Louis Hernandez watches people using a dongle switch on their iPad to pay their restaurant tab online through Square and knows the future is now.
The chairman/CEO of Open Solutions Inc. has long helped drive the evolution of change from the back shop, with new core platforms from his company and others that tie with more third-party services that allow smaller financial institutions to compete with the largest.
Now, Hernandez and others see that competition evolving to a whole new level, bringing into question the very business model of credit unions and their ability to survive.
Competitors now include retailers and telcom operators, giants like Google and Walmart and startups like Square and others that provide services that had been the sole province of traditional financial institutions, all through a global financial technology services and payments delivery infrastructure that increasingly demands interconnectivity for survival.
“The fundamental idea has changed,” Hernandez said. “And so has member expectations. You can no longer expect them to walk in to your credit union and go back three decades. They’re no longer willing to do that.”
While core processing and then ATMs and then online banking took decades to evolve, the pace of change has accelerated rapidly, with observers noting, for instance, that desktop remote deposit capture was replaced by mobile RDC almost overnight.
Longtime industry analysts and leaders like Mark Sievewright, president of Credit Union Solutions at Fiserv Inc., said that slow evolution has become a torrent and that it can be a two-edged sword.
“The digital transformation of the industry is an unstoppable force and credit unions’ ability to keep pace with it represents one of the most significant challenges the movement has faced in its history. Equally, the opportunities for credit unions to deepen member relations and generate new streams of noninterest income are substantial,” Sievewright said.
Another industry leader, Randy Karnes, shares a similar view. As president/CEO of CU*Answers, he and his colleagues at the Michigan CUSO have long been engaged in sharing and scaling enabling, member-facing and back shop technology and operations tools to get them in the hands of small credit unions across the country, both directly from Grand Rapids and through a series of affiliated CUSOs.
“Today the distribution of technology is becoming more and more consumer-based, making the most important piece – infrastructure investment – an issue for consumers,” Karnes said. “Consumers are responding faster and faster with their purchases of mobile devices, personal Internet access and their acceptance of cloud-type solutions.”
Therein may pose scenarios for both competition and opportunity.
“All any institution will have to do in the future is plug in. Add to that that media advertising is funded more by our competition and retailers than by us, their investment to win over consumers to new technology means that in many cases, the small financial institution can join in with an audience ready made for the solutions,” Karnes said.
Today, the playing field is not truly defined by the entry investment or the creation of market interest, as much as it is by the ability of the institution to track, judge and execute on when to start using new ideas, Karnes explained. If an institution wants to keep up today, money is the last issue while focus and will are the greatest challenges, he said, adding joining a network or collaboration can be the key to both challenges.”
Rick Roy, chief information officer at CUNA Mutual Group, puts it this way: “The beautiful thing about technology is that it can serve to level the playing field in many industries between very large and very small companies. One does not have to look further than the tech industry itself for many examples of small companies over the very largest such as IBM, Microsoft or HP.
“There is no reason credit unions of any size have to be left behind,” Roy said. “The key is for them to build a vendor and partner ecosystem to bring the technology, expertise and resources to the table to help them serve their members.”
Evolving Challenges, “Be Remarkable”
Daryl Tanner, president/CEO of Share One, a Memphis, Tenn.-based core processing CUSO, said although there will be a place in the market, over the near term, for credit unions that provide only basic services, it will probably be with ever-diminishing viability.
The industry may face another evolving threat.
“The forces against their long-term success are less the availability of advanced delivery systems and more the threat of regulatory burdens and the growing discouragement of the volunteer segment of these institutions,” Tanner said.
“Technology advancements can improve the ability of credit unions to survive and compete in a hyper-regulated world but the threat is always there that the regulatory burden will be too high, the income opportunities too compromised and the discouragement factor too overwhelming,” he said.
“One of the most common statements I hear from the CEOs of my generation and the one just younger is that ‘it isn’t fun anymore,’” Tanner said “Our goal is to make every technology-driven system available to every client regardless of size at a cost that does not become a burden to their financial stability and viability.”
That’s the idea behind products like CUFX technology standards being created by a group led by the CUNA Technology Council, a project intended to help credit unions move quickly to develop and deploy, collaboratively, those products and services that have already emerged and continue to emerge – the “tipping points” to borrow the phrase from best-selling author Malcolm Gladwell – that represent inexorable, permanent change.
