“Small Entity” Credit Unions Must Think FinTech

By Homer Fager 

During the twenty year span, from 1950 to the 70s, the US credit union movement experienced an expansive growth period. The 60s saw the movement pass the 20,000 number of credit unions, including state and federal institutions. US’s original credit union movement was founded to provide the middle class families a source of affordable credit to purchase items using installment payments from used automobiles to washing machines. The credit unions of the 60s was the first choice of financial assistance by post war Americans because commercial banks and savings institutions had limited interested in offering small installment loans.

The local community-employee based credit unions continued to grow until the institutional
changes of the 1980s. The 80s brought new technology to the industry from IBMs personal
computer to the introduction of the first credit union sponsored ATM. Another defining change of the period was when the National Credit Union Administration (NCUA) allowed the merging of “select employee groups” into existing credit unions thereby creating the model of the mega-credit unions, a defining moment to the “small entity” credit unions survival. These structural changes to the industry were the beginning of the decline of the “small entity” credit union.

Today, 30 plus years later, the “small entity” credit union segment of the industry still represent its largest segment at 80%, but its number has been reduced by over 60 percent since the 80s. The local community-employee based credit union, the “small entity” credit union, is definitely not a growth market segment. How should the local community-employee based credit unions address their declining status? One answer is do what they did in the 80s, accept current technology options. The “small entity” credit unions need to incorporate today’s financial technology in their business model.

“FinTech”, an aberration for financial technologies, is a 21st century disrupting technology model. Originally it represented technologies used on the back-end of traditional consumer and financial institutions. In the consumer digital engaged age “FinTech” has become a disruptive technology to the traditional financial services industry. “FinTech” is altering the financial services traditional workflow processes for banks and money management alike. The effect of “FinTech” disruption on the financial services is noted by the results of a recent survey published in January focused on “Big Data Business Impact: Achieving Business Results Through Innovation And Disruption”; when industry participants expressed the viewpoints “it’s transform or die”.

The “small entity” credit unions are facing a similar disruptive environment as that of traditional financial businesses, they must adapt to the needs of their digitally engaged members, meaning “transform or die”. However “small entity” credit unions cannot achieve this smart technology transformation without assistance. Individually they do not represent the “Economies of Scale” (market mass) required to afford the expense of going “FinTech”. “Economies of Scale” is generally defined as $300,000,000 and above for affordability of basic smart technologies.

The digital revolution is transforming the consumer and their use of the cell phone, today making a call is no longer the primary use of cell phones. An example of the “FinTech” revolution can be seen in the $13 trillion ATM market now being challenged by P-to-P and cell phone pay apps. Credit union members are no different than other consumers of banking services they expect banking to be as convenient as getting a rental car or having groceries delivered to their home by their local supermarket.

“Small entity” credit unions must join the global trend among financial institutions and deploy
technologies that allow them to provide cloud base financial services for their members. The
general consumer and credit union member’s behaviors have change radically since the 80s. The finance channels of yesterday are no longer accepted; instead the members want their banking services to be a part of their “now lifestyle”.

How does the “small entity” credit union respond to this shift in their members desire to be at the center of the process?

They need to employ new digital financial technologies compatible with digital tools such as mobile internet, smart devices, and machine interaction. When these technologies are integrated into the credit union’s core data system their operation will become intuitive and attractive to their digitally native members. Credit unions in partnership with their core date provider must address the 21st century emerging digital trends and implement technologies that optimize their existing investments, improve member information, provide security assurance, empower collaboration, and ensure regulatory compliance.

How can the “small entity” credit unions benefit from the “FinTech” revolution?

As noted previously core data providers need to integrate 21st century financial technologies within their core systems. The core must become the platform by which “small entity” credit unions gain access to the “FinTech” digital revolution. One option is for core data processors, those serving at least $300 million in aggregate credit union assets, to negotiate service partnerships with 3rd party financial service companies for the benefit of their client credit unions. Adoption of this roll as contractor of 3rd party financial service is in the best interest of the core data processors, without the “small entity” credit unions many core data processors would no longer exist today.

When core data processor integrates these 3rd party financial services into their proprietary core data system they open a cost-effective avenue for their clients to link into the digital age without the typical upfront expense. A further development of these 3rd party financial services would be for the core data processors to create a technology service ladder within their core data programs. One option for the suggested ladder concept could be the following 6 level structure.

Service Ladder Level 1 – Data Warehousing
Service Ladder Level 2 – Hosting w/ Regulatory Compliance
Service Ladder Level 3 – Mobile eBanking
Service Ladder Level 4 – Member Mobility Network
Service Ladder Level 5 – Customer Relationship Management
Service Ladder Level 6 – Business Banking

When a core data processor creates a technology service ladder its integration can be structured to be affordable to the smallest credit unions, those $100,000 in assets or less, thereby allowing to access to cloud data storage and regulatory compliance documentation as a minimum. Service ladders are an excellent process for allowing all credit unions, whether $100,000 or $100 million in assets, to elect a program of digital services to match their individual members needs.

In essence, both credit unions and core data provider’s survival is dependent on them
revolutionizing their processes, management functions, and member services through the
acceptance of innovative digital technologies. “Small entity” credit unions must improve their
member’s experience, create win-win products, and be competitive in the digital era such as
replacing brick and motor branches with eBanking systems. Core data providers must become a partner with their credit union clients in providing solutions in three key areas: core data platform digitalization, data security, and member services. The application of “FinTech” by the “small entity” credit unions must cover all phases of their business (front-end, middle, and back-end).

The consolidation trend which has been played out nationally over the last decade does not support the survival of the “small entity” credit unions. Survival of the “small entity” credit unions will only be possible when they can have access to the same 21st century financial technologies that allow the mega-credit unions to make it simple and easy for their members to conduct their daily business using smart devises. “Small entity” credit unions survival requires an “Economies of Scale” avenue, similar to that of mega-credit unions, to permit them to implementation of 21st century disrupting “FinTech” technology.

More About the Author:

Homer Fager, former president of core data processor FedComp Inc., small business owner and adviser, multi-million dollar Project Manager, providing him an extensive resume of experience in governance, risk and consulting work. He began his 40 year career as a Degreed Aerospace Engineer within major US Industrial companies. In his 30 plus years as a manager with listed and multinational Fortune companies he severed in various positions in industries including: automotive aftermarket, software systems, aircraft manufacturing, energy (including oil and gas), and electrical power production including co-generation.

During the last 10 years of his tender as a small business adviser, he handled over 100 individual assignments in North America. As an adviser he conducted and led many financial, operational and compliance audits in multinational companies in various industries including industrial services, precision engineering, property management, printing and publishing, retail, industrial manufacturing, trading, distribution, financial industry, software technology and marine businesses.

Email Address: homerfager@hotmail.com

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