3 Ways Credit Unions Can Flourish in the Age of FinTech Disruption
Updated: Aug 26, 2020
First published on CUInsight. Credit unions are sandwiched. On one side, they have the big banks, with their sprawling balance sheets, rock bottom cost of funds and deep reservoirs of resources. On the other side, they have to make sense of the disruptive FinTech upstarts that threaten to upend the banking model and consign sleepy backwater institutions to the outdated curiosities of history along with the internal combustion engine.
It’s easy to get caught up in the predictions of the demise of small financial institutions. The number of credit unions in the US has declined by almost 30% during the last 10 years from 7,597 in 2010 to 5,354 as of June 2020.
However, dig a little further, and we see that credit union membership in the US has grown by 3% per annum over the last 10 years, much higher than the country’s 0.75% annual population growth rate.
The picture for community banks has also remained fairly solid according to a report from the Federal Deposit Insurance Corporation (FDIC), with a long term return on assets near 1%.
In fact, for the US banking industry overall, FDIC data shows that 2018 and 2019 represented the most profitable years for more than 20 years. Over 96% of FDIC banks were profitable during those two years.
With every wave of change from the Enlightenment, to the Industrial Revolution, the internet and now Artificial Intelligence, predictions are made about the demise of some particular industry.
If you wander around the old factories of the north of England or the rust belt of the US you will be able to point to the incontrovertible evidence of industrial decline. But textiles are still made, steel is still poured and cars are still produced. In fact, in far higher volumes. None of these industries died. They just changed.
What Kills Companies
Humans evolve very, very slowly. Our needs are still the same. Millennials are not two-headed monsters. When they buy they still want to buy from people they know like and trust. Yes they’d prefer to do so on a phone (rather than a branch) but so would most people. We all want our experiences to be as pain-free as possible.
What kills companies is inwardness. Apparently that’s not a word but you probably understand anyway. Companies that are inwardly focused, that resist change eventually fail. Blockbuster turned down an offer to buy Netflix. In 2007, half of all smartphones sold in the world were Nokias, while Apple’s iPhone had a mere 5% share of the global market. Nokia failed for the same reason Blockbuster failed - the politics of internal decision-making.
In short, inward-looking companies fail to adapt. This is captured in the famous quote misattributed to Charles Darwin:
‘It is not the strongest of the species that survives, not the most intelligent that survives. It is the one that is most adaptable to change’.
The Enduring Truth of Business
Although there is some evidence that humans are evolving more rapidly, evolution deals in millennia, not months. For companies to became and remain successful, they must adapt and meet our universal wants.
For a consumer to buy from you, you need to offer them something they want, and they need to trust you. The riskier the purchase (either through financial, physical or emotional cost), the more they need trust to be part of the equation.
This is the Achilles heel of Big Banks and Big Tech. The bigger a company gets the harder it is for its board and management to remain connected to their customers. These companies become more inward-focused looking to protect their moat. This results in a decline in trust. Trust is the glue that binds relationships together. The level of trust in Big Banks is poor. Now, levels of trust in Big Tech are also wavering.
To complete that circle, in November 2019, we learned that Google was to offer checking accounts. Convincing people to give Google access to this potentially sensitive area of their lives might be an uphill battle, especially given the current political and social climate around big tech.
However, the biggest danger for banks that take Google up on its offer is that this will mean less control over the client relationship, as the consumer-facing front end will be under Google's control. When you give the customer relationship to someone else you no longer have a business.
So Is Small Beautiful in an Age of Unicorns?
Do you trust the local family-owned coffee shop on the corner? The business has been in the family for generations. Your kids went to school together. You see them at football games. Were independent coffee shops wiped out by Starbucks? No. Instead of putting them out of business, Starbucks in injected caffeine into the local coffee shop. They now make better coffee at higher prices, and we drink more than ever.
Smaller financial institutions, like community banks and credit unions, have the most important asset any business needs - trust
But commentators aren’t predicting their demise based on trust. They are predicting their demise on the basis of technology.
There was a time this might have been true. Computing technology was incredibly expensive. As a result it was only available to large corporations with correspondingly large research & development budgets.
