Hot Topics

While the level of mergers between credit unions has remained low (9 in the last 12 months according to PRA figures), it is possible that this number will increase over the course of 2017 / 2018. Urbanisation impacting on rural common bonds means some credit unions are losing-out on potential members. Credit unions may find opportunities to expand into under-serviced common bonds through the merger process.

As for Q2, smaller standalone credit unions may find themselves at a competitive disadvantage if operating a common bond over-lapping with larger neighbouring credit unions created through a merger process. Where credit union members satisfy multiple common bonds, high-calibre potential borrowers are likely to gravitate to the larger credit unions with a wider range of services, higher levels of convenience and more competitive rates.

Credit unions continue to benefit from negative public
sentiment towards the banking sector. Public view of
credit unions as trusted and people-oriented financial
service providers continues evidenced by increased
savings figures.

Indeed in the ROI credit unions topped the CXi Ireland Customer Experience league table for the 3rd consecutive year where credit unions ranked highly for integrity, empathy and staff commitment which credit unions should build upon to advance their business model.

If more frequent negative press arises, due to the emergence of any compliance, viability and/or governance issues within credit unions, it could sway current public opinion as trusted financial institutions.

As previously indicated, millennials & generation Y present
a key challenge for credit unions in how to become
relevant to these consumer segments by delivering
suitable products and services.
The credit union strategy should consider the investment
the main banks have undertaken and are continuing to
undertake in developing their communication /
advertisement channels on social media and also in their
development of internet based loan application processes.

Millennials and generation Y have arrived as the core
borrowing demographic of credit unions. Credit unions
must attract this segment in delivering basic, convenient
suitable products and services. This is a business priority in
many credit unions. Failure to capture significant market
share within these demographics will be harshly felt in
credit unions finance in the long-term.

While credit union loans are up 4% year on year, loans to
assets ratio is down due to the faster growth in savings.
The high street pillar banks have indicated their intentions
to target the credit union personal loan market and they
have the resources to ensure quick loan decision
turnaround times. They are investing heavily in high convenience service delivery and better relationship management for customers. They have the resources to
ensure quick loan decision turnaround times in addition to
competitive interest rates.
The competition from the PCP market from car
manufacturers / dealerships area continues to be of
concern to credit union although credit unions are making
good comparisons recently between credit union loans
and PCP finance from car brands.

The introduction of more FinTech companies into the
financial services market will result in increased
competition in the lending and secondary financial
services market for credit unions. High tech, low cost base
and strategically agile – FinTech companies could pose stiff
competition to traditional financial services institutions.
Current and potential members who have established
long-term borrowing relationships with their banks (driven
by effective relationship management and key product
availability) will be difficult to bring back to the credit
union.

According to Dankse Bank’s quarterly report there is
growing evidence that the Brexit uncertainty in
conjunction with the political uncertainty referenced
previously, is affecting consumer confidence. Rising
inflation is also having a negative impact on consumer
confidence.
Commenting on the latest release of the index, Danske
Bank Economist Conor Lambe, said:
“Inflation in the UK has now reached there per cent, and
we are forecasting that it will average around 2.7 per cent
in 2017 and 2018. As a result, household purchasing power
is likely to remain under some pressure. The squeeze on
consumers is still, very much, a key factor in the outlook for
the UK and Northern Ireland economies.”
Economic growth has been mixed during 2017 – the weak
sterling at present has provided a boost to total exports
which would indicate an expectation that economic
growth will become more balanced where it not for the
Brexit uncertainties that remain.

The long term economic outlook remains unclear and will
depend a lot on the Brexit negotiations and also the
political situation in Northern Ireland. There is evidence
that some businesses have reduced capital spending and
are therefore reluctant to invest until the Brexit outcomes
are a lot clearer. With the Brexit negotiations ongoing
which may become contentious and protracted the long
term economic outlook remains very uncertain and
volatile.
“The forecast slowdown in overall UK growth in 2018 is
attributable to an overall downturn in business investment
driven by continued uncertainty surrounding the
negotiations to leave the EU. We also expect a softening of
jobs growth and a squeeze on real household spending
power from rising inflation, which could reach around 3%
in 2018” David Armstrong, PWC Partner in Northern
Ireland.

