BY ALEC HOLLIS AND MICHAEL ORAVETZ
As financial technology continues to evolve, the need for credit unions to remain competitive grows by the day.While the unknown is potentially frightening, adoption of financial technology solutions can be a successful way to enhance member experience and improve business.
Financial technology, or FinTech, is nothing new to depository institutions. While the buzzword “FinTech” may have recently become popular, financial technology has been on the minds of depositories for over 50 years. In fact, a 1962 Federal Reserve bulletin details the growing popularity of computer-aided automation and related 3rd party services at commercial banks. At the time, almost half of all banks surveyed reported planned or existing electronic accounting systems, in contrast to traditional, more laborious processes. “The more things change, the more they stay the same” the saying goes; today is no different as institutions seek to replace traditional processes with more customer-friendly, efficient ones.The EFMA, or European Financial Management Association, estimates there are nearly 12,000 FinTech companies worldwide comprising 18 segments of the financial industry. Until recently, smaller community banks and credit unions have been left out of the party, as many FinTech companies focused on large and regional banking partnerships.
Figure 1: The FinTech Universe
The benefits associated with technological innovation are vast, but many institutionsare not prepared to fully embrace the advantages. According to a 2017 KPMG survey of 160 institutions across the globe, only 46% of respondents believed their institution had a clear FinTech strategy in place, and 10% indicated that they had no strategy at all. Ultimately, institutions with a defined plan will be better prepared to separate themselves amongst the pack and stand to benefit now, and in the future.In many instances, these benefits are closely linked to one another – let’s examine.
Enhanced Member Experience
Perhaps the most intuitive improvement FinTech can provide is to member services.Whether it be through online or mobile banking enhancements such as electronic wallets or mobile payment solutions, credit unions must have the ability to meet the ever-changing needs of the member.
A digital presence is becoming important for lenders to adequately compete across all product categories. Unlimited access, service quality, and transparency are at the top of the priority list for many millennials, who like the idea of having several service channels.
Credit unions should prioritize around their members, rather than individual products or channels. Ease of use, convenience, and an overall good experience are very important, and they can help drive a competitive advantage.
Improved Cost Control
The value chain is rapidly changing for many institutions, including credit unions. Delivering services more cost effectively and improving back-office efficiency can reduce bloated cost structures and add to the bottom line.
Non-physical channels can help streamline and improve operations. Often a vast branch network is costly to maintain, whereas maintenance of online channels can be more cost effective.
Improving or expanding the institutions capabilities is an additional benefit commonly associated with the implementation of FinTech solutions. For example, online loan and deposit origination can allow credit unions to reach untapped markets and expand product lines.
- On the lending side, online portals can now efficiently sift through loan applications based on pre-arranged credit criteria, reducing underwriting costs and decision time. Deposit gathering functions can also be improved by increasing website traffic, allowing for more effective deposit targeting based on certain member specifications.
Risk and Strategy
While modernization can provide many benefits, the need to understand and manage the potential trade-offs should be incorporated into the credit union’s enterprise risk management plan. Below are issues to consider:
- Third-party Risk Management
- In the Fall 2017 Semi-annual Risk Prospective published by the Office of the Comptroller of the Currency (OCC), third party risk management remains top-of-mind. Depositories are becoming increasingly reliant on third party service providers to support key operations. Consolidation amongst providers within the financial services industry continues to worsen the problem.
- This means that an increasingly smaller group is providing critical operations,which could create concentrated points of failure and potentially create systemic risk within the financial services industry.
- Strategy and Integration
- As we’ve already touched on, many institutions, including credit unions, do not have a defined technology strategy. While there is not a proverbial “once size fits all” strategy, the following can help in assessing the need for direct investment or partnership:
- Strategic initiatives and objectives of the technology
- Understand current operations and business cycles
- Determine level of institution-wide adoption
Advancements in financial technology have allowed the industry to redefine “community”. No longer contingent on geography, members are now served across the country through a variety of channels. Such technology has helped enhance customer experience, reduce operational burden, and drive new capabilities, which ultimately leads to business expansion. However, technology is not risk free. Defining a technology strategy is very important; while there are many benefits of technology, a strategy is only as good as its implementation.