Today consumers can access that for $20 a month. Software as a Service (SaaS) has changed the way we can access and consume software. The best known areas include Customer Relationship Management (Hubspot and Salesforce), communication (Slack, ServiceNow, Twilio, Mailchimp, Zoom), accounting (Xero), ecommerce (Shopify), Computing (Mathworks), Payroll (Paycom) etc.
What this means is that your corner coffee shop can compete with Starbucks. Smaller businesses, and even individuals, can often access the same technology as much larger competitors.
The same is true for credit unions. Both Banking-as-a-Service and Platform Banking enable smaller financial institutions to compete more effectively by getting access to financial infrastructure and a wider range of products.
This improved access to financial infrastructure and a vast array of potential products will enable any community bank or credit union to rapidly adapt their business in ways that were unimaginable just 15 years ago.
This solves the technology part of the equation. Small financial institutions now have access to both side of the bridge. All they need to do it to connect it.
But What About FinTech?
Almost 10 years ago, I published a presentation entitled FinTech and Banking - Friend or Foe? This wasn’t long after the 2008 Global Financial Crisis (the GFC acronym seems to have faded from our collective memory as much as the crisis itself), so banks weren’t exactly flavor of the month. Even though I was the CEO of a small bank, with less than $200 million in assets, I seemed to be taking one for the team.
I called that the push factor. The pull factor of course was FinTech.
In truth, I never saw FinTech as a disruptive threat to banking. That may, in part, be down to how I define banking.
Banking is a very simple business that big banks have made complicated
You take other people’s money and you lend it out. You use a thin slice of the company’s own equity to act as buffer for bad lending decisions and operational risks.
Banks also utilize maturity transformation to rescue the cost of borrowing for consumers. In other words, they borrow short and lend long. This is why mortgage rates are so low relative to the term of borrowing.
None of this would be possible without governments. Governments effectively guarantee depositors up to certain limits. That artificially lowers the cost of funds for banks and enables them to lend this money out more cheaply than they could otherwise. This government subsidy creates a huge competitive advantage. I don’t pass judgement on whether this is a good thing. I can see both sides of the argument. A lower cost of credit versus moral hazard.
This fundamental model has never been disrupted. That doesn’t mean it will never change but so far it hasn’t. The Peer-to-Peer (P2P) model threatened to until people realized they were just unregulated banks. P2P lenders started creating their own buffer reserves just like banks. In this regard, there’s nothing really novel or disruptive about P2P.
Through history, banks became tired with this capital intensive business model and looked for other ways to generate better returns for their shareholders. They expanded horizontally into related businesses such as brokerage, foreign exchange, payments, wealth management and capital raising.
Nevertheless, these activities are not intrinsic to banking. They appear that way because banks have been doing them so long that they have become part of the identity of bigger banks.
This has ebbed and flowed from the 1933 Glass–Steagall Act, until the floodgates were opened when President Clinton signed the Gramm–Leach–Bliley Act (GLBA). The concept of universal banking became more commonplace with giants like Citigroup, Bank of America, RBS and HSBC.
However, by expanding horizontally, banks have strayed away from their core business where their natural competitive advantage is strongest. To build a moat from competition they have employed various mechanisms such as joint ownership of financial infrastructure.
This is where FinTech is a threat to banking (in this expanded definition of banking)
Let’s call this financial services rather than banking.
If you look at where Fintech has had most impact, it is in payments, currency and brokerage. Paypal (seems old school now!), Stripe, Ripple, Square, Coinbase, Adyen, Transferwise, Robinhood etc.
This impacts big banks much more than community banks and credit unions. In fact, for this latter group, FinTech offers enormous potential to reach new customers and offer more services to existing customers.
What about all these new digital-only banks? To understand this, let’s return to the purist definition of banking for a moment.
Banks have traditionally been vertically integrated businesses. There are three parts to this vertical integration:
Mining: it all starts with banks mining their own raw material - money (with the help of government risk subsidies). In reality, they borrow their raw material.