It is very difficult to predict the long-term implications of
Brexit for Northern Ireland. The negotiations that will take
place over the coming months will hopefully give some
insight into the long term impacts for the region. There are
still significant challenges to overcome in the negotiations and with 25k – 30k commuters crossing the border there are big implications for all involved.

In June 2017, the UK government introduced the Money
Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations 2017 as the UK’s
transposition of the EU’s fourth money laundering
directive. The FCA have already indicated that they will be
conducting AML inspections in the not too distant future
on this topic.

The reporting deadline for high value pre-exiting individual
accounts under CRS was the 31st of May and the attention
now turns to the next deadline of 31st December 2017
where due diligence is required for identifying low-value
pre-existing individual accounts and entity accounts.
Following recent engagements with credit unions, the PRA
communicated its findings to each credit union via a letter
to the board of directors. The PRA issued comments on
the areas of governance, succession planning, internal
audit / supervisory committee, policies & procedures,
strategic planning, SCV, and risk management. Credit
unions should consider the comments from the PRA which
should inform their regulatory focus.

Regulatory inspections of credit unions are likely to
become the norm for credit unions into the foreseeable
future, particularly the assurance functions within credit
unions. If regulatory expectations within the sector
continue to increase it will become an unavoidable factor
pushing some credit unions towards exploring mergers or
strategic partnerships as a long-term strategic response to
this issue.

Political uncertainty remains high on the agenda in
Northern Ireland having entered another quarter with no
resolution in sight. Talk to resolve the situation ended in
stalemate in June. The absence of the devolved
government poses a number of issues for Northern Ireland
including finalising and implementing the Industrial
Strategy and also the local decision making about
spending.
The political uncertainty also increases the risk that
Northern Ireland as a whole is under presented when the
Brexit negotiations are ongoing and this could have
further detrimental impacts on the area.
Indeed according to the Dankse Bank Northern Ireland
Consumer Confidence Index political uncertainty and the
lack of an Executive has caused consumer confidence to
drop in Q3.

The same issues as Q2 remain with no further progress
made in establishing a devolved government. With the
make-up of the UK Government and future of the
Northern Ireland Assembly unknown, combined with
pending Brexit negotiations; the long term political
outlook remains uncertain for Northern Ireland.
If Direct Rule becomes a reality, the ability of credit unions
to push for further legislative reform will be limited as it
will unlikely be a high priority agenda item among Direct
Rule ministers in London.

The Monetary Policy Committee voted to leave the bank of England interest rate at 0.25% in September. However the Committee indicated that ‘some withdrawal of
monetary stimulus is likely to be appropriate over the coming months’.
This would indicate that interest rate increases are more likely in the short term with many commentators suggesting interest rates might rise from early 2018.

However the increase is likely to be gradual so the interest rate environment will remain low in the short term which in turn means investments returns remain difficult in turn impacting on credit union income.

Current Indications are that the pace of interest rates rises will be slow over the coming years. There is uncertainty over the long term regarding interest rate movements both in the EU and the UK and the current uncertainty surrounding Brexit makes it all the more volatile.

However the negative impact of low interest rates on the credit union operating model still needs to be considered into the long term.

Once again this continues to remain an ongoing short term
priority for credit unions prioritising the enhancement of
its IT capabilities in areas such as payment services, debit
cards, online services, e-signatures, and internal analytics
and operations systems.
The ‘Wannacry’ incident in May 2017 resulted in over
200,000 victims and more than 300,000 computers
infected during the cyber-attack.
In addition to this, the functionality of current CU IT
systems are now being challenged by up-stream
regulatory requirements such as 4MLD and GDPR. A more
risk-based approach to compliance will necessity greater
automation, security and reporting functionality of
existing systems.

While Banks continue to invest in new technologies and
improve existing infrastructure in order to compete with
Fintech start-ups (Bank of Ireland intend on spending up
to €225 million annually from capital over the next 4 years
on its IT infrastructure), it is looking increasingly likely that
Amazon, Google and Facebook will pose the greatest
threat to the traditional financial services world in the
coming years. They have the ability to gain access to a
huge customer base and also have the capabilities of
analysing and exploiting big data.
Due to limited resources, insufficient scale and restrictions
within the business model – credit unions are at risk of
falling further behind relative to competing banks and
other financial institutions in the development of their IT
capabilities to support their business model.
For those credit unions not investing in enhancing their IT
capabilities – the long-term future of their business model
is more uncertain.

