BankTech

Changes Credit Unions Have to Go Through Before Digital Transformation

Change is difficult and organizational wide transformations impact both business and people in many ways. If transformations are not done right the organization might suffer unsustainable impacts like employee attrition or business loss. Credit unions must go through these five key organizational changes before they start on their digital transformation journey to transform member and employee digital experience.

Organizational Culture

Credit union culture and people are unique and different when compared to rest of the corporate world, but in recent years, credit unions are operating and thinking like the rest of the world to stay competitive and relevant. Credit unions are service-orientated organizations. They have always valued in-person interaction and personal relationships with members due to the community nature of the credit unions. However, the member demographics are changing with the retirement of baby boomers and millennials joining the workforce.

Today’s members are busy and constantly on the move; they rarely visit the branch, but they expect their financial institutions to guide them through the financial journey and personalize their service to meet their personal needs. It is important for credit unions and their employees to understand this shift in members’ mindset and learn how to use digital channels to stay connected with the members while they nurture them digitally.

In fact, according to the Global Consumer Banking Survey 2014 conducted by Ernst & Young, 58% of those using financial services globally and 68% in North America use online/Internet as a communication channel more often than any other channel. Contrary to that, only 24% of financial services users globally and the same number in North America visit branches with the same frequency as they use online channels.

credit_union_digital

Source: EY

What that means for credit unions is that the culture built on providing an outstanding service in the branch and building intimate personal relationships with customers becomes obsolete when customer preferences of the channel transform.

In addition to online being the most frequently used channel, nowadays, users of financial services prefer to make payments through the same channel. EY study indicated that 70% of North American users prefer to pay their bills online while only 15% go to the branch.

credit_union_digital

Source: EY

Credit union culture must transform to be more agile and innovative; they need to think in terms of member value, business value and employee value, and not just personal relationships with members. Culture can be one of the top barriers for digital transformation, so the management must take up the responsibility of culture transformation before starting their digital transformation journey.

Legacy Systems

Many credit unions are still on legacy core banking and loan decision engines that have not evolved with time. Those systems are out-of-date; if they do not upgrade eventually, they risk losing members to more technologically advanced banks or other non-bank institutions that are offering financial services. These legacy systems are not flexible, not customizable, have long release cycles, they do not expose their core functionality through APIs which are needed for integrating with third-party solutions that millennials love to use and they cannot consume third-party data to enhance their functionality. Modernizing these systems is expensive and time-consuming, but the payoff is reduced risk and an enhanced ability to innovate and quickly respond to member needs.

One of the examples of legacy system replacement can be Credit Union Australia which spent $57 million—about 18 months' profits—and two and a half years replacing its core banking system with Tata Consultancy Services' BaNCS platform. Another significant expense on system upgrade is made by National Australia Bank, which is implementing a 10-year plan to decommission 100 legacy applications. The technology side of this project, which the $754 billion-asset NAB calls Total Environment Transformation, includes a core systems overhaul as well as branch, contact center, data center, network and social media upgrades. This year, Zions Bancorporation is rolling out a major transformation on which the company is planning to spend $200 million. The numbers talk for themselves; it is matter of time when credit unions will either have to take this expense of upgrading their systems for more sustainable future and better customer experience, or go obsolete and vanish eventually.

Federal Credit Union is another example of a financial institution that realized the necessity of removing legacy system. Epicor ERP 10 is going to be the new system taking Federal Credit Union to the next level of efficiency. “To be successful in today’s business world, financial institutions require technology that provides both basic and advanced features to promote operational efficiency, tight system integration, advanced business intelligence, and flexible reporting,” said Frank Nisenboum, VP of ERP and CRM Sales at e2b teknologies.

These legacy systems are not prepared to support the modern mobile-first approach. They must be either replaced or redesigned before starting digital transformation journey. Otherwