FT. LAUDERDALE, Fla.–If it’s not here already, the “Zombie Apocalypse” is coming for credit unions, which are being unbundled by often-unrecognized competitors that are eating the pieces.
The result: credit unions that are unaware they have joined the walking dead, according to one person who believes CUs can avoid having their brains eaten by using their brains instead, especially in one discipline: analytics.
“My concern for this industry is we should have been doing this two years ago,” said John Best.
In fast-paced but far-reaching comments, Best, the former chief technology officer for the CUSO Wescom Resources Group who now heads Best Innovation Group out of Colorado Springs, Colo., was often light-hearted in his presentation at the CUNA Lending Council meeting in using the zombie theme, but also deadly serious about his concerns over what could be in the future for many CUs.
What is the apocalypse for credit unions and what are its signs? According to Best:
- Interchange compression. “I didn’t say disappearing interchange. But it is going to compress.”
- Cannibalization.
- Digitalization.
- Mobilization.
- Disintermediation.
What makes that apocalypse so frightening, said Best, is that it occurs over time and often credit unions don’t realize what’s happening, until…
“Interchange is suffering from price compression,” said Best. “Durbin took out a big bite. Continued competition from the big brands is leading to lower interchange rates in the under-$10 billion (in assets) crowd as the big brands compete for market share of transactions. They don’t earn on interchange, but they gorge on fees—both on merchants and issuers.”
Alternative payments are clearly cheaper, especially ACH, said Best. “Merchants understand this and are incented by price to move transitions to chapter channels. Even Starbucks figured out that transaction fees on the periodic top-up are cheaper than individual transaction fees for every cup of coffee,” observed Best.
Credit unions love to talk about Uber and how it has “disrupted” the taxi business, but Best said CUs are going to be among Uber’s victims, too, as soon as the company and its drivers get tired of paying fees on credit cards and just convert everyone to ACH. But the real lesson in Uber can also be seen in iTunes, Amazon, and similar providers, said Best.
“I will tell you that while bill pay was the sticky product, the new sticky product is all these digital transactions,” said Best. “If you’re going to start seeing interchange disappearing, it’s time to start hoarding. In the zombie apocalypse, it’s the hoarders who win.”
Other zombies for CUs, according to Best:
- Overreaching regulatory scrutiny
- P2P lending will get higher scrutiny from the CFPB
- FICO alone won’t be enough
Death From 6,000 Cuts
Zombies eat their victims in pieces, and similarly credit unions face death from “6,000 cuts,” according to Best—cuts that come in the form of a variety of digital platforms and fintech start-ups that offer various pieces of the traditional CU menu. Those providers include acorns.com, billguard.com, planwise.com, kabbage.com, currencycloud.com, stripe.com, and others.
“They all realize we have all this regulatory scrutiny,” said Best. “They don’t want to be us; nobody wants to be us. Nobody is looking over their shoulders. Acorn rounds up transactions and puts it into savings account. You have no relationship with them, but they are using your data. These guys want to integrate with you but don’t understand anything about you. Credit unions look like the Kiwanis Club to them.”
Competitors such as P2P lenders Prosper and Lending Club are helping to quietly “disintermediate credit unions,” said Best. Just one week prior to his remarks, the CEO of Prosper told credit unions in California his company is seeking to partner with CUs, as CUToday.info reported here.
In the post-zombie apocalypse world, Best said credit unions will only survive by realizing:
- You wont’ have a house. You must be mobile transient.
- You need to make a little go a long way.
- You must fight for your turf. There is no more law.
- You must identify risk quickly, not avoid risk. “Notice I did not say, ‘You must avoid risk at all costs.’ You know what we’re doing in credit unions? Trying to engineer the risk out of every decision. The definition of innovation is how many times you have failed. Edison said, ‘I didn’t find a way to make a light bulb, I found 10,000 ways how not to make one.’ In credit unions if you fail you’re out.”
- You must be high speed, low drag.
- You have to travel light and jettison anything you don’t need.
- You can no longer take a bite of the elephant and then you throw away the rest of the elephant. “Do you know what I call that? Indirect lending.”
What To Throw Overboard
In a world of zombies it’s important to travel lightly, and to illustrate his point Best said he knows of one credit union that makes calls to members who make requests related to loan payoffs. “The problem is they aren’t fast enough—there’s a 10-minute window and it’s gone.”
Another item Best recommends throwing overboard is data centers. “If it’s not benefitting you and the member experience, get rid of it. Travel light.”
Survivors are going to include a lot of new titles, said Best, including chief analytics officers, programmers, statistical and optimization engineers, data scientists, behaviorists, user experience specialists, and scrum masters.
“Who will survive? Those who are well stocked, know how to hunt, can collaborate, who are insightful, know how to fight, and those who are willing to break the status quo,” said Best.
As those job titles make clear, Best believes analytics are going to be key for every credit union when it comes to new engagements, maxing out profitability (“It’s not what you perceive, but what is real”); and creating cost-effective services, new sources of income, deeper relationships, digital relationships, and more insights.
“I got a loan recently from a credit union and I had to occasionally go to the branch. Why couldn’t I just Skype and interact with you that way?”
Best said a recent survey by PWC suggested that global banks are poised to gain the most from analytics, while credit unions have most to lose because they haven’t embraced it.
“You don’t need more data. You are overflowing with data,” said Best. “People would die to get their hands on the data you have. You have data around mortgages, credit cards, mobile statistics and more. How many of you sell your loans but keep the servicing? You’re giving your data away.”
What Is Slowing You Down
Creating drag on credit unions, he said, is:
- Too much data and the fact no one knows where everything is
- Takes too long to analyze large data sets
- Shortage of people who have the skills to do it
- Analytics is viewed as a single product by management and not a capability or strategic partnership.
“Our number-one issue is that digital is not a product, it’s a discipline. Analytics is not a product, it’s a discipline,” said Best. “Why did the Titanic sink? Not because they didn’t see the iceberg. They saw the iceberg, they didn’t turn.”
What are the big banks doing in analytics driven products and services? According to Best:
- PNC Bank. Audience Management Platform. “PNC is doing something very interesting that is the Holy Grail for everyone. They know who is logging into home banking and who is logging into the website. Now they can target market to those using the same browser. They track visitor data on their marketing website. They marry visitor data and financial investment information and external data sources, such as online shopping habits. The goal: identify a more desirable demographic.”
- US Bank. Payment Analytics. “This is one area where I think credit unions do pretty well. US Bank auto reviews all card misuse and out of policy spending to streamline audit and better better control process.”
- Wells Fargo. Big data lab. Wells Fargo is seeking to monetize data and has a $100-million budget with a team of 600 people doing just that. “The sole purpose: to better inform the front line so they know who the customers are.”
- Bank of America and Chase. Location-Aware Predictive Targeting that offers discounts based on location, including data-driven consumer loans.
“I will tell you that credit unions need to be ready to talk to merchants,” said Best. “We are perfectly positioned with merchants. They don’t view us like they view the banks. Turn your credit union into a zombie slayer. You are small enough and nimble enough to do this, but you must turn the ship.”