Same concerns as Q4 2016 remain in that mergers across the sector are opening up a wider range of strategic options available to credit unions due to increased scale. Registrar has indicated that expected cost savings and economies of scale have yet to materialise in some post-merged credit unions. Urbanisation impacting on rural common bonds means some credit unions are losing-out on potential members. Credit unions may find opportunities to expand into under-serviced common bonds through the merger process.

Smaller standalone credit unions may find themselves at a competitive disadvantage if operating a common bond over-lapping with larger neighbouring credit unions created through the merger process. Where credit union members satisfy multiple common bonds, high-calibre potential borrowers are likely to gravitate to the larger credit unions with a wider range of services, higher levels of convenience and more competitive rates. Pressure to re-define the concept of the common bond may intensify as the expanding geographical / industrial reach of credit unions test the viability of the common bond in its current form.

Interest rates are likely to remain low in the short term making investments returns more difficult. There is also a possibility that even negative interest rates may be charged on credit union deposits. Bank of Ireland since October 2016, have now commenced charging a negative interest rate of 0.1 per cent on large corporate and institutional customers for deposits of €10 million or more.

Credit union investment income is down 20% in 2016 when compared with 2015. The low interest rates on investments in conjunction with a declining loan to asset ratio represents a significant challenge to the future operating model of credit unions.

It is expected that interest rates will remain low or even negative for a number of years and consequently, the impact of low interest rates on the credit union operating model needs to be considered into the long term.

As previously indicated, millennials & generation Y present a key challenge for credit unions in how to become relevant to these consumer segments by delivering suitable products and services. The credit union strategy should consider the investment the main banks have undertaken and are continuing to undertake in developing their communication/advertisement channels on social media and also in their development of internet based loan application processes.

Millennials and generation Y have arrived as the core borrowing demographic of credit unions. Credit unions must attract this segment in delivering basic, convenient suitable products and services. This is a business priority in many credit unions. Failure to capture significant market share within these demographics will be harshly felt in credit unions finance in the long-term.

Credit unions continue to benefit from negative public sentiment towards the banking sector, i.e. the CBI tracker mortgage rate examination. Public view of credit unions as trusted and people-oriented financial service providers continues evidenced by increased savings figures. Recent negative media coverage relating to credit unions (CBI F&P report, AML sanctions) has dented an otherwise positive public sentiment towards credit unions.

If more frequent negative press arises, due to the emergence of further compliance, viability and/or governance issues within credit unions, it could sway current public opinion as trusted financial institutions.

While the challenges from the previous quarter remain in relation to attracting volunteers, the majority of credit unions have filled their committees for 2017 so this is less of a pressing issue in this quarter.

The same challenges already experienced by credit union will remain when attracting volunteers – Increases in workload, changing attitudes to volunteerism, introduction of F&P Standards, and increased complexity of the role. Mergers may bring relief to some credit unions as common bonds, and thus the potential pool of volunteers, expand.

The impact on governance may be felt more acutely on credit unions with a static, ageing or declining membership base. The business and technical demands of advancing credit unions may begin to ask questions of the current governance model.

Irish consumer sentiment remains buoyant. With unemployment levels at an 8.5 year low consumers are upbeat about the economy and their finances. However the KBC Ireland/ESRI consumer sentiment index also highlighted that some consumers were readjusting their spending intentions reflecting a continuing caution that is in no doubt linked to the uncertain economic outlook. Also a lot of Budget 2017 changes came into effect in Q1 2017. Current business sentiment is mixed according to March’s BOI Economic Pulse survey. The unsettled external environment, in particular Brexit, is a concern for businesses and their outlook is slightly more cautious. The construction sector is the only sector where sentiment is up. The majority surveyed expect both house prices and rents to continue increasing over the next 12 months, mainly due to continued shortage of supply. This is in spite of rent caps introduced in late 2016.

