Timing the Leap

Introducing technology-based financial products and services is like hopping between big boulders. Timing is everything, and those who miss will likely get some bruises. Leaders often aspire to be “fast followers,” but just how fast to move can be a tricky call.

Boards can support success by staying abreast of changes in the technology marketplace, and seeing that the strategic plan aligns with the CU’s overall appetite for innovation and risk.

As a practical matter, “fast follower” often means being among the first CUs to sign up for a new product or service once their core or card processor has developed, tested and made it available. Some CUs even seek to get involved at the testing stage. Processors usually wait for significant demand before they invest heavily in development, which could leave progressive institutions a bit ahead of other CUs, but well behind market innovators.

But waiting wasn’t the right option for Tech Credit Union, San Jose, Calif. “We needed a good mobile banking app before our core processor had one,” recalls CEO Todd Harris, “so we went with a third party and integrated it with our core. Now the core processor has a good mobile banking app offering.”

Moving mobile vendors would not be worth the resources, so the $2 billion CU stills uses the core system from Symitar, a division of Jack Henry & Associates, San Diego, and the mobile banking solution from Jwaala, Austin, Texas.

“In the Silicon Valley, we can’t always wait for our core provider to invent new features,” Harris explains. “We have competitors here that are ahead of our core provider. There are maybe 20 credit unions that are impatient to move ahead, and a processor could have a clientele of 600-plus CUs, so our needs are not necessarily their top priority. But we have conversations with them about where the market is heading, and we offer to help lead them into new products the rest of their clients will be wanting down the road. Often they are receptive and appreciate the dialogue.”

Tech CU works closely with its board, which regularly advises on timing. “They sometimes prod us to move faster and sometimes caution us to move slower,” Harris notes. He has good reason to listen to his board because they’re Silicon Valley business leaders, many of them in the technology business. Board input mostly comes when the technology committee presents its annual tech roadmap at a board meeting.

So when does Tech CU not invest in new technology? Harris points to desktop video conferencing. “We think it’s a great technology, and we have it in our branches,” he explains. But “we think that mobile (phone or tablet) will leapfrog desktop and that desktop will become obsolete pretty soon, so we chose not to offer it, even though some of our competitors do.”

Technology is heralded as the means to greater operating efficiency and the differentiator that helps CUs attract new members and grow their business, but does it really improve the bottom line? Not always right away, Harris suggests. “We’ve invested a lot of money in technology,” he says. “We knew it would hurt our ROA in the short run, but we’re not a public company that has to make quarterly earnings forecasts and deal with questions from investors and analysts, so we can take the long-term view.

“We thought the benefits from these investments would come, and now they’re starting to. We think we’ve reached the point where growth will offset continued investment in technology and our ROA will stabilize. We saw a nice pick-up in growth in the second half of 2015, and it’s continuing this year. We’re now growing membership at 4 to 5 percent a year, after slower growth in previous years.”

Slowed by Vendors

At CUs less able than Tech CU to design workarounds, vendor readiness can be a big factor in how fast a CU can follow, says Les Wallace, president of Signature Resources in Aurora, Colo.

Changing a CU’s core to get better technology add-ons is usually not practical, Wallace notes. “It’s risky and a hard change to make, one that can take 18 months,” which can defeat the purpose of being a fast follower, he observes.

That’s why it’s important to make vendors, especially those who provide your core banking systems, strategic partners instead of just vendors. Staff needs to make sure vendors know their concerns, what they need and when they need it,” Wallace says. “They’ll listen. [Your CU is] one voice telling them what the market wants.”

As Harris suggests, there are now passing lanes on the technology innovation highway that allow CUs to get around slower vendors. One accelerator is more flexible technology, notes JP Nicols, innovation expert, chairman of Next Money and a speaker at Execu/Net™ slated for Aug. 28-31 near Yellowstone National Park.

“We’re moving to a plug-and-play world,” he points out. “It’s possible now to buy pieces that talk to each other without waiting for a vendor to put together an integrated package.”

Another accelerator is marketing. “Many of today’s financial technology companies would love to partner with a credit union,” Nicols says. Most fintechs will sell their technology under a white label. The fintech company powers it, but CU members see it as their CU’s product, he explains.

Gene Blishen, general manager of $43 million Mt. Lehman Credit Union, Mt. Lehman, British Columbia, thinks timing doesn’t have to depend on vendors. When most financial institution heads saw the Internet coming, they turned to technology outsourcing. Mt. Lehman CU, on the other hand, “brought it all in house,” he explains.

“Now, when we want a product, we build it. When we want a report, we run it. We don’t request it from a processor and wait. We’re not trying to be a technology leader or a fast follower or a slow follower. We don’t see ourselves as part of a crowd. We control our choices. We look at what would help our members, and then we look for the best technology to get the job done.”

The board set the strategy from the start.

“Without the board’s endorsement and understanding, I don’t know if any of what we did would have happened,” Blishen says. “They saw the possibilities of how technology could become a major component in the marketplace as well as our operation and wanted to make sure we would not be left behind.

