Can credit unions become disruptors?

Potential disruptors in the financial sector are a cause of concern even for big players like GP Morgan, whose chair warned that Silicon Valley start-ups would bring new challenges to traditional financial players. In a special breakout session at the World Credit Union Conference in Denver, Karim Habib, director of lending, CUNA Mutual Group, and Patrick McElhenie, director, product management – LDP at CUNA Mutual Group, explained how credit unions could respond to new market entrants.

“It’s important to talk about disruptive innovation,” said Mr McElhenie. “Things are moving fast. The more you understand, the better you’ll be able to take decisions.”

There are two types of disruptive innovation, he explained. The first one enables new entrants to target consumers at the bottom of the market and climb their way up. This happened in the automotive industry in the 1920a, when the Duisenberg, an expensive car at the time, faced competition from Ford, which offered an affordable alternative, disrupting the whole manufacturing market. In the 1970s, Ford was itself disrupted by the very inexpensive Honda Civic, came in at the bottom of market and worked its way up. Later, the Honda Accord was in turn disrupted by the Kia Optima.

“That’s one way of disruption. Now we also have big bang disruption, which is an innovation that from moment it enters the market it is better and cheaper than the products and services it competes with. It uses new technology in the internet, cloud-based computers and computing devices, competing immediately rather than starting at bottom and working their way up,” explained Mr McElhenie.

An important moment in this process is crossing the chasm, moving from early adopters to early majority. “They need to cross that chasm as innovators,” he said.

“Apple tablets crossed chasm pretty quickly. Product adoption for big bang disruption happens a lot faster.”

He also highlighted how it is important for board members or leaders of credit unions to decide on whether to adopt innovations early on. “You don’t have much time to test out and see how technology works. The big bang technology disruption means you don’t have much time – by the time you make decisions your competitor has already adopted it. The decision time you have now is compressed. The competition is becoming hot.”

Successful innovation does not necessarily have to be technological innovation. It can also mean business innovation, added Mr McElhenie.

Many players already are trying to disrupt the financial retail industry, including Google, Walmart, Costco, Moven and PayPal. The latter is considering using bluetooth technology to enable customers that have the PayPal app to pay for products by verbal agreement. When they walk into a store, the app sends a message at the point of sale display and someone behind the register can greet the customer by first name.

“They know you’re in the store, you can take merchandise to the cash register, then all you need to do is give verbal confirmation that this is the product you want – and that’s it. This has not crossed the chasm yet. It may never do.

“Every financial service disruption company is based on convenience, eliminate the pressure of applying for loans, or the need to check credit scores, and the ease of transaction. How easy are you making it for your members to get a loan?”

Apple Pay is one potential disruptor. “[Apple] gets access to so many consumers through iTunes,” said Mr McElhenie. “They have access to more people than any other organisation around”

He also gave the example of Kabbage, a small business lender online, that guarantees they will give an answer on loans up to $100,000 within 7 minutes. “They don’t look at credit support, they look at you, your social profiles, LinkedIn – that’s how they are underwriting loans.

“These disruptors are starting to form partnerships. These companies are very clear about target markets – millennials. This is the group most likely to use mobile technology, and are the largest population cohort in the US’ history. A lot of millennials – 90% – say their phones never leave their sides.”

How to fight disruption?

Credit unions can fight disruption by making sure they are the disruptors moving forward, said Karim Habib. His tips for credit unions are:

1. Be alert: you need to research these disruptors and stay in front of them. You need to know what these disruptors are doing, how your members are using these them and how you can counteract.
2. Build an offensive strategy: find ways to meet the disruptor in the market place – being a disruptor does not always involve technology.
3. Use a defensive strategy to buy time: you need to come up with defensive strategy to have more time to do research and involve in things that are going to make you a disruptor.
4. Pay attention to the clock: disruption is happening fast and consumers are taking on new services rapidly. You need to watch the clock as consumers are adopting new technologies very quickly.

“If you are not optimised for mobile, you are losing members and sales,” he added. “Go to your credit union website right now. Is your website easy to navigate? First impressions are the most important – if it’s not easy to navigate through and easy for them to do banking online, you are losing members.”

According to Mr Habib, 57% of mobile users will abandon a website if it takes more than three seconds to load.

“As we transform to more channels, we can lose sight of the window of opportunity that we have with members to have that face interaction with them. 88% of American adults say they need a physical branch location to go to as well – so although more and more members want the convenience, 88% still want to do business in physical branch – that’s your window of opportunity to interact with those members.”

 He also advised credit union members to distinguish between sustaining and disruptive technologies, being able to adapt quickly based on research and what is coming on the market place.

“What can you do to remain relevant to millennials?” he asked delegates. Kodak is a good example, he said. Once a giant in the marketplace, they invented the first digital camera in 1974, but refused to bring it to the market for fear it would impact on the sale of their other products. This happened because they did not see themselves as potential disruptors.

Mr Habib encouraged credit union leaders to analyse whether they were prepared to defend their credit union’s position versus a disruptive bank and to examine whether their value proposition would still resonate with members ten years from now.