While Irish sentiment was up, the first weakening in 6 months in the Euro area was witnessed, possibly due to the pending elections in a number of key Eurozone countries and renewed concerns regarding the Greek debts and Italian economic and financial weaknesses.

However there is no evidence of ECB intervention in the short term to counteract this. The Irish mortgage market and the continued rise in property prices is gathering a lot of media attention presently with concerns being raised of a repeat of the previous property bubble emerging. US government decisions on corporation tax have potential long term economic consequences for ROI. Brexit developments will be monitored closely to determine potential impact on the agri-food sector (who are largely dependent on UK exports) and manufacturing sector.

Larger credit unions are being given permission to expand the range of additional services which they can offer. These opportunities will bring with them a higher level of regulation and required investment.

Previously, over half of credit unions had a lending restriction, this year restrictions are now down to 25% of credit unions but is still too high.

Introduction of SME Regulations, MCD, revised MCC, PSD2, GDPR, 4/5MLD clearly signal a stricter regulatory environment for all credit unions in the short-term.

Recent high-profile compliance breaches within the sector will almost certainly drive more intensive supervision across the Movement.

Combined, these trends are likely to give credit unions cause to re-evaluate the current resourcing of their compliance and risk functions.

If regulatory expectations within the sector continue to increase it will become an unavoidable factor pushing some credit unions towards exploring mergers or strategic partnerships as a long-term strategic response to this issue.

With interest rates likely to remain low in the short term, investments returns remain difficult in turn impacting on credit union income. There is also a possibility that even negative interest rates may be charged on credit union deposits. Bank of Ireland since October 2016, have been charging a negative interest rate of -0.1 % on large corporate and institutional customers for deposits of €10 million or more. Indications are that AIB will shortly follow suit. Credit union investment income is down 20% in 2016 when compared with 2015. The low interest rates on investments in conjunction with a declining loan to asset ratio represents a significant challenge to the future operating model of credit unions.

Indications are that ECB interest rates will begin to rise in Q4 2019. While this will be encouraging for investment returns, it may bring other challenges especially when other financial institutions begin increasing mortgage interest rates. This could reduce consumer confidence and in turn affect consumer spending. It could also affect loan repayment capacity. However the impact of low interest rates on the credit union operating model needs to be considered into the long term. Without the development of products and services, credit unions are unlikely to develop sufficiently to ensure a sustainable business model into the future

This continues to remain an ongoing short term priority for credit unions prioritising the enhancement of its IT capabilities in areas such as payment services, debit cards, online services, e-signatures, internal analytics and operations systems. Data fraud or theft and cyber-attacks ranked number five and six in the top ten global risks in terms of likelihood of occurrence in the World Economic Forum’s 2017 Global Risks Report. According to a PWC survey, there were more instances of cybercrime in Ireland in 2016 (44%) compared to the global average (32%). The capital and operating costs of certain technologies are high and therefore the business case for investment requires ongoing careful consideration. For credit unions not investing in enhancing IT capabilities – exposure to cyber-attacks is lower, but vigilance should be maintained with special attention given to addressing the risks of aging IT infrastructure. Credit unions should reference the IT Risk Management & Cybersecurity for Financial Institutions guidelines issued by CBI for expectations in this area.

The CBI through their supervisory work state that firms have insufficient awareness, understanding and prioritisation of IT and cybersecurity risks. IT systems and controls are not sufficiently robust and firms are not doing enough to minimise the potential impact of an IT failure or successful cyber-attack on their business. Less than half of Boards (41%) are requesting information on the cyber readiness of their organisation in spite to the fact that cybercrime is perceived as the highest risk to Irish businesses in the next 2 years (PWC survey). Due to limited resources, insufficient scale and restrictions within the business model – credit unions are at risk of falling further behind relative to competing banks and other financial institutions in the development of their IT capabilities to support their business model. Banks are continuing to invest in new technologies and improve existing infrastructure and they have the resources to do so. This continues to give these firms a significant edge over smaller competitors. For those credit unions not investing in enhancing their IT capabilities – the long-term future of their business model is more uncertain.

