In today's hyper-connected, highly digitized world, credit unions face greater challenges to their survival than ever before. Members increasingly expect highly-personalized, high-tech services coupled with the convenience of anytime, anywhere banking through any channel. At the same time, credit unions are facing greater competition than ever before from not only banks, but also fintech startups and non-traditional players. These non-traditional competitors are extremely savvy at leveraging digital technologies including mobile, analytics and the Internet of Things to deliver greater convenience and much sought-after services to members, often at a much lower cost than traditional financial institutions can offer. Credit unions must continue to find ways to differentiate themselves in a crowded market, provide the services that today's digital members want and increase their bottom lines.
Exacerbating the challenges credit unions face today is the threat of digital disruption – the use of digital technologies and business models to improve business performance. Digital disruption is sweeping across industries and has the potential to overturn and reshape markets faster than perhaps any force in history. Cisco and IMD, one of the top-ranked business schools in the world, recently surveyed more than 165 financial services executives to better understand the impact digital disruption will have on the industry and found that roughly four of today's top 10 financial services incumbents (in terms of market share) will be displaced by digital disruption in the next five years! In fact, 45% of financial services executives surveyed believe that digital disruption "somewhat" or "significantly" increases their risk of going out of business altogether.
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Despite the dire ramifications, the vast majority of credit unions may not be prepared to deal with digital disruption and do not have a plan in place for how they can better leverage digital technologies to differentiate themselves from competitors and deliver an improved member experience. Forty-one percent of financial services executives responding to our survey stated they are taking a "wait and see" approach, in hopes of emulating successful competitors. Only 27% have a plan and are willing to disrupt themselves in order to compete.
What is Digital Disruption?
In the new era of digital disruption, businesses shed the physical components that inhibit competitive advantage (such as manual, paper-based processes) and digitize business models, offerings and value chains to the highest extent possible. These digital components and new, disruptive business models then enable businesses to innovate rapidly, deliver member value in new ways, and gain market share and scale far faster than competitors.
A number of all-digital fintech startups have been successful at leveraging new business models to create value by "unbundling" financial services. This has allowed these non-traditional players to seize a share of credit unions' most profitable business units while avoiding the barriers to entry – such as capital investments and regulatory requirements – that come with being a full-service financial institution. Examples of fast-growing fintech startups that are unbundling services and using analytics and automation to digitize their offerings include TransferWise (money transfers), Prosper (peer-to-peer lending), Privlo (mortgages) and Covestor (investing). Prosper, the peer-to-peer lending platform, is lending $5 billion per year. Only eight credit unions in the United States have lending and leasing portfolios totaling more than $5 billion, according to data from SNL Financial. There's a new competitor in town.
How Credit Unions Can Enact Digital Transformation to Better Compete
Fortunately, while digitization poses a potential threat to credit unions, it can also serve as the key to unlocking the solution. To successfully navigate the tide of digital disruption over the next five years, credit unions should adopt the characteristic advantages of start-ups, including innovation, agility and experimentation. Above all, they must adopt digital technologies such as data analytics, mobile applications and the IoT to create new business models that enable them to reduce costs, increase efficiencies and improve the member experience. By leveraging new digital technologies and processes, credit unions can consolidate, automate and modernize their IT infrastructure so they can operate more nimbly and on a thinner cost structure.
Digital technologies that credit unions should deploy as they undertake digital transformation include:
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Analytics tools and applications, including "big data," location-based services, video analytics and context-aware marketing offers
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Mobile tools and applications
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Platforms upon which to build shareable digital capabilities, such as cloud solutions and app marketplaces
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Social media tools and applications
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The IoT, including connected devices and "smart" networks. Potential IoT technologies include interactive ATMs and kiosks, beacons and branch recognition technologies that enable staff to recognize members as soon as they walk in the door.
The looming digital vortex can be viewed as a threat to business if credit unions are not prepared. However, by adopting the disruptive power of digital technologies and processes, credit unions can create new business models that enable them to differentiate themselves from the competition and deliver greater value to members at a lower cost. This will ensure that they thrive in the new, digital landscape and don't become one of the four out of 10 financial services institutions forced out of business by digital disruption in the next five years.
Leni Selvaggio is global industry solutions manager for Cisco and board chairman for PrimeSource Credit Union. He can be reached at 408-526-4000 or [email protected].
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