Manufacturing: then banks manufacture and process their financial products. They design mortgages and overdrafts and process these products with fraud and credit checks, contracts and payments.
Distribution: finally banks market and sell their products, traditionally through their branch network and now online. Having a branch network was a huge barrier to entry but that asset has increasingly become a liability which is why many banks are closing them as fast as they can.
It’s helpful to view banking it terms of its individual components because it allows us to assemble the best products using suppliers that can add value in a particular component
If we were to make a comparison with, say, the car industry, it would be like BMW owning its own mines and smelters to make steel for its cars and owning all its dealerships. In fact, car manufacturers design and assemble cars. They find the best brake supplier, the best maker of suspension that fits their vehicle design. These go together to make a car people want to buy.
This is the interesting bit for community banks and credit unions. As we move through the chain from mining to manufacturing to distribution, banks move further away from their core competitive advantage. As a result, FinTech has been able to make inroads in these areas.
However, this impacts banks in very different ways. Big banks have had a disproportionate grip on key ares in the manufacturing and distribution stages relative to community banks and credit unions.
In distribution for example, big banks have had enormous branch networks in key locations with high foot traffic. Obviously that advantage has been upended by google. Now anyone can access potential customers through Search Engine Optimization (SEO) and an active social media presence (admittedly budget is still a consideration but with careful keyword research the opportunities are there).
A banking license enables financial institutions to attract deposits that are protected from the failure of the bank. This is a major source of competitive advantage compared with ‘ordinary’ companies. It gives such institutions access to deep pools of cheap money. It also allows them (subject to certain limits) to convert low risk, short term money into higher risk, long term money. This process of maturity transformation is central to how banks make money.
The second source of competitive advantage is leverage. Banks borrow money with only a thin cushion (around 10%) of their own equity. Non-bank lenders who rely on commercial loans for their funding are typically restricted to less aggressive leverage ratios (60-80%). Again, this means that they have to lend at higher rates to generate a comparable return on equity.
Of course, there is a price to pay for this. In order to attempt to mitigate the inherent risk of high leverage and maturity transformation, a banking license comes with regulation. Most of the time this works, but occasionally it fails with disastrous consequences. The bigger the banking sector, the bigger the consequences.
As former Governor of the Bank of England, Mervyn King, writes in his book The End of Alchemy: Money, Banking and the Future of the Global Economy:
Banking crises have been frequent down the years, occurring almost once a decade in Britain and the United States in the nineteenth and twentieth centuries.
It’s very hard to replicate this competitive advantage without a banking license. Non-bank lenders need to rely on commercial sources of funds which are more expensive, and have more conditions attached to their use. As a result, they need to lend out that money at a higher rate to generate profit. I already mentioned P2P lenders, that after a wave of disruptive enthusiasm, are themselves looking to be regulated as banks for the reasons I have just alluded to.
Of course, there are some companies that are sitting on piles of cash. Apple, Microsoft and Google and Facebook each have more than $10 billion in cash on their respective balance sheets. While each has a presence in financial services, none has yet decided to become a full fledged lender, presumably because they have better uses for their money, or they want to steer clear of what is a highly regulated industry. Who knows? Perhaps they are just biding their time.
Over the last 50 years, big banks have done an incredible job of carving out a competitive advantage in financial manufacturing.
Two areas, in particular, stand out:
We will also look at a third area, the user inferface (UI), which is responsible for much of the customer experience.
The ability to make payments is obviously a critical component of financial services.
Payments is the delivery service that enables banks to deliver their product. It’s the UPS of financial services. The big difference between UPS or Fedex and banking is that UPS and Fedex don't own the roads they use. They are available to all of us.
In a strategic masterstroke, a handful of banks has created/acquired and controlled much of the payments infrastructure. Owning the roads meant they could control access to them. For many community banks and credit unions this has been problematic, particularly in lower value, high velocity products. This hasn’t gone unnoticed.
In the UK in 2000, the Cruickshank Report noted that the ownership and governance of the UK payments systems was restricting innovation, and advocated a separation of infrastructure providers and operators. However, it wasn’t until some 12 years later that the UK government made it clear that the current system was not adequately meeting objectives to promote and develop new and existing payment systems, and to facilitate competition.
