Advice to Credit Unions: Innovate or Die

Ivan Schneider, Writer, specializing in financial technology | 2/22/2013 | 21 comments

Ivan Schneider
Credit unions are capable, strategic opportunists. Whether it's a pullback in small business lending or a cultural moment of dissatisfaction with big banks, the credit unions have been ready and willing to take advantage of opportunities when they arise.

When the big banks curtailed small-business lending during the financial crisis, the credit unions swooped in. In 2011, credit unions were the primary financial institution for nearly 7 percent of small businesses, up from less than 4 percent in 2009.

Another example is the buzz around Bank Transfer Day in November 2011. Following the banking industry's initial attempts to impose monthly fees, a Los Angeles woman set up a Facebook page to encourage people to switch banks. The resulting media attention sparked a successful membership drive for credit unions.

Yet these opportunistic stories are not enough, as the big banks won't stay easy targets for long. Despite big banks falling into public disfavor, overall market share for credit unions has been stuck at around 6 percent of total financial institution assets for over 20 years.

To reach the mass market with a broader range of compelling services, the credit union industry will need to take an innovator's approach to the marketplace, disrupting the commercial banking industry with low-cost, high-quality alternatives to existing products and services. Credit unions have to popularize great products that banks would never dare to launch for fear of cannibalizing existing revenue streams.

At present, credit unions rely far too heavily on the marketing-led concept that they are morally superior to commercial banks because of their community focus, ethical lending policies and member-owned structure, and by extension, that their customers are better people for supporting the credit union movement. By that thinking, credit unions need only to maintain service levels on par with commercial banks because virtue-based messaging will do the rest. And by that thinking, credit unions will stagnate at 6 percent market share forever.

The leaders in the credit union community do recognize the need for technological innovation. "We [the credit unions] should have invented Square," remarked Gene Blishen, general manager of Mount Lehman Credit Union in British Columbia, speaking at BarCamp Bank Seattle, a day-long event devoted to disruptive innovations in the world of banking and finance.

Similarly, during a discussion of personal financial management (PFM) tools, I asked whether the credit unions should have invented Mint, the popular PFM from Intuit. Again, the consensus was "Yes."

I respectfully disagree. No credit union or CU collective could have invented Square or Mint. The credit union industry, either individually or as a group, lacks the DNA, the tech talent pipeline, and the stomach to invest member assets into financial technology startups. Credit unions may be among the first to envision the future, but they're among the last people we should expect to invent it. Innovation doesn't wait for a group consensus to emerge about the proper way to proceed. Innovations fail, and they fail badly and at great cost to investors and inventors.

Nevertheless, credit unions are more than capable of acting as proving grounds and test beds for emerging technologies. Credit unions should have been the first to deploy Square and Mint or their equivalents. The financial technology market consists of countless companies, whether startups or established players, having new approaches to core banking, multichannel management, mobile access, branch reconfiguration, and any number of other powerful and potentially disruptive technologies. If credit unions intend to shift financial power away from big banks, there's no quicker route than for credit unions to discover a better technological formula for serving customers.

The main challenge is that the overburdened, underpaid technology leaders at credit unions are in no mood to field the constant stream of technology pitches that bombard anyone with a visible presence in the industry.

In attendance at BarCampBank Seattle there was just one technology vendor, Graeme Cox, CTO of Mobilearth. When given a brief opportunity, Cox described how the company's MobiBranch tablet app untethers employees from the branch, allowing them to accept deposits, open accounts or take loan applications from anywhere.

A perfect match for credit unions, wouldn't you think? In the pre-mobile era, banks competed on branch network coverage. When bankers can go anywhere, the credit unions with local community ties should be in a great position as long as they're not late to the party.

At BarCampBank Seattle, the response to the pitch was lukewarm at best. A profit-seeking software vendor has to tread carefully in the not-for-profit world. Unless you have a free, open-source product, it's unlikely that you'll be given the time to present a live demo, let alone score an introduction to a credit union's CTO. My sense was that if you're not part of the virtuous and saintly not-for-profit credit union culture, you're an interloper, a profit-seeking vendor, or an MBA-toting infiltrator -- even if it's precisely those people who are best able to help the credit unions to achieve their goal of changing the financial system for the better.

