We do not need a crystal ball to figure out what tools financial institutions will need to compete in the 21st century. The internet has disrupted many business models, including the credit union business model. While the internet provides credit unions with the opportunity to connect to their members remotely, the internet has also enabled credit union competitors nationwide to access members. Some of these competitors have technology that is extraordinary and improving every year. The latest example is Rocket Mortgage by Quicken Loans. While the eight-minute approval it advertises is rarely a reality, its approval process takes a fraction of the time for conventional underwriting.
The bar on what constitutes swift, effective and convenient service keeps rising as do the expectations of consumers. This trend is irreversible. If a financial services provider cannot keep up the pace, it will be left in the dust. You remember Kodak, Blockbuster and Borders. Advances in technology and their refusal to react to change in a timely manner turned their business model from vibrant company to business school case study.
The ability to acquire, store, analyze and act on data is also a game changer. Credit unions have an image of themselves that they are close to their members and know their financial needs, but that image in most cases is just that – an image. Today, Google and Amazon likely know much more about a credit union’s members than the credit union. If a credit union’s competitor has the ability to leverage data on a credit union’s membership better than the credit union, there is little doubt what the outcome of that competition will be. Leveraging data enables a credit union to provide product offerings that are relevant and timely to particular members, anticipate loan pay-offs and provide modifications to keep the loans, ask fewer but more relevant questions in the underwriting process, and undercut the competition on loan rates with better data on credit risk.
It is imperative for credit union management and boards to ask themselves a series of questions. What technology and data tools do we need to remain competitive and relevant to our members? Can we afford to buy or develop these tools ourselves? If not, can we acquire the tools either through a merger or collaboration and remain independent? Note that if you do not elect to collaborate, you are on a path to merge – you just don’t know it yet.
The good news is there are existing CUSOs and CUSOs in the planning stage that will help credit unions acquire the necessary technology and data analysis tools at prices most credit unions can afford. But credit unions are not the only entities in the credit union community that need to change. The regulators need to change with the times as well.
To the NCUA’s credit, the agency is undertaking a study of how it can better leverage technology and resources to make the examination process more efficient and less costly, but there is no industry-wide initiative for the use of collaboration and innovation.
Interestingly, the Office of the Comptroller of the Currency has taken a lead position on collaboration and innovation – yes, the community bank regulator. For a number of years, the OCC has been touting the benefits of collaboration to its banks. Bank culture has resisted the advice, but the OCC is pressing ahead nonetheless as it can read the tea leaves and knows that most community banks do not have the scale to successfully compete in the long-run. The OCC is reorganizing its internal structure to promote collaboration and responsible innovation to its banks.
The credit union culture tends to follow the lead of the regulators. We are conservative and compliant as a group. If the NCUA sent signals to credit unions that innovation and collaboration are important to the future of credit unions, more credit unions will be willing to make the leap into the evolving credit union business model.
The competition gap between the traditional credit union model and providers using high-tech solutions and big data is widening. If a credit union cannot respond with sufficient technology and data analysis tools to meet the competition, it is only a matter of time before that credit union has a “Kodak moment” and disappears. The time to act is now.
Guy A. Messick is a Partner at Messick Lauer & Smith P.C. He can be reached at 610-891-9000 or email@example.com.