SAN DIEGO-The time is now to start building the credit union of the future, John Lass advised, because the industry is at a strategic inflection point.
Lass, SVP of strategy for CUNA Mutual Group, said strategic inflection point is one term for a major shift in an industry's competitive dynamic. Other terms include strategic crossroads, tipping point and critical juncture.
"The meaning of all of these is the same: the old way of doing business must give way to the new in order to survive, and decisions have to be made to determine where a business goes forward," he said. "The future of the credit union system will look different from the past. The way we deliver our services will evolve and improve."
A strategic inflection point can be brought on by disruptive innovation, Lass continued. He pointed to the example of using ACH to clear items versus physical check processing, which he noted was a new way of doing business that changed the way everyone in financial services competes.
"It is not a question of whether physical checks are going to die, but when," he said. "Another example is digital photography versus film. Eastman Kodak actually invented the first digital camera, but it could not turn the ship fast enough to avoid the iceberg and now the company is bankrupt."
Avoiding An 8-Track Future
The music industry experienced a series of inflection points in recent decades, Lass noted, as compact discs killed sales of vinyl records, then iPods and their digital kin crushed CDs. In each of these inflection points, the decisions record companies and device manufacturers made affected everything that followed for years to come.
It is not easy to tell when an industry is at a crossroads, Lass cautioned. Sometimes just one factor changing can cause major disruption.
"In just four decades music has gone from LPs and 8-tracks to tapes to CDs to digital today," he said. "Digital made CDs obsolete almost overnight. People are listening to music today, but revenue has fallen dramatically. Since 2003 most music stores have closed. Tower Records and Musicland went bankrupt, while billions of songs traded illegally each month. Record companies did not recognize change in times."
Moreover, today, after just two-and-a-half years, Amazon is selling more e-books than physical books. Amazon does regional print-on-demand, a business model Lass noted is far more efficient than printing mass quantities of books and shipping them across the country.
"What can credit unions learn from these examples? In each case the primary product or content could be digitized," Lass said. "Can money be digitized? Of course. It is important to know what your credit union does that cannot be digitized."
Lass said the answer is CUs do a lot, but he warned anything that can be digitized carries a risk.
Why Independent Stores Are Perking
Starbucks grew rapidly from 2000 to 2008: going from 2,000 stores to nearly 12,000. But the real lesson, said Lass, isn't Starbucks growth but the fact there are now more independent coffee shops than ever before-the same shops thought to be an endangered species.
"What happened is Starbucks raised the price umbrella on a cup of coffee, creating a renaissance," he said. "Credit unions have to ask themselves, do we want to be like Eastman Kodak, or like an independent coffee seller that is thriving?"
To determine if the CU system at a strategic inflection point, Lass said an examination is needed of its existing competitors, potential competitors and the members/bank customers it wants to attract.
Good news on the competition: many competitors failed to survive the recent recession. But many remain, Lass warned. In 2012 Target offers debit and credit cards, there is a substantial threat from PayPal, the ISIS mobile wallet, and Apple and Google mobile wallets. In addition, AMEX now has pre-paid debit, Mutual of Omaha Bank is expanding, and after being thwarted in the U.S., Walmart started a bank in Mexico.
One more major competitor is USAA Bank, which Lass described as having a "powerful affinity model" for military people and families. USAA is "very efficient" as 87% of its inbound transactions are self-service.
"Over next three years adoption of mobile banking will continue to surpass online banking," he said. "Branch banking usage will continue to decline. We cannot abandon our branches, but we must change the model. Simply staying with the old branch delivery model is not going to work. The economics are going to eat that credit union alive."
So how do CUs manage through a strategic inflection point? According to Lass one very important strategy is: don't panic. Another: don't be complacent.
"Doing nothing is not an option," he said. "What credit unions need to do is keep evaluating their existing strategies to make sure they are still viable today. One year ago, having a mobile app was a nice differentiator. Today, it puts a credit union right in the middle of the pack. But by next year, not having one will be bad. It is the same with doing mobile check deposit via a smart phone. The most important thing is delivering greater value to members."
CUs also must decide what not to do. Lass quoted noted military historian Von Clausewitz, who said, "He who defends all borders defends none."
Leveraging Cooperative Principles
CUs practice cooperative principles, but Lass questioned how many of their members understand these principles or appreciate them. The problem? CUs have not educated the members.
"Do not lose sight of what separates credit unions from banks," he counseled. "These principles are a powerful competitive advantage credit unions offer. In addition, there are strategy principles credit unions can leverage, such as cost, service level and product quality."
While every individual CU needs to decide if the industry is at a strategic inflection point, Lass said credit unions can leverage the cooperative model as a competitive advantage while banks cannot.
"Credit unions have the ability to focus on the community and have transparency," he said. "There is an opportunity to combine competitive principles with cooperative principles."