Free advice to the CU industry from this MBA: Transform BarCampBank into an event like Finovate. Spend more time listening to pitches, and then share your impressions with your peers. Work as a community to identify firms that can shake things up, and then have the courage to go for it. Get a reputation for being first to launch by working with those who are first to invent. Forget "skunkworks" projects; you're outgunned. Don't worry if your business partners get rich while helping you to succeed. Try everything to find out what works.

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batye   Advice to Credit Unions: Innovate or Die   3/3/2013 9:11:12 PM
Re: tech follows the money
I think it all depends on the price of the technology for the institution and end user on the long run... Big Banks could afford to pay it forward for the new technology... in some cases just use one big city to try smart card for example in London, Ontario Canada in 2000, before rolling smart card everywhere in Canada in 2009...
Cyrus   Advice to Credit Unions: Innovate or Die   2/26/2013 7:10:09 AM
Re: tech follows the money
@Ivan In terms of a tech gap, I was referring to what used to be a gap in the technology reliant services available to the consumer. I haven't seen what credit unions are doing in years, but at one time, the front-end technology systems that the customer used to see, such as systems used to produce statements, etc. were not nearly as robust as what commercial banks were using at the time.

I'm sure this has changed over the years, if for no other reason than the fact that they've benefitted from a drop in technology costs as well.
Ivan Schneider   Advice to Credit Unions: Innovate or Die   2/26/2013 2:25:35 AM
Ivan Schneider
Re: Destroy the Box... Don't Just Think Outside It

Thanks for your comments. I'm glad to see that my outsider's perspective to what's going on with credit unions resonates with people who live and breathe the CU world. 

Perhaps we can look forward to a few CUs out of the thousands leading the way and taking some real chances. There's definitely room for experimentation by individual CUs, as well as collaboration in the CU industry in terms of talking about what approaches might work, and about who the best technology partners might be.

As for free software vs commercial providers, we can ask the question: could the FOSS community have invented Square or Mint? That's not so far fetched, actually. But unless and until there's a FOSS community that works on projects with applicability to credit unions, the CUs should have an open mind for whoever's offering the most compelling tech solutions, which at this point is the tech startup world.
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Ivan Schneider   Advice to Credit Unions: Innovate or Die   2/26/2013 2:09:01 AM
Re: tech follows the money
Cyrus: In many really, there really isn't a technology gap between credit unions and banks. The credit unions use the same core processors as smaller commercial banks, from the same vendors, they offer basic IVR, call centers, even mobile apps. And by doing so, they end up with similar features, similar offerings, and similar limitations. 

In some areas of financial services, yes, the organizations with the most resources will win. High-frequency trading, for example -- you can't compete in HFT on a shoestring, and the spoils go to the ones with the biggest tech budgets who have the ability to site their systems closest to the exchanges. That's competition in a well-defined playing field, i.e. which admiral can put the largest fleet in the water, which manager can sign the most expensive talent in the league. 

But what I'm talking about is technological disruption. There are technologies out there with the potential to disrupt the banks' business model. And CUs should use them. The mobile branch employee idea is an example. If a megabank's entire strategy is based on building nationwide coverage, with a branch or ATM on every corner, they're not about to turn around and undermine that very advantage with a mobile banker strategy. 

On the other hand, a smaller institution with virtually no branch footprint may be successful on the idea that a banker can meet you at your house.

This is technology as asymmetric warfare, as disruption. For that to work, it's not about the money, but rather the boldness to try new approaches.
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jrwlay   Advice to Credit Unions: Innovate or Die   2/25/2013 6:14:00 PM
Destroy the Box... Don't Just Think Outside It
Great points being made here and echo some of my own I shared at the end of 2012 along the lines of relying on "moral basis marketing".  While I believe in it, I am not sure if it is still relevant outside the industry. Maybe that 6% answers the question for us. I presented the argument to kill credit union dogma and stop drinking the CU kool-aid.

We have gone around the country asking if people know the difference between credit unions and banks? Do they even care? 

I know this message pisses off a vast majority of credit union lovers. I love credit unions too but instead of being silent we must start making strong calls to action; for inaction will surely hurt us all.  Let us not confuse loyalty with silence. As Seth Godin notes, "Some organizations demand total fealty, and often that means never questioning those in authority. Those organizations are ultimately doomed. Respectfully challenging the status quo, combined with relentlessly iterating new ideas is the hallmark of the vibrant tribe."