For financial services, that’s highlighted by the rapid development of mobile banking and payment options, including services such as person-to-person payments, personal financial management and remote check deposit – on the front end, and analytics that have taken long-established tools such as MCIF files and 360-degree member relationship views at the teller and contact center desk to all new levels of targeted digital marketing.
Then there are the social media tools that credit unions can use to reach out to the public in ways that blend advertising, marketing and good old-fashioned public relations to show the cooperative difference.
“In a nutshell, credit unions have to be remarkable,” said Matt Davis, innovation director at the Filene Research Institute in Madison, Wis. “The adoption of new technology can drive that, but it’s not the only requirement. The opportunity for credit unions is that if they are truly remarkable, it has never been easier for the word to get out about it.”
The double-edged sword of competition and opportunity is not really different from other technology tipping points previously faced by credit unions such as ATM networks, online banking, creation of service delivery efficiencies and now, mobile technologies,” said Jim Morrell, president/CEO of the $153 million Peninsula Community Federal Credit Union in Shelton, Wash.
The key, Morrell said, is “keeping your member needs at the forefront, strategically evaluating the most nimble and adaptable business partners and ensuring your staff is equipped to deliver through this rapid evolution.”
“Those that say they can’t offer those products and services likely have not nurtured these three legs upon which their credit union is supported,” he pointed out.
Not Standing Alone
Indeed, technology as a standalone line item budget and department in the back also may need to go by the wayside as part of this evolutionary change. That’s the view from Susan Epperson, vice president of retail at the $133 million Henrico Federal Credit Union in Henrico, Va.
“I continue to be surprised that technology is viewed as a separate entity from other areas of our business. While it can be novel, it’s a means to get things done and reach your goals,” Epperson said. “Would you ask the same question about telephones, copy paper or pneumatic tubes for a drive-through?”
Epperson takes that a step further: “Would you hire employees in the front of the shop who can’t communicate? Would you hire folks in the back that don’t understand debits and credits? In each of these cases, you look at your situation and find a way to get the best tool to complete your objective.”
Does all this change put credit unions, especially small ones, in peril? While many cite the cost of compliance and simply paying NCUA assessments as burdens that, combined with razor-thin interest margins, pose a threat to survival, others say simply the decision not to offer members and potential members what they want and need could really lead to the ultimate demise.
“Credit unions that no longer solve the evolving set of consumer finance problems are in jeopardy,” Davis said. “That reality has little to do with new technology.”
In many ways the emergence of a hyper connected world has leveled the playing field for smaller financial institutions, Davis offered. It has allowed credit unions with compelling services, pricing and offer sets to reach large audiences more effectively and efficiently than ever.
“The problem is simply that the competition this new reality has created means that credit unions have to work harder than ever to adapt to new consumer trends and the needs of their fields of membership,” Davis said.
Ultimately, the ability to compete is not dependent on credit union size, since the tools are there if the will to invest financial and people resources are there, the respondents generally agreed.
“It’s not about size and scale, although they can both or hurt, it’s about the willingness of the credit union to adapt and be nimble so it can live up to its values and meet its goals,” Epperson said. “Technology is one of the many tools that makes that happen.”
Collaboration is ultimately how credit unions can tap into that agility needed to adapt and survive, some have said.
“The only way to keep up is with collaboration,” said Hernandez, pointing as an example to his own company’s DNA App Store, which allows his own developers and counterparts from client credit unions and banks to develop their own, all of which extend functionality of the core system and can be purchased and downloaded.
“I just don’t’ see how small institutions can possibly keep up unless they have common services like this to drive down costs. The investment is just so significant,” Hernandez said, repeating the call for sharing a common platform for worldwide development and delivery of financial services and the services and tools they use.
Ultimately, one credit union veteran observed, those tools can help deepen the tie between credit union and member in ways dictated by outside realities.
“The trust relationship that credit unions have with their members has recently been evidenced by the continuing strong inflow of deposits,” Morrell said. “These relationships can be deepened with products and services that can add value to the financial well-being of members that further instill trust, especially as we continue to slowly crawl out of these extremely difficult economic times.”