MADISON, Wis.–How can credit unions focus on the future and find fee income replacements and new revenue sources? A couple of experts said the answer lies less in specific product/service categories and much more in a credit union’s broader strategic approach.
During a webinar titled “Exploring New & Novel Ideas” hosted by Filene, it was agreed every credit union is “grappling” with the low-rate environment and the pressure on margins. The question is how can credit unions respond.
Offering their insights on that question and others were Joe Heck of Happy Money and Steve Gotz of Silicon Foundry. Happy Money is a behavioral science and tech company focused on finding consumers with the right aptitude to get out of debt and accelerate path from borrower to saver. Silicon Foundry is an advisory firm that works with companies and venture capitalists on their innovation strategies.
The conversation with Heck and Gotz was moderated by Erin Coleman of Filene.
Here’s a look at what was discussed:
Coleman: Do you think people are expecting a feeless experience moving forward, and how are CUs and banks strategizing about moving forward with fees?
Gotz: Overwhelmingly, people are voting with their wallets. They are showing they are willing to pay for quality experiences. What the tech world has shown is the consumer is willing to pay fees. I do think it puts the onus on the financial institution to get creative and come up with new ways to be relevant and support their customers beyond what their existing relationship is. If you can come up with those new experiences, people are willing to vote with their wallet.
Heck: I agree with Steve. I think it all boils down to differentiation; if you can provide some sort of differentiated experience the consumer is more than willing to pay for it. We see that across non-financial institutions. You see the emergence of fintechs like Chime that are delivering a digital-first brand with small differentiation, but they are able to charge for small pieces. The creativity must be matched with differentiation; it can’t just be differentiation of fees. That’s where most credit unions need to think about the value of what they are providing. Are they just out there chasing the legacy banks?
Coleman: How do you believe credit unions are responding?
Heck: A benefit and pitfall of being in this industry for this long is the march for 10 straight years is the same, and I’m not sure we’ve done anything all that different. The question is are we going to embrace a fundamental shift. The challenge with fees is how are you going to differentiate with that? How tight and aligned in your organization and your strategy and how focused is your differentiation? The way I test it is to ask, Who else can say ‘Me, too.’ Leadership teams have to come out and ask how are we going to do this different. That change is going to be hard; it’s going to blow up a lot of legacy revenues. But in my experience across all of fintech there is always a resistance when you have a nice legacy business, and it’s even harder in an 80-year-old-plus industry.
Gotz: One thing I will add is it’s more existential now. Ten years ago there wasn’t as much risk of disruption from the larger tech industry. Fast forward 10 years and all the large technology platforms are thinking about how they can embed financial services in their platforms. It’s an existential risk, but also an opportunity to lean into the kinds of experiences being invented online and create more human, more personal experiences. It’s what credit unions and community banks have always led with, the humanization. But it is a crisis we are heading up to and I think that requires a more active response.
Heck: I think the conversations we have been having the last 10 years are the same, and we are on the precipice of great change. Coming out of COVID I don’t think the world will be the same again. You have Chase investing $11 billion in technology annually and they have 50,000 technologists. If you’re going to go out and compete with them with the same digital tools, you are not going to win that. The movement must come to look at what are we really going to do different. To this point what we’ve done is chase someone with a lot more money than us.
Coleman: What about subscription models in the FI space?
Heck: I do think there’s a place for it, but you have to be very, very careful. You see this with some of the neo-banks, typically because they don’t do lending and they are often plain and simple. Those that do align value with the subscription have found reasonable success with that. But the differentiation has to be substantial.
Gotz: I think there is appetite there, as there is appetite for who pays for those financial services. We are seeing startups selling financial health solutions to employers. Traditionally, that would have been a service that came along with your FI relationship. Here’s an interesting opportunity to de-commodify the relationship and maybe get creative with who covers the bill for that experience.
Coleman: What about building relationships?
Gotz: Facebook did a 2015 survey that found 55% of Millennials don’t have anyone to talk to about money. Because it’s such a loaded topic and people don’t talk about it, they make irrational decisions. If we can build a relationship that is trust based using technology, the opportunity to be relevant increases. It’s just asking about budget or spending in a non-judgement way.
Coleman: Is there a place for members to participate in cooperatives as a way to waive fees?
Heck: Members used to come into the branches and we could talk with them there. One thing I learned at CUNA Mutual Group was bring the customer into product development and dedicate a team to it. If you really care, you will carve out the resources. Lots of customers out there are willing to take on a beta-test. They are waiting for things to break. I guarantee there are people in your organization willing to be that chief member officer.
Coleman: How do we move the needle on remaining a safe place for members and which also provides amazing service, while still accelerating and expanding who we can help?
Heck: Should you blow up your business model and change the next day? No. It really starts with building out the right strategy and building out against that strategy. Who do you want to benchmark yourself against? I so often hear of credit unions comparing themselves to another credit union or bank, but frankly, that’s more of the same. Find someone to benchmark yourself against that’s not another bank or credit union and that your members measure you against.
You should be thinking five to 10 years out and asking how can you run experiments with small teams that have the risk appetite to try and fail, try and fail. I often hear ‘fail fast’--I really like the mindset of learn fast. Failure is when you don’t learn anything. This is about really pushing the envelope to learn fast that the track you’re on isn’t the right one. It all starts with a strong focus on strategy.
Gotz: Most financial institutions are in a regulatory box, and when I look at their innovation activities it’s small. I think there’s an opportunity to lean into this. Regulators are increasingly embracing the need for innovation. I think there’s an opportunity for groups of credit unions to come together and push the envelope on the regulatory frontier. What could we be doing? What should we be doing?