A Look At Three New Reports On Trends In Wholesale, Retail Markets

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Investment Trend Analysis:

More CUs Biting The 'Bullet'

DALLAS-Despite tightening liquidity during 2004, Southwest Corporate FCU said its analysis shows a clear shift in credit union managers' appetites toward fixed-maturity instruments. As an example, Southwest Corporate said it offered a record number (108) of special certificate of deposit offerings in 2004, up from 91 in 2003 and 50 in 2002.

SWFCU primarily offers certificates in two flavors: "structured certificates" and "bullet certificates." "The structured certificates, with their potentially higher returns, were favored in 2003," it noted. "However, credit union managers turned in the direction of 'certainty' during 2004 by investing more into fixed-maturity, bullet instruments. The percentage of bullet-style certificate of deposits shot up from 38% in 2003 to approximately 54% in 2004. When combining investment in both structures and bullet instruments, Southwest Corporate Federal Credit Union issued a total of $2.8 billion in certificates of deposit in 2004, up from $2.6 billion in 2003."

"We did see CUs shift interest from structured certificates to bullets over the past year," said Cynthia Shi, manager of Portfolio Management at SWFCU.

Part of the reason for the shift, Shi said, was because CUs started preparing for the liquidity runoff resulting from an improving economy. "Credit union managers stayed relatively short. There is not much yield pickup or flexibility when investing in structures with short maturities. So credit union managers opted for bullet investments."

Southwest Corporate suggested another reason for the shift may have been a result of the "callable" feature embedded in many of the structured CDs. "The callable aspect can terminate the investment instrument if rates tumble. That happened with some frequency in 2003-thus making some investors a bit reluctant to try the structured certificates in 2004, despite the potential for higher returns," SWFCU said.

And finally, another contributing factor to the migration toward bullet investments was that higher returns were offered as the Federal Reserve started tightening its monetary policy, Shi said.

"I do think the trend for bullets will persist in early 2005 as there is expected to be lower volatility in the market, a flatter yield curve and continuing liquidity concerns. These factors might encourage CUs managers to stay relatively short," Shi said.

"I would want to encourage CUs, however, to re-evaluate their decision frequently-callables do perform better than bullets in a rising-rate environment, Shi said. "And that is what we are facing now."

Demographic Trend Analysis:

COOL Ways To Get To 'Y'

MADISON, Wis.-Following earlier research that suggests credit unions could lose millions of dollars in loans over the next decade by not better penetrating the young adult market, a new report has been released offering suggestions for doing just that.

Published by the Filene Research Institute, the new study, called "COOL Solutions for Gen Y: A Guide for Credit Unions," was authored by Filene Director of Innovation, Mark C. Meyer.

Filene said the new "COOL Solutions Special Report" is different in some respects than most Filene monographs, relying on a variety of journalistic sources and anecdotal information, rather than the traditional academic research typically found in a Filene publication. "The reason for this departure," says Meyer, "is that COOL Solutions is intended to provoke thought and discussion regarding an enormous opportunity for credit unions in the form of a new generation of consumers just entering the financial services marketplace."

The report includes:

* Characteristics of what has been called Gen Y, "the nexters" and "the millennial generation."

* Basic needs and wants of the market segment.

* Compelling reasons for credit unions to attract and serve this market.

* Case studies featuring organizations that have successfully served millennials.

* Best practices, pricing strategies, and sample products, services and business models with a needs-based focus

Related to the report, on March 16 and 17, 2005 Filene will also co-sponsor a multi-league COOL Solutions work session in Columbus, Ohio, to explore products, services and business models credit unions can implement to effectively meet the needs of Gen Y.

Product Trend Analysis:

Preference For Plastic

SAN FRANCISCO-Just 36% of consumers are aware of Health Savings Accounts (HSAs) and the value they can bring to employee health programs, according to a new study from Visa USA.

Visa, which has an inherent interest in the findings, said the same study found, however, that consumer interest in HSA plans increased-as much as 40%-when consumers are given the option to use a Visa card to access the account's funds, as opposed to writing checks or paying by other means.

"Consumers are being provided more options to maximize their healthcare dollars, while retaining greater control and more responsibility for managing their medical expenses," said Todd Brockman, senior vice president, prepaid products, Visa USA. In December 2003, Congress created HSAs to help consumers with high-deductible healthcare plans pay for qualified medical expenses. HSAs allow individuals to pay for current health expenses before federal income taxes and earn federal income tax exempt interest on funds saved for future medical expenses.

The study also found:

* Most of those surveyed (60%) indicated an interest in contributing dollars to a tax-advantaged account, such as a Health Savings Account

* Two-thirds (67%) of those surveyed find the ability to roll-over unused funds from year to year with an HSA of considerable interest

Visa said that interest in HSAs is expected to grow as companies look for ways to manage the rising cost of providing health insurance benefits to their employees. A recent survey of 270 companies conducted by Hewitt Associates found 61% of companies indicated they will likely offer their employees high deductible health plans combined with HSAs in the near future. Additionally, the Congressional Joint Committee on Taxation expects one million accounts will have been opened by the end of 2004.

First introduced in the late 1990s, employee benefit cards allow participants to directly access funds in their benefits accounts to pay for qualified expenses, rather than having to pay upfront for the expenses and wait to be reimbursed by the benefits administrator. The market for employee benefits cards rapidly grew following IRS approval of card-based programs in 2003. When the card is used to pay for qualified plan expenses the funds are deducted from the appropriate benefit account.

CUJ Resources

COOL Solutions for Gen Y: A Guide for Credit Unions and other Filene special reports are available free to Institute members; $75 to non-members. Monographs are $125. For more info: (608) 231-8550 or www.filene.org.

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