I agree 100% with you regarding, "No credit union or CU collective could have invented Square or Mint. The credit union industry, either individually or as a group, lacks the DNA, the tech talent pipeline, and the stomach to invest member assets into financial technology startups."

It sucks to be a leader because you are the one failing at your own expense and many times on your own dollar. I have been there and done that plenty of times and will continue to do so as we help credit unions not just think outside the box but destroy the damn thing. The simple fact is by just thinking outside the box is the box still exists and it can be very easy to find your credit union back in the box. To truly create and move beyond the status quo, credit unions must destroy the box and embrace new creative thoughts and ideas driven by a focus on people, product and process.

To continue to be relevant and compete with an increasing onslaught of traditional and nontraditional competitors, credit unions must embrace creativity, innovation and re-examine how they view the world. And playing the "small credit union" card is one of the lamest excuses ever

When it comes to technology, many credit unions view tech as another check list item. What they don't understand is that their lack of digital strategy may actually be killing them in a way they did not predict simply by removing people from the equation.

The example you provided from BarCampBank Seattle sounds like a perfect solution to many of the pain points credit unions are experiencing today.

And in lies the irony as you pointed out, "A profit-seeking software vendor has to tread carefully in the not-for-profit world. Unless you have a free, open-source product, it's unlikely that you'll be given the time to present a live demo, let alone score an introduction to a credit union's CTO. "

That's bullshit. I can't tell you how many times I have personally faced this. At the end of the day, free will not cut it. Free does not drive change. Free does not drive innovation. Free devalues an idea as a whole. To drive change takes thought, time and planning and be aware that mistakes, even costly ones, will be made along the way. We can't wait for everyone else to try it. 

For me, an entrepreneur, tis' better to die (fail) trying something that has the chance to succeed rather than living through a slow painful demise caused by taking no or slow action at all.  Sooner or later, quicker or slower, the game will change.

Will that change be driven from within the credit union industry by those who want to destroy the box or from organizations on the outside of embrace creativity and innovation? As of now it appears those outside of the traditional financial setting have the upper hand. 
David Wagner   Advice to Credit Unions: Innovate or Die   2/25/2013 11:58:34 AM
Re: tech follows the money
@syedzunair- I wasn't talking about collaborating (though I think that's great) but actually merging. Bring the best minds together who know their customers best in order to compete better.

That said, there is a lot of regulation standing between that.

on the other hand, collabration might work since most credtit unions arne't actually competing since geographical realities and rules about who can join the union mean they are going after different people.
Cyrus   Advice to Credit Unions: Innovate or Die   2/25/2013 11:45:43 AM
Re: tech follows the money
@David You're probably right about consolidation. But the key issue is the way credit unions are structured. The very fact that they're a cooperative owned by members and are legally structured as non-profit organizations means there's no real necessity, or even incentive, to combining.

Credit unions are really the last relationship-based business in the consumer financial space when you get right down to it. Members like the small office feel, personal service and the fact that generally someone's going to know your name when you go in there.
syedzunair   Advice to Credit Unions: Innovate or Die   2/25/2013 5:25:18 AM
Re: tech follows the money

It would be helpful but I don't get what incentive would the unions have to collaborate?
Susan Nunziata   Advice to Credit Unions: Innovate or Die   2/24/2013 11:50:06 PM
Re: Test Bed
@Ivan-Thanks for a really informative article. I did not know much about the challenges facing credit unions until reading your post and your further discussion of the topic with our community. The financial crisis and resulting mistrust of large banks gave credit unions the biggest boost in consumer recognition that they've had in years. yet they risk squandering this unprecedented opportunity for growth by failing to keep up with services available from traditional banks. Resistance to technological change is not a good thing for any business, whehter for-profit or non-profit. 
David Wagner   Advice to Credit Unions: Innovate or Die   2/24/2013 6:56:08 PM
Re: tech follows the money
@syedzunair and technocrat- True consolidation is difficult. The law makes it difficult fo one. There are regulations based on how they work and who can be their customers. But I think opening that up wuld be helpful.
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