By Ray Birch
LAKE FOREST, Ill.—Credit unions are ramping up their investments in technology personnel while they are reducing their focus on executives whose expertise is risk, according to a new study that reveals how the “secret sauce” at banks and CUs differs.
According to a new report from Moebs $ervices, 82.7% of credit unions now have a chief technology officer (CTO), while only 17.3% have a chief risk officer (CRO).
It is a shift running counter to the direction of banks, said Michael Moebs, economist and CEO at Moebs $ervices, who said 43% of banks have a CTO while 57% have a CRO. But the trendline comes with a caveat.
While Moebs said both trends can serve banks and credit unions, the strategy is working best for cooperatives as they are winning over more consumers. He also emphasized having more CTOs does not mean credit unions are ignoring lending risk, and that they are instead shifting risk technology and auto decisioning.
CUs 'Abandon' Risk Cheifs
“Credit unions have substantially abandoned the chiefs in charge of risk for many more chief technology officers. CUs have technology-driven risk. They are not exposing themself to risk but controlling risk better by moving away from judgmental, human-driven risk the banks still use,” said Moebs. “The use of FICO scores as decisioning reduces lending and collection cost. CU lenders can concentrate on correct information in underwriting.”
Moebs also suggested the credit union strategy better addresses the growing threat from fintechs, which are encroaching on financial services.
“The fintech firms are using technology to make a big impact on banks and credit unions. While depositories are slow to adapt, the coronavirus is accelerating change. Those financial institutions who adjust will win,” he predicted.
Moebs said credit unions started at the beginning of the Great Recession in 2007 to develop one chief for technology or information, while banks began to develop a chief risk officer truly separate from lending.
“We started seeing the rise of the chief technology officer, or chief information officer, at the end of the second millennium with Y2K, when supposedly all systems would stop at Jan. 1, 2000,” he told CUtoday.info. “This didn’t happen but the event spawned the CTO—one person to make the ultimate decision on information and systems.”
Michael Moebs
The Moebs Depository Leadership Study of all depositories with assets greater than $250 million also identified the mortgage crisis as the birth of the chief risk officer position.
“To avoid massive mortgage losses in the future, banks moved to consolidate investments, real estate lending, business loans, consumer loans and even deposit overdrafts into one overseer of risk—the CRO,” said Moebs. “Chief credit officers came into this position and away from only loans. The chief lending officer became development, underwriting closure, processing and collections but not risk. Policy shifted. This paradigm shift was very significant. CUs moved heavily toward technology and now have four CTOs to one CRO, while the bank model is three CROs to two CTOs.”
Moebs emphasized he believes both approaches work.
“Banks have 55% in loans to assets while CUs are much higher at 71%. Banks have 37% in investments to assets while CUs are much lower at 24%,” explained Moebs. “CUs do consumer lending in autos and mortgages, while banks are heavy into business loans. Operationally CUs process many more transactions per consumer while banks process less for consumers and more for businesses. Banks even hold a $3-to-$1 advantage in overdraft revenue compared to credit unions. Each has a different, but value-driven strategic direction.”
CEO Roles
Data from the Moebs report also show just 6.7% of FIs do not currently have a CEO.
“COVID-19 has forced directors to more than double replacing not only CEOs, but many chief level positions. Normal CEO turnover is one in 50 a year. In 2020 it’s one in 15,” said Moebs.
Ultimately there are three “decisive” leadership positions, Moebs said.
“Our research shows the three-chief team for CUs is CEO, CFO and CTO,” said Moebs. “This troika of chiefs is the secret, strategic sauce for CUs. The bank team is CEO, CFO and CLO/CRO. The critical troika for banks starts as CEO, CFO and the last person is a combined CLO and CRO. As banks grow the trio becomes CEO, CFO and CRO—this is the secret, strategic sauce of banks.”