Even though Article 50 has now been triggered there is still no public Brexit-strategy by the UK Government which is creating uncertainty within the EU. There is no doubt that Brexit will have an impact on Ireland, how much and how quickly remains to be seen. The longer the period of uncertainty remains, the more volatility Ireland will experience in currency markets, investment, trade and confidence. The nature of any border with Northern Ireland remains of significant concern. For Ireland, the harder the Brexit, the bigger the risks. The pressure of a weak sterling is already having a negative impact of many of our exports.

There is the potential that Ireland will gain as a result of winning an increased share of foreign direct investment however, all commentary recently is indicating the most likely impact of Brexit will be negative and material. Large financial institutions that indicated relocating their head offices to Ireland have chosen other EU locations.

There is currently, an apparent lack of Brexit-strategy by the UK Government which is creating uncertainty within the EU. The longer the period of uncertainty remains, the more volatility Ireland will experience in currency markets, investment, trade and confidence. The nature of any border with Northern Ireland remains of significant concern. For Ireland, the harder the Brexit, the bigger the risks. Should the WTO trade model be adopted putting tariffs in operation on trade between the EU and the UK, Ireland will be particularly exposed and there is a real risk of a reduction in trade. The areas most impacted by the sterling fall and trade disruption are Ireland’s traditional markets such as agri-food and engineering.

The pressure of a weak sterling is having a negative impact of many of our exports.

There is the potential that Ireland will gain as a result of winning an increased share of foreign direct investment however, it is most likely that the impact of Brexit will be negative and material.

While consumer sentiment remains buoyant, Novembers BOI Economic Pulse survey has indicated that current consumer confidence is at its lowest level for the year – due mainly to the unsettled external backdrop (Brexit & US election result), and some industrial unrest at home. Households have downgraded their assessment of both the economy and their own financial prospects.

However 3 in 4 plan to spend either the same or more on Christmas this year, with retailers expecting turnover to be up on last year.

Central Bank Macro Financial Review 2016 states that risk to financial stability within Europe remains elevated. However domestically there has been recent positive increases in employment levels and earnings domestically.

Labour force is now expanding at a faster pace due to net immigration. Skills shortages are driving up wages in certain sectors but overall there are no real concerns about wage pressures.

The shortage of supply in the housing market will continue to drive up house prices and rents.

US government decisions on corporation tax have potential long term economic consequences for ROI.

External developments could impact on the agri-food sector (who are largely dependent on UK exports) and manufacturing sector.

Increases in workload, changing attitudes to volunteerism, introduction of F&P Standards, and increased complexity of the role has resulted in a decreasing pool of suitable volunteers to fill senior positions within credit unions.

Mergers may bring relief to some credit unions as common bonds, and thus the potential pool of volunteers, expand.

The impact on governance may be felt more acutely on credit unions with a static, ageing or declining membership base.

The business and technical demands of advancing credit unions may begin to ask questions of the current governance model.

Credit unions continue to benefit from negative public sentiment towards the banking sector. Public view of credit unions as trusted and people-oriented financial service providers continues.

Recent negative media coverage relating to credit union governance has dented an otherwise positive public sentiment towards credit unions.

If more frequent negative press arises, due to the emergence of further compliance, viability and/or governance issues within credit unions, it could sway current public opinion as trusted financial institutions.

Millennials & generation Y present a key challenge for credit unions in how to become relevant to these consumer segments by delivering suitable products and services.

Banks are acutely aware of the importance of this segment and have undertaken investment in channels and products for this segment. Bank of Ireland results for first half of 2016 states: “Enhancing the mobile proposition to respond to increased customer usage. Simplifying and digitalising customer journeys. Over 59% of personal and 83% of small business loans delivered online or via phone in H1 2016”.

Millennials and generation Y have arrived as the core borrowing demographic of credit unions. Credit unions must attract this segment in delivering basic, convenient suitable products and services. This is a business priority in many credit unions. Failure to capture significant market share within these demographics will be harshly felt in credit unions finance in the long-term.

Interest rates are likely to remain low in the short term making investments returns more difficult. There is also a possibility that even negative interest rates may be charged on credit union deposits. Bank of Ireland since October 2016, have now commenced charging a negative interest rate of 0.1 per cent on large corporate and institutional customers for deposits of €10 million or more.

