Credit Unions Face Tough Tech Choice: Pay Up or Fall Behind
By Ken McCarthy, Manager of Marketing Communications, Tyfone
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Perhaps the largest challenge facing credit unions today is the financial investment that is required to meet members’ digital demands and effectively compete with big banks and other financial institutions.
“It isn’t cheap, but it’s a cost of doing business, and tough resource allocation discussions need to take place,” said Shane London, President and CEO of Deseret First Credit Union in West Valley City, Utah.
The issue of credit unions — especially those on the smaller end of the asset spectrum — finding ways to provide user-friendly digital experiences without disrupting their current systems and/or breaking the budget was the topic of a recent article from McKinsey & Company.
McKinsey, a global management consulting firm, spotlighted the need for credit unions to get their digital houses in order or risk becoming irrelevant or, worse, being merged out of existence.
Handling Tech Spend at Banks vs. Credit Unions
Jim Adkins, managing partner for the consultant Artisan Advisors, told Tyfone some of the comparisons made in the McKinsey article may not be appropriate, as the story in a few spots compares credit unions to regional banks.
“A more accurate comparison would be [comparing] community-oriented credit unions to community banks — and of course big credit unions to big banks,” Adkins said. “For credit unions to close the gap with its competition, whether banks or bigger credit unions, there will need to be consolidation at the lower end of the credit union space to generate the economies of scale required as well as to attract the tech and marketing talent to effectively compete.”
Small-to-midsized credit unions are facing the same system and tech issues as small community banks, Adkins said. The non-merger solutions will include money and talent, both to set up the technology and to continue to drive the technology.
London from the $1.2 billion-asset Deseret First told Tyfone he believes DFCU is in “relatively good shape” in handling the digital transformation questions. He said the organization is not perfect, and there are still elements it needs to address and adapt.
“It has required solid third-party vendor platforms combined with some in-house development, but overall we’re able to effectively compete in the digital space,” London said.
He added that credit unions will have to evaluate and determine the resources available and then create a prioritization of where to put the funds for their individual shops.
“In the end, many will have some recognizable deficiencies but hopefully will be able to allocate to the most pressing issues,” he said.
Dig deeper:
- Will Fintechs Overtake Banks? Five Lessons from Fintech-Bank Mergers
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- Four Overlooked Questions in Vendor Selection That Can Doom the Relationship
How to Know Which Partners to Choose
These issues and others often lead small credit unions to be extremely thoughtful when picking their digital banking partners.
The $129 million-asset Caro Federal Credit Union in Columbia, South Carolina, for instance, recently chose Tyfone and its nFinia platform for its 7,400 members.
“With members across the U.S. as well as countries across the world, we needed a solution that could enable us to be at the forefront of technology and would expand our members’ financial capabilities from wherever they are located,” said Caro CEO Anne Shivers.
Tim Scholten, founder and president of the credit union and community bank consultancy Visible Progress, told Tyfone the McKinsey article sends a strong message to credit unions: Evolve or die.
With that said, what actions can credit unions take when resources are limited?
Scholtren said engaging their core systems and ancillary providers is a good jumping off point.
“Ask them for help financially and with implementing new technologies. Have them help ensure you are leveraging all that you can from your current systems,” Scholten said.
In many instances, credit unions are using less than 50% of the real capabilities of the systems they purchase, he said. The focus is to get the system up as opposed to maximizing its use.
“What they already own may be more capable than they think,” he said.
Get Leadership on Board Early
Also, Scholten said credit unions should require their leadership team to open an account and apply for a loan digitally and then compare it to strong digital competitors.
“Bankers don’t often eat their own cooking, so they never know if their capabilities are really that competitive or not,” Scholten said.
John Buckley Jr., President and CEO of Gerber Federal Credit Union in Fremont, Michigan, told Tyfone that McKinsey talks about the industry using summary data from all credit unions rolled up into one dataset.
But the experience of the $244 million-asset Gerber FCU is more akin to the lifetime-value marketing example McKinsey uses.
“We have excellent primary financial institution percentages compared to the whole financial services industry, as well as digital adoption, penetration and usage,” Buckley said. “Our plastic cards are used more often per month than peers by a significant percentage.”
Buckley believes the message to credit unions is to be relevant to their own memberships and worry less about being featured in the next article in Forbes.
“Our members are not going to be in their current financial situation for the rest of their lives. Their situation will change, and we will be able to walk beside them throughout those changes. The key is to become trusted enough in the early years so that the member stays with you when their circumstances improve,” he said.