In the end, regulation was required in the UK to open up access to payments for smaller banks, non-banks and FinTech. Indeed, this is one of the key aims of the Payments System Regulator (PSR). The PSR has conducted a number of reviews which are well worth reading. I particularly recommend PSR MR15/2.3 – Final report: market review into the ownership and competitiveness of infrastructure provision.
The PSR is really the unsung hero of UK FinTech and smaller players
The situation is similar in the US for real time payments (although the US has lagged a long way behind the UK in this area). In 2017, The Clearing House, a consortium of large banks, created its own real-time payments system. Again, having a group of operators own the payments infrastructure can be awkward.
In an important step forward for US payments, in August 2019, the U.S. Federal Reserve announced that it planned to develop its own round-the-clock real-time payments and settlement service, with an expected launch in 2023 or 2024. This is obviously being resisted by big banks and supported by the tech industry (Amazon, Apple, Google, Intuit, PayPal, Square and Stripe wrote to the Fed in 2018 imploring action).
So what does this mean for community banks and credit unions?
The combination of direct access to payments infrastructure and the plethora of FinTechs in the payments space will allow community banks and credit unions to offer more products, and better serve to more people.
Payments, particularly international payments, is an extremely painful process. Integrating fast, low cost payments through companies such as Paypal, Applepay, Venmo, Zelle, Transferwise, Square, Facebook Messenger and Remitly will reduce friction for customers which will strengthen the relationship with their community banks and credit unions.
The second area of interest In manufacturing is credit data. Big banks have had superior access to financial information on their customer base. When assessing the creditworthiness of consumers and small businesses with a view to making a loan, an important source of information for the lender is a business’ past financial performance. This information is, however, often held by the bank that provides the business’ current account and is not widely shared.
The control of credit information by existing providers is a barrier to entry in the market for lending (particulalry to small and medium-sized businesses). Lack of access to this data limits the ability of smaller banks and alternative finance providers to accurately assess credit risk both in absolute terms and relative to those lenders that hold the relevant information.
The UK government has taken steps to address this, but perhaps the more interesting change is the development of new sources of credit data.
As Chris Holmes, Senior Vice President at KAE Consulting explains, in the U.S., Canada, the U.K. and Germany, creditworthiness is determined primarily based on credit scores provided by large credit reporting agencies (e.g. Experian, Equifax, SCHUFA). These scores are typically based on the applicant’s recent bank account and payment history, and his/her borrowing and repayment activity, with approval and the terms of the loan, including the loan amount and interest rate, closely tied to the applicant’s credit score.
The biggest issue is that these systems are biased towards people who use credit. The irony is that not borrowing can negatively impact your credit score. This impacts millennials, immigrants and older people disproportionately.
In an earlier report, the Consumer Financial Protection Bureau estimated that 20% of the US adult population didn’t have a credit score. The report also found that there was a strong relationship between income and having a scored credit record. Almost 30% of consumers in low-income neighborhoods are credit invisible and an additional 15% have unscored records. For community banks and credit unions this represents a real problem.
Furthermore, Blacks and Hispanics are more likely than Whites or Asians to be credit invisible or to have unscored credit records. About 15% of Blacks and Hispanics are credit invisible (compared to 9% of Whites and Asians) and an additional 13% of Blacks and 12% of Hispanics have unscored records (compared to 7% of Whites). These differences are observed across all age groups, suggesting that these differences materialize early in the adult lives of these consumers and persist thereafter.
So the challenge for community banks and credit unions is access to credit data that helps them make the best decisions for the markets they wish to serve.
Again, Fintech is an ally here.
There are two pathways:
Payment data: this is current credit scoring but on a wider scale using additional data sources. Examples include utility payments, tax returns, cloud-based accounting platforms, rent and ebay transactions.
Non-payment data: this is data sources from outside financial transactions. Examples include behavioral and linguistic data sources from social media accounts or GoogleAds. Other examples include device type, email address and your sales channel (how you were acquired as a potential customer). The Federal Deposit Insurance Corporation Center for Financial Research have done some interest research into this area.
