PARADISE ISLAND, Bahamas–Look up, look down and, especially, don’t forget to look sideways–and toward specific places. It’s the only way to stay ahead of and even drive innovation while dealing effectively with disruptive threats, advises one person.
Fittingly, credit unions from around the world here were told there is a world of change taking place that has many executives “terrified,” but instead of running from what’s coming at them, the smart (and only) move is to run toward technological change, Patrick Schwerdtfeger, a business futurist told WOCCU’s World Credit Union Conference here. And that includes “budgeting for failure.”
Credit unions aren’t alone in “struggling” with the way technology is changing the world and what members and consumers are demanding, said Schwerdtfeger. He noted much of what is happening is the result of the sharp decline in the cost of storing one terabyte of data, which in 2000 was $17,000. In 2020, that cost will be $3.
“I know you’ve heard this many times, but the fact is just think about the actual scale of what’s happening. It’s not just data storage: it’s also data processing. The cost of this is plunging, and when things get cheaper more people use it and more uses emerge,” he said. “This is the genesis behind the Internet of Things and predictions of 50-billion devices connected to the Internet by 2020.”
What credit union leaders must do, as must the leaders of all organizations, is forget the entire human mindset of thinking in linear terms. “We have to think in exponential terms,” said Schwerdtfeger, referring to how fast change now occurs.
‘Most are Terrified’
Schwerdtfeger pointed to the predictions by some that 40% of S&P companies will no longer exist by 2026, saying he doesn’t know if that is true or not. But it also doesn’t matter, he said.
“Most executives are terrified. Their first response is, ‘Who is coming in to eat my lunch?’ In my opinion, that’s the exact opposite of what we should be doing. If those companies fail, who will take their place? The question we should be asking, ‘Who else’s lunch can we eat?’ My message is we have to stay on offense. We need to aggressively implement change.”
What’s Really Up With WhatsApp?
As an example, Schwerdtfeger cited the sale of WhatsApp for $19 billion to Facebook in 2014. But the sale price—for a company just five years old—wasn’t what was most notable about the sale, he said.
“Maybe the most interesting way to look at this transaction is that 55 employees managed to engage 450 million monthly users,” Schwerdtfeger said. “Fifty-five employees did something that touched the lives of a half-billion users. Think about that. Technology is the biggest form of leverage in today’s environment. All those stories about the division between rich and poor are true and it’s widening. The reality is there are some people and some companies that are leveraging technology and doing really well and thriving, and on the other hand there are a whole bunch of people and companies and governments that are not leveraging technology, and every year it’s harder and harder to get the results they had last year and other people are using the technology against them.
‘Run Toward Technology’
“We have to run toward technology even if it’s intimidating and expensive,” he continued. “You have to have a budget to try new things. It’s not easy. Not everything is going to work. It means you have to have a budget for failure.”
Schwerdtfeger pointed to two technologies in particular he said are worthy of more thought: machine learning and blockchain. Both are going to have potentially big effects on credit unions, he predicted.
What is AI?
Machine learning, or artificial intelligence, assumes some level of human comprehension, and it has to learn, Schwerdtfeger explained. “It has to be able to take in new data and get better.”
The early winner in artificial intelligence was recommendation engines, such as those seen on Amazon. And what are people using it for? Understanding the customer or member journey. “The whole point is to understand where people are and what does their life look like at that point,” Schwerdtfeger said.
A Potentially Big Threat
As credit unions have heard at other conferences, Schwerdtfeger shared potentially ominous news about the future of auto lending, noting Google’s Waymo, Tesla and other companies are gathering billions of miles of data, which is the backbone of machine learning in autonomous driving.
A prototype autonomous truck from Volvo, as shown by Patrick Schwerdtfeger during presentation.
“It’s an asset. It’s called fleet learning. Your data is an asset, probably one of the biggest you have,” he said. “You have to always ask yourself, where is the financial incentive in using any technology? In two three or four years, we are going to be at the point where communicating with a computer is more reassuring than communicating with a person.”
And not long after that the market for autonomous vehicles is going to reach a point where people finally opt not to own vehicles, he said, as the alternative is less expensive and more convenient. What that means for credit union auto lending could be dire, Schwerdtfeger suggested.
A Blockchain Primer
Schwerdtfeger walked his audience through a primer on how Blockchain works, saying it often isn’t explained well. His example included an Excel spreadsheet that lists transactions, and instead of residing on one computer, it resides on hundreds or thousands, and before any changes can be made all of the other nodes must sign off.
“It’s a decentralized ledger,” he said. “But it gets even better than that. Every new block added to the chain of has a summary of the old block on it, meaning you can’t change it. You’d have to simultaneously hack 51% of all the nodes. No one has ever successfully hacked the Bitcoin blockchain, and everybody has tried. At the end of the day you can understand it in three words: blockchain automates trust. It’s a way of recording transactions that makes it almost impossible to hack. You can be confident in the software architecture itself. You can be confident in doing business with people you don’t know.”
The Future of Jobs
Schwerdtfeger touched on another issue that has many people concerned, inside and out of credit unions, and that is the future of employment in a world of robots and artificial intelligence. Dividing jobs into two buckets, manual and cognitive, and then dividing each bucket according to whether a job involves repetitive and nonrepetitive tasks, he observed, “It’s reasonable to assume the manual repetitive jobs will be replaced in the future by robots, and the cognitive repetitive jobs will be replaced by algorithms. Non-repetitive manual jobs will require agile humans, and nonrepetitive cognitive jobs will require creative humans.
How Forecasts Can Be Wrong
But predictions about the future of employment have been wrong in the past, conceded Schwerdtfeger, saying there have been few better examples than the introduction of ATMS, which many forecast would eliminate teller jobs. Instead, the number of tellers employed has increased.
“ATMs meant fewer tellers per branch, lowering the breakeven point on opening a branch. That allowed banks and credit unions to open more branches,” he said.
Look Sideways
In looking for where the next disruption may come from, Schwerdtfeger cautioned credit union executives to look sideways, saying new rivals often come from adjacent markets. He urged credit unions to think about their own adjacent markets and places where there is overlap. “Disruption often comes from the side, and people are caught by surprise.”
Disruption, he added, very often caters to the least profitable consumer segments first, those who want a cheaper, simpler solution.
“But every industry focuses on the most profitable segments, and there’s nothing wrong with that. You have to have a source of gross profit to do innovation. But the people at the bottom get left behind. I tell people in strategy sessions to look up—that’s where the profit is—look down, that’s where disruptive innovation comes from—and look side to side, the adjacent markets, that’s where the new market opportunities are. Who else’s lunch can you eat?”
Some Final Advice
Before concluding, Schwerdtfeger urged credit union leaders from around the world to “think way bigger about what is possible. When you do that there are a few things you can take for granted, because they will happen: you will inspire everyone around you, your employees, your members and your competitors. And if you truly are trying something new, you are going to have no competition along the way.”