Beware the Box

Oh, that ubiquitous box. We’re often told to think beyond the confines of traditional customs and practices. But when it comes to forging a strategy for your credit union, experts say, cogitation’s not enough.

Directors also need to carefully look outside the box–because if we’re only aware of what’s happening inside the financial sector, we’ll soon find ourselves crushed by other kinds of boxes we never saw coming—from markets as diverse as ride-sharing services and smartphone payment systems.

Directors must take a fresh, close look at their planning, and understand how challenges that at first glance seem like same-old, same-old are actually heading for credit unions in new and different ways, consultants say.

“When it comes to crafting strategy, directors need to start looking much more professionally at what strategy really is,” says John Oliver, president of Laurel Management Systems, Palm Springs, Calif.

“When I talk to directors, they often say, ‘We told the CEO that our strategy is growth,’” he says. “‘Growth’ is not a strategy. It might be a result, but it is not a strategy. Strategy isn’t numbers, isn’t budgets—it’s ideas. Strategy is just a process. We are a process-driven sector. It’s extremely hard work, and it takes huge amounts of self-questioning.”

Too many CU boards have turned too far inward because of recent industry challenges, experts say.

Directors need to be monitoring the external environment,” says Jarrad Roeder, senior consultant at Decision Strategies International, based in London and Conshohocken, Pa. “Instead, they tend to focus internally on what’s right in front of them.”

Looking Outside

The consensus is that credit unions must take into account mold-breaking companies both in and outside the financial field, from “sharing economy” players like ride-sharing firm Uber and home-sharing network Airbnb, to Lending Club and Venmo, the peer-to-peer payments system.

Just as important as what these companies are offering is how they are offering it, how they avoid regulations, how they establish relationships–and how credit unions should deal with the far-flung expectations these trend-setters create.

“Directors need to think, ‘What can we do to serve a need or desire in our marketplace?’” says Oliver. “‘If we build it, they will come’ doesn’t work anymore. You have to turn strategy on its head from ‘What do we want it to be?’ to ‘What does the marketplace want of us?’”

For  years, the financial institution business model was very successful and virtually unassailable. “We became complacent,” he says.

But times have changed drastically. Today’s disruption to the financial sector’s modus operandi is coming from non-traditional models that pick off a business line from companies like credit unions, rather than going after their entire business.

“We can’t be arrogant enough to think it can’t happen to us,” Oliver says. “It is happening to us.”

It isn’t only credit unions that have ignored non-traditional but serious risks from the outside. “Microsoft wouldn’t have thought Amazon would be a threat,” Roeder points out, yet what was thought of as an Internet bookseller has turned into the biggest provider of cloud storage.

Indeed, credit unions must examine the marketplace from every angle. For instance, pre-loaded debit cards divert money. So do pre-loaded cards from frequently visited retailers–and they carry more funds than you might think, both in terms of being depleted and reloaded for actual use and just being casually tucked away somewhere by consumers. How many gift cards do you have sitting in a drawer, with the original amount or an unknown balance sitting on them? Even if it’s just one, multiply that by a few households, and the funds add up.

“Money that would have been in credit unions is sitting on pre-loaded cards,” Oliver points out.

Non-traditional companies are also targeting consumer and small business loans. Web companies are moving in on credit unions’ territory by making vast numbers of new loans every month. “We ignore this at our peril,” Oliver warns.

Know Thy Customer Even Better

Making credit unions even more vulnerable is the fact that while they have traditionally prided themselves on their close relationships with their members, Web companies and their partners know much, much more about their customers. For example, Square Capital uses data collected from stores that use its Square Register.

And it goes far beyond companies offering financial services. “Even if I’m a member of a credit union for a significant length of time, Amazon knows more about me (than my credit union does),” Roeder points out.

Intimacy is increasingly important, especially for higher-value credit-union members, says Peter Sheahan, founder and CEO of ChangeLabs. One way for CUs to respond is to get involved in wealth management and financial advice for every member. 

There are practical difficulties holding CUs back. Scarcity of resources is a real headache. New regulations and the burden of compliance have been a big part of the reason directors have been looking inward. The huge costs are a pressing concern even for global banks, which have the scale to handle it, points out Roeder, so it’s not surprising CUs are scrambling to cope.

In fact, scale is perhaps the biggest problem CUs will face in developing worthwhile strategies for the future. “Many credit unions don’t even have the scale of regional banks,” Roeder says, adding that CUs need collaboration on a system level. “Small players can’t make it,” he says. “Credit unions need to invest in collaboration to at least stay in the game. They need to find ways to leverage their combined scale.”

While board members may tell themselves that CUs offer more intimacy, mega-bank Wells Fargo now boasts 6.8 products per customer. “So which has the more intimate relationship?” Roeder asks.

Directors need to realize that it’s just as important to fundamentally change how they do things as it is to stay true to the credit union legacy, Sheahan says. He, too, touts collaboration, including consolidation at the back end. At the same time, directors should be asking what their CU needs to do to attract new members—as in, “Where’s the non-member voice?”

The Impact of Payments

Then there’s the ever-changing world of payments, clearly a force when CUs consider strategy. The obvious big deal of late has been Apple Pay and its upcoming competitors for non-Apple smartphones. 

“Apple Pay’s impact is going to be enormous,” Oliver predicts.  The early results back him up: On June 8, Apple announced new credit card and retail partners, four times growth since launch for Apple Pay and the renaming of its iOS Passbook app to Wallet. Forrester forecasts that mobile payments will top $142 billion by 2019, up from $67 billion this year.

$60.5 billion Navy Federal Credit Union joined the digital party as one of Apple Pay’s initial partners, along with such heavy-hitters as Bank of America, Wells Fargo and JP Morgan Chase. Navy FCU touted both the convenience and security of the mobile wallet. And it’s also on the list for Android Pay, which will replace Google Wallet sometime this year.

And don’t forget that in October 2015, most card issuers will switch over to EMV (chip) cards. Merchants will be looking at purchasing new point-of-sale devices to handle these cards, as well as near-field communications (wave) transactions. (What payment trends will prevail? Read The Future of Payments: Scenarios for Credit Unions 2018.)

Technology Tango

CUs must look at all these developments in payment systems both in terms of competition and technology. But the success of companies like Uber and Airbnb may have greater impact on credit union strategy, despite the fact they are not part of the financial industry, experts warn.

“More broadly, technology affects customer expectations,” says Roeder. Consumers come to expect instant gratification, easy-to-use solutions, and low-cost pricing. The customer doesn’t see any distinction between their interactions with a CU and, say, Uber. Rather, they wonder why you aren’t like the companies they love.

Directors should note the current television ad campaign for Airbnb. Although famous for offering low-cost accommodations, Airbnb now uses the warm-and-fuzzy “Never a stranger” theme and the tag line, “Thank you for sharing your life.” Sounds pretty CU-like, doesn’t it?

Board Support is Key

The experts agree that CU management largely is poised to make the right moves. What’s needed now is board support.

“Don’t get bogged down in the tactical,” Oliver urges, recommending the book Good Strategy, Bad Strategy by Richard Rumelt.

“Build a system of learning inside the credit union,” Roeder says. “Pay attention to the weak signals in the external environment and set up a system to interpret them. You don’t want to end up saying, ‘I should have seen this.’ With all the uncertainty out there, management teams need to build optionality,” meaning the ability to respond in more than one way, he points out .

“Management is starting to get it,” says Sheahan. “Boards need to give CEOs ‘air cover’ to lead this transformation.”

Charlene Komar Storey is a veteran credit union writer based in New Jersey.