Clearly, data privacy is critical here and this assumes full consent from the subject. This is a bit of a minefield that we need to navigate.
Some players in this space include FriendlyScore, Zest, Ravelin, Lenddo, Featurespace, and Aire. There are many, many more. This is an area of real opportunity for community banks and credit unions to improve the quality of their decision-making and open up new products and markets within their catchment area.
There’s a third area, one in which big banks have thus far failed to deliver. The user interface, the way we interact with banks, is uninteresting and clunky. Just trying to log in to my bank account sends my cortisol levels into the stratosphere.
When I fail because I haven’t remembered where I wrote down my password and wonder if I left it on the bus, I have to brave the telephone banking experience. After I have navigated the keypad dance to find the nuclear code that lets me speak to a real person, I wait in line for an agent. In a level of dry humor us Brits would appreciate, a recorded message reminds me how easy their online banking service is. I’d rather go to the dentist. In fact, I’d rather go to the branch. They can’t ignore me at the branch.
This may surprise some, but the customer experience is 3x more important than the price, because it has a more direct relationship with how we feel as customers. Community banks and credit unions aren't in the money business. They are in the feelings business.
This is another area where FinTech can be a positive partner for financial institutions. The concept of user experience (UX) is something that should be a key focus for the boards and management of all community banks and credit unions. This is the responsibility of the financial institution not the supplier. This is why it’s critical to understand your customer and map their experience before embarking down this road. Design the house before you decide which saw to buy.
The Real Battle is for the Customer Relationship
You know there’s a secret sauce that’s available to every community bank and credit union. It’s a secret sauce that is harder for big banks and FinTech to access, because they are all about scale. It’s very hard to scale customer relationships. Maybe that will change when we reach singularity, but for now, I know when I’m talking to a bot.
Business is a subset of humanity and humanity is all about relationships. People want to do business with people they know, like and trust. People like companies that treat them as humans not mobile profit centers. In the B2C universe, I haven’t yet met a big bank like that. What’s the probability of Brian Moynihan, the CEO of Bank of America, picking up the phone to check in on me (hey Brian if you are reading this article thanks for the call...)?
The jury is still out for me on FinTech. The landscape is probably more nuanced but funny things happen to businesses when they are acquired by venture capital. The priority becomes growth.
Growth is good but… here’s a short story told by advertising legend David Ogilvy:
"Marvin Bower, who made McKinsey what it is today, believes that every company should have a written set of principles and purposes. So I drafted mine and sent them to Marvin for comment. On the first page I had listed seven purposes, starting with ‘Earn an increased profit every year’.
Marvin gave me holy hell. He said that any service business which gave higher priority to profits than to serving its clients deserved to fail. So I relegated profit to seventh place on my list."
How to have Unbeatable Customer Relationships
You are probably familiar with the 3 Ps of business:
Many businesses focus on the product. That seems logical but it’s actually the least important of the 3 Ps.
It’s people that create relationships and it’s processes that enable consistency and some scalability to those relationships
That’s why we focus so much on processes. Building relationships is a process. Processes are also needed to ensure those relationships can flourish regardless of where the customer is or who attends to her. Processes also improve the probability of hiring and onboarding incredible people to your company. In short, you have to design for success.
How to Design for Success with the 6 Stage Process
We designed a 6 stage process that enables credit unions and community banks to create the ultimate competitive advantage - powerful customer relationships.
It has 6 steps which I will share with you now:
Customer segmentation - so you better understand different groups of customer
Customer experience mapping - so your customers feel good about doing business with you
Defining your unique value proposition - so you can define and quickly communicate your value
Optimizing your sales channels - so you can find new sources of customer and reduce your customer acquisition costs
Aligning your marketing assets - so you can guide, convert and retain more customers
Measuring, testing and iterating - so you can continuously improve in a virtuous loop
1. CUSTOMER SEGMENTATION
Relationships form over time between two individuals. There’s a saying in marketing that if you are speaking to everybody you are speaking to no one. That’s why when companies attempt to appeal to everyone they normally don’t get good results. In every customer base there are different segments. That is equally true for credit unions that serve a particular community or workforce.