Credit union investment income is down 20% in 2016 when compared with 2015. The low interest rates on investments in conjunction with a declining loan to asset ratio represents a significant challenge to the future operating model of credit unions.

It is expected that interest rates will remain low or even negative for a number of years and consequently, the impact of low interest rates on the credit union operating model needs to be considered into the long term.

Mergers across the sector are opening up a wider range of strategic options available to credit unions due to increased scale. Registrar has indicated that expected cost savings and economies of scale have yet to materialise in some post-merged credit unions.

Urbanisation impacting on rural common bonds means some credit unions are losing-out on potential members.

Credit unions may find opportunities to expand into under-serviced common bonds through the merger process.

Smaller standalone credit unions may find themselves at a competitive disadvantage if operating a common bond over-lapping with larger neighbouring credit unions created through the merger process.

Where credit union members satisfy multiple common bonds, high-calibre potential borrowers are likely to gravitate to the larger credit unions with a wider range of services, higher levels of convenience and more competitive rates.

Pressure to re-define the concept of the common bond may intensify as the expanding geographical / industrial reach of credit unions test the viability of the common bond in its current form.

Larger credit unions are being given permission to expand the range of additional services which they can offer. These opportunities will bring with them a higher level of regulation and required investment.

Previously, over half of credit unions had a lending restriction, this year restrictions are now down to 25% of credit unions but is still too high.

Introduction of SME Regulations, MCD, revised MCC, PSD2, GDPR, 4/5MLD clearly signal a stricter regulatory environment for all credit unions in the short-term.

Recent high-profile compliance breaches within the sector will almost certainly drive more intensive supervision across the Movement.

Combined, these trends are likely to give credit unions cause to re-evaluate the current resourcing of their compliance and risk functions.

If regulatory expectations within the sector continue to increase it will become an unavoidable factor pushing some credit unions towards exploring mergers or strategic partnerships as a long-term strategic response to this issue.

Pillar banks have aggressively targeted the unsecured lending market due to supressed demand in the mortgage market up to 2016. Also there is evidence of significant investment by banks in high-convenience service delivery and better relationship management for customers. 2016 media spends YTD indicate further increased advertising spend across all major banks.

Banking sector and other lenders are becoming more adept at “soft-selling” financial products to consumers. Bank of Ireland: new lending up 14% for first half of 2016 on same period in 2015. Credit union tradition and practices have resulted in missed opportunities for building lending relationships with valuable current and future borrowers.

Introduction of new competition in the unsecured lending market in the form of PCP from car manufacturers / dealerships and direct-to-SME lenders.

Slower growth of credit union loan-books relative to average growth within the ROI financial services sector is an indicator of the new competitive environment.

The introduction of more Fin Tech companies into the financial services market will result in increased competition in the lending and secondary financial services market for credit unions. High-tech, low-cost base and strategically agile – Fin Tech companies could pose stiff competition to traditional financial services institutions.

Advancements in technology and changes in EU policy may open up the ROI financial services market to non-domestic based financial service providers.

Current and potential members who have established long-term borrowing relationships with their banks (driven by effective relationship management) will be difficult to bring back to the credit union.

For those credit unions prioritising the enhancement of its IT capabilities in areas such as payment services, debit cards, online services, e-signatures, internal analytics and operations systems – the sharp increase in recent corporate cyber-attacks will push cyber-security further up the agenda. Also capital and operating costs of certain technologies are high and therefore the business case for investment requires careful consideration.

For credit unions not investing in enhancing IT capabilities – exposure to cyber-attacks is lower, but vigilance should be maintained.

Due to limited resources, insufficient scale and restrictions within the business model – credit unions are at risk of falling further behind relative to competing banks and other financial institutions in the development of their IT capabilities to support their business model.

Banks are investing in new technologies and channels such as blockchain, big data and customer intelligence. At the same time Banks are also investing heavily in renewing existing infrastructure technology to ensure their operations support their business model. This has the potential to give these firms a significant edge over smaller competitors.

For those credit unions not investing in enhancing their IT capabilities – the long-term future of their business model is more uncertain.