Research Reports & White Papers; GonzoBanker.com (our blog); Executive Roundtables; Webinars & Professional Speakers

www.crnrstone.com Cornerstone Advisors @gonzobanker 480.423.2030

FOR MORE INFORMATION ON THIS REPORT, CONTACT:

Ron ShevlinDirector of ResearchCornerstone Advisorsrshevlin@crnrstone.com(480) 424-5849