Speaking to everyone individually is a challenge even for a small business, so we need to segment our customers based upon certain attributes that they have in common. There are lots of ways of doing that to suit your objectives and constraints but the most insightful way is through data analytics.
Once we have identified our key customer segments we need to start designing the customer experience.
2. CUSTOMER EXPERIENCE MAPPING
When I buy a Hershey’s Kiss I get a thrill from unwrapping the silver foil from the chocolate, from feeling my molars slide down the side of the chocolate as they attempt to create a fissure in the steeply sided chocolate. I begin to taste the unique malty flavor of Hershey’s and my mind is filled with images of Milton S. Hershey experimenting in his factory as he tried to perfect his fermentation process.
There’s no such thing as a product. There are only experiences. The single most important element of the customer relationship is how the customer feels about your business
The place I bank might have the lowest cost loan on the market or offer the best savings rates but I don’t feel good about them. The experience of dealing with my bank is painful. I am made to jump through hoops. Elon Musk has a better chance of reaching Mars than I do speaking to a real life human being where I bank.
When they say “your call is important to us please hold until a customer representative becomes available” What they are really telling me is that they don’t care about me. They don’t care how I feel. If they did, they wouldn’t design their processes that way. My call should be answered within 3 rings like this “Good day Mr Kelly, this is Chris from the Customer Experience Team, it’s great to speak with you again!” Now I feel the love!
The way to ensure your customers love you is to design their experience from an emotional perspective. By mapping out each step of the customer journey from their point of view we can create an experience that forms, then strengths, our relationship. This is why we segment our customers first. We need to understand our customer groups in order to design the process around them. A one-size-fits-all process fits no one.
Remember, that the relationship doesn't end at the sale. That is just the beginning
Now we know who our customers are and how we are going to make them feel special we need to be able to attract them. For that we need to communicate our unique value.
3. DEFINING THE UNIQUE VALUE PROPOSITION
There are over 11,000 financial institutions in the US. What makes one unique? Why should a consumer choose one over another? Is a unique value proposition possible in an ocean of friendly local banks offering free checking accounts and low-cost credit?
This widely used phrase is one of the hardest parts of any business. Because it takes a lot of work and, for a lot of companies it tends to sit alone, unconnected to the processes of the business.
Great value propositions are exceedingly rare. Next time you have a few minutes to spare, have a quick browse through the LinkedIn and Twitter bios of a few community banks and credit unions. Now take away their names and logos. Can you tell them apart? For most the only discernible factor is geography. In a digital world that’s a barrier easily crossed.
Just like everything else, there is a process of defining and distilling the essence of what you do in just one paragraph, then one sentence and then in just a couple of words. Like a sculptor chiseling away at a block of Tarentine marble, you chip away at the unnecessary until it slowly reveals itself the more time you work on it. You have created something unique.
Now we can communicate our value to the customer we need to find them.
4. SALES CHANNELS
Financial institutions in the retail space typically use three main sales channels:
The problem is that they are competing with everyone else in these channels. It’s overcrowded! That makes it hard to stand out and more expensive to acquire customers.
The objective is to acquire more customers at less cost than your competitors
The good news is that there are 18 other channels that most people aren't optimizing. Distribution is a key source of competitive advantage. The secret is to get creative about where and how you attract your customers.
Yes, there’s a process for this too. Developed by the founders of privacy search engine, Duckduckgo, it helps identify, rank, test and prioritize the best distribution channels for your business. It’s too much to include here, so I’ll write a separate article on this.
Now we know where to find more customers at less cost, we need some help to get our customers moving through the process. That’s the job of your marketing assets.
5. ALIGNING YOUR MARKETING ASSETS
We talked a little about the customer experience journey in step 2. We need to return to it here for this penultimate step in the process.
It’s counterintuitive, but the more steps you have in your process, the higher number of potential customers will make it to the end and become actual customers.
Imagine taking a path you don't know. The path has big puddles you need to jump across. The light is fading fast and you can't see any sign posts. That’s what it feels like to be in a lot of company’s sales processes.
