Digital transformation and help from fintech will help credit unions provide people-first service in a post-pandemic future.
COVID-19 has forever changed the way we do business in nearly every industry, financial services included. In the second session of Directors & Dialogue December, hosted by CUES, finance and fintech expert Chris Skinner, chair of the European networking forum The Financial Services Club and chair of Nordic Finance Innovation, discussed how credit unions can adapt and grow digital strategy to be successful in a post-pandemic world without the big budgets of the mega banks.
A K-Shaped Recovery
Though politicians and business leaders have lamented the unexpectedness of the coronavirus pandemic, Skinner dismisses this as a sign of poor planning. “It was completely predictable. If you saw the 2012 movie Contagion with Jude Law, we all knew it was coming one day,” he said. “It’s just that we didn’t plan for it.”
Or at least, we didn’t plan for it the right way. Skinner noted that banks developing their business continuity plans focused too much on the physical aspect of operations. “They should have had a disaster recovery plan for if people had no office to go to, whereas their physical disaster recovery plan was to have another office.”
But not all businesses are stuck in this mindset. For this reason, Skinner observed that the global economy isn’t headed for a V-, U- or W-shaped recovery—instead, he suggested that the recovery will be K-shaped: “The upside of the K is anything that’s digital; the downside of the K is anything that’s physical.”
Businesses that rely on in-person interactions, such as hospitality, entertainment and restaurants, are in trouble, he said. “Meanwhile, Amazon and the tech companies—Apple and Facebook and Alphabet/Google—have all been doing fantastic business. Their stocks have risen massively. PayPal this year is worth more than Bank of America. Square is worth more than Goldman Sachs.
“Sales in stores went through the floor; sales online went through the ceiling.”
A Parent/Child Relationship
So how can credit unions ensure they’re included in and supporting the upper part of the K? The perennial industry catch-phrase: digital transformation. But Skinner pointed out that it has to be done right to survive and grow.
“It’s not about being the most intelligent or the strongest or the fastest to survive. It’s being the most adaptable to change,” he said, paraphrasing Charles Darwin. “I’ve been incredibly annoyed with credit union leaders and bank leaders who just don’t want to change. … They don’t understand artificial intelligence, block chain and APIs and open banking. This is the critical thing in 2020.”
A significant obstacle in becoming “digital at the core,” rather than simply trying to lay technology on top of existing processes, is a lack of digital expertise and understanding within senior leadership. “Do you understand apps, APIs, analytics—front, middle, back office—based on platforms of the internet? Because if you don’t, get someone who does tomorrow.”
It’s also vital to understand data. “Data is actually growing. It’s huge. It’s like air. It’s what we breathe. And the more oxygen you have in your lungs, the better you breathe. And the cleaner the oxygen you have in your lungs, the better you breathe. So data is air. You need to sort out your data,” Skinner said.
Working with fintechs is a way to gain access to such expertise, but “there’s a friction here,” noted Skinner.
“The relationship between ‘fin’ and ‘tech’ for me is like parent and child: Fin is the parent; tech is the child,” he said. The financial services industry is all about security, stability and resilience, while tech is all about breaking business models and breaking the mold. “It's the child that wants to spray on the walls and get crayons on the floor. It wants to kick everything and make the world different. Which they will—but they have to work together.
“It's a really difficult relationship because it has to be equitable—and how can you be equitable with a child?”
Credit unions should be in the mindset of mentoring and nurturing the fintechs they partner with because technology is the future.
Stripe, an online payments processing fintech, is the poster child of such a future. The founders secured seed funding for their venture in 2010 based on just seven lines of code. The company was worth almost $10 billion five years after its 2011 launch because it made it simple for merchants and businesses like an Airbnb to accept many forms of payment online.
Stripe recently announced two new services, Stripe Treasury and Stripe Capital, connecting its code to companies that want to do business online with traditional banks.
“They’re becoming the Amazon of financial services on the internet,” Skinner noted. “They’re becoming the platform of platforms, connecting the merchants and the customers of those merchants with the financial institutions and the customers of those financial institutions through a real-time simple interface platform that everybody loves because the code is beautiful.
“What you’ll find with Stripe in another decade is maybe that they’re bigger than Amazon,” Skinner added. “But they’ll never become a bank, because they don’t want to do banking and deposits and credit union activity. What they want to do is connect credit union activity and checking accounts with merchants and consumers.”
This is the key to an equitable, nurturing relationship between financial institutions and fintech—credit unions can invest and provide financial expertise to the technology providers capable of improving the consumer experience without diminishing the value of what each organization does best.
Opportunity for Credit Unions
Skinner concluded the session with a reminder to credit unions to focus their strategies on what matters most.
“During the late 2010s, there was a big movement toward talking about ‘what’s the purpose of an organization?’” he said. Business began to shift toward a mindset of delivering value to stakeholders rather than delivering profit to shareholders and to be “socially useful.”
“Playing to the heart, not just to the wallet,” is the big opportunity for credit unions, Skinner suggested. “Gen Z and millennials—young people—want to see finance connecting to society and being socially useful in that intermediation of trust between government, society and the economy.”
So even while you gather the expertise and partner with fintechs on tackling true digital transformation, do it with your purpose in mind. Make digital a key point of your people-helping-people strategy rather than the goal.
“As a credit union, you probably worry about the big tech, the fintech, the big bank, the digital world, the internet—the challenges you have with dealing with all of this,” said Skinner. “You probably worry about the investment you have to make, the cost it's going to have, whether you can actually do it, whether you have the right talent, the right team.
“My answer to you is most fintech companies are starting with a dollar, with a bootstrap. I've dealt with a lot of banks that are credit union-sized that have pivoted and done really well in creating digital [institutions], and if you feel you don't know how to do that—you can do it. But even if you don't do it, remember your purpose. That's the most important thing. Stand for something.”
Danielle Dyer is an editor at CUES.