“The key components of the strategy were to be vigilant in knowing what was happening, educating ourselves about the technology and knowing our limits, strengths and possibilities,” he adds. “For example, when Apple introduced the iPhone years ago, we had a programmer and operations person present to understand what that device would mean to our business. We could get past the hype and stay focused on what we could do.”

All this technological independence makes Mt. Lehman CU quirky, but quirky is good because it is the smallest CU in its market and can’t run on economies of scale. “Two of the largest CUs in Canada are just steps from our front door,” he notes. “We can’t offer the lowest loan rates or free checking. It would be suicidal for us to try to match them.”

But Mt. Lehman CU can run on economies of ownership, Blishen insists. “Once you create something digital, if you own it, you can use it forever for next to nothing. With a vendor, you pay ongoing fees that perpetuate overhead.”

Not many credit unions try to follow the Mt. Lehman CU’s example, Blishen concedes. “We have a niche model. Some CUs are interested, and we’ll share our codes, but they’re tied to legacy systems. It would be too disruptive now for them to change.”

Finding the Sweet Spot

Ambitious CUs have come close to mastering what could be called Fast Following 1.0. They’re not too fast, not too slow. The “sweet spot” for CUs seeking to offer technology-based products is “north of infancy and south of maturation on the bell curve,” observes consultant Sabeh F. Samaha, president/CEO of Samaha & Associates Inc., Chino Hills, Calif.

Some CUs follow too quickly when they listen to market or vendor hype or possibly to their own ambitious tech crew, Samaha reports. That happened to some CUs that jumped on the customer relationship management software bandwagon a decade ago and got mired in complicated, expensive deployments, he explains.

There are pitfalls to moving quickly, Wallace agrees. Once a technology has been tested and found reliable, being among the first CUs in your market to offer it to members still may not be the best course.

“Technology is expensive, especially when it is fresh and new,” he points out. If you wait, it will probably get cheaper, he says, and more members may sign up for it because they’ve heard good things about it. But waiting also means you reduce your chance to distinguish yourself from your competitors and have less to attract prospective members who are early adopters. “It’s a classic trade-off,” he notes.

Too slow is a more common, more serious problem, many experts insist. For many progressive CUs, the goal has been to move quickly to embrace best practices once the marketplace has had time to sort out what are best practices, Nicols explains. That strategy gets riskier “when the world is changing under your feet,” he observes. Now CUs are having to act differently.

Financial services once were a pretty standard set of relatively safe products and services, he points out. There wasn’t really a threat of substitution. “Now a normal person can get along without ... a traditional financial institution,” he says. “They can do it all with apps.”

$14.5 billion BECU, Seattle, has moved ahead and accelerated decision-making around product adoption.

“The old, formal model of doing research, issuing an RFP and watching demos is just too slow for today,” explains Ken Myhra, director of payments. “It has to be streamlined or it will just put you further behind.” So BECU developed a new model and set of strategic objectives, and now runs a prospective product or service through its new model to get a “Go,” “Stop,” or “Look Further” verdict in just a day or two, he says.

But that doesn’t mean the timing is always perfect. After being a leader in online P2P payments, the CU held back on mobile P2P  because elements of the technology seemed immature. “There was so much uncertainty about which way mobile payments would go that we were afraid we’d pick the wrong solution and have to do our product over,” notes CUES member Howie Wu, CSE, BECU’s VP/digital solutions.

“Then things moved quicker than we expected, and we were a bit behind where we like to be. It’s common today to have to redo a product in months instead of years. A potential redo is less reason to wait now.”

BECU moved a little too quickly, he says in hindsight, to introduce image ATMs in 2006. “We were among the very first to go to all-image ATMs,” Wu recalls, “and the vendors were still working the bugs out of their equipment, so we didn’t get top performance at first.”

Devastating Attrition

CUs need to continue to advance quickly, some critics charge, because they are still falling behind, almost across the board. That’s the opinion of consultant Richard K. Crone, head of Crone Consulting LLC, San Carlos, Calif. Mobile remote deposit capture is a glaring example, he says.

“When USAA introduced it, Chase promoted it heavily, and every time they ran their ad, they opened 10,000 new accounts, mostly for millennials, mostly coming from credit unions,” he reports, noting that, at the height of the Chase promotion in 2014, about 94 percent of CUs still did not offer the service.

“That caused the single biggest attrition event in financial institution history,” he asserts. “After fees, mobile is the most cited reason people change financial institutions (according to a 2013 AlixPartners study). CUs lost a big chunk of their youngest members, and it won’t be easy to get them back. It was a devastating blow.”

The challenge is not changing tactics but culture, and here directors who understand technology and how the popular culture is embracing mobile and digital technology can help. They can suggest consultants. They can advocate forward-looking staffing practices. In some cases, they can change top management.

In the end, look to your strategic plan to determine how fast you should follow, Wallace insists. “If your strategy is to build market share and attract younger members, you need to be a fast follower,” he explains. The next biggest factor should be your risk tolerance and your willingness and capacity to support failure, he says. Both are fundamental, strategic foundations for decision-making. Only then should staff put tactical considerations—such as a price break, your competitors’ marketing strategy, a sales pitch from your IT vendor, presentations from a trade show—into play.

Richard H. Gamble is a freelance writer based in Colorado.