This happens because companies tend to design their processes with their own needs in mind. Everyone is sat around the meeting room thinking through how the process affects their department and how they are going to deliver on the obligations it imposes upon them.
There’s a story about a Silicon Valley start up that always leaves on chair empty at every meeting. That chair belongs to the customer
Your customers need to know two things before they take the next step with you:
Where they are going
What’s in it for them
Explain where they are going
Your organization know how things work. Your potential customers don’t. Your customers don't want to walk down a dark path with someone they don't know unless you explain who you are, where you are going and what’s in it for them.
What’s in it for them
Customers will consider doing business with you when they know, like and trust you. They will do business with you when they perceive a benefit to them of doing so. Each step in the process, should add value to them in some way.
For example, buying a property and obtaining a mortgage is a complicated process that on average people only do twice in their lifetime. Buying a property is a big deal. It’s a home. It’s a lot of money. There’s a lot of legal stuff. It’s exciting and stressful at the same time. Your institution has a part in this process multiple times every day. If you design a sales process that explains, sign posts and accompanies each and every customer through the process you will win a lot more business because you are also taking care of their emotional needs.
Your marketing assets are the signposts and benefits your customers need to move to the next step of your sales process.
6. MEASURING & TESTING
If this sounds like a lot of work, well I suppose it is. That’s a good thing because it means some of your competitors probably won’t invest in optimizing their businesses. Anyway, there’s a way to make it much easier - start small.
This is an iterative process. The most effective way to implement this is like coats of paint. Rather than paint one room at a time applying several coats, paint the whole house once before you apply the second and third coat.
The benefits of this approach are:
Your organization can see progress which encourages further action. Sucess breeds success
You can identify the whole process end to end
You can quickly figure out where the low hanging fruit is. Those areas that generate the greatest benefit for your organization, while requiring the least amount of resource
A common mistake is for organizations to try to go too deep too quickly. You don’t have the resources to do that and it’s not effective. You soon get bogged down as your projects grind to a halt and people get frustrated. Hugely ambitious transformation projects rarely work, because they take too long and the world isn’t static. You get better results with an agile approach.
By setting smaller objectives you will get faster results. You can then build upon those smaller successes to create momentum. This works like accrued interest compounding on your earlier achievements. With each completed step you get 1% better. We all know the power of compounding over time.
The Innovator’s Dilemma
This is the most exciting time to be a credit union since Friedrich Wilhelm Raiffeisen and Hermann Schulze-Delitzsch pioneered the first true credit unions in Germany in the 1850s.
In fact, all smaller financial institutions have, for the first time, been given the keys to an equal playing field, place where financial technology and regulation meet. The potential of this symbiotic relationship between financial technology and credit unions and community banks isn't an idealist’s pipe dream, it is a reality in reach of any financial institution that chooses to grasp it.
Smaller financial institutions have, for the first time, been given the keys to an equal playing field, place where financial technology and regulation meet
However, the same was true for Blockbuster Video. When Netflix launched in 1997, Blockbuster was the undisputed champion of the video rental industry. For years, Blockbuster dominated the video rental space. Blockbuster refused to change and stuck with the model they were comfortable using. On one level this is entirely logical. Blockbuster had a highly successful business model. Punitive features such as late fees contributed a lot to Blockbuster’s profitability.
The Blockbuster / Netflix story is a classic case of the Innovator’s Dilemma. As Clayton Christensen identified in that book, the list of leading companies that failed when confronted with disruptive changes in technology and market structure is a long one. The cause, he argued, was not the technology itself, but rather the way decisions get made in successful organizations that sows the seeds of eventual failure.
"Every company in every industry works under certain forces—laws of organizational nature—that act powerfully to define what that company can and cannot do. Managers faced with disruptive technologies fail their companies when these forces overpower them"
It’s the failure to adapt that seals their fate. Today, the way financial technology is widely distributed means that it is within reach of financial institutions of all sizes, whether you have assets of $10 billion of $75 million. Being small is an advantage. Cost is no longer the barrier.
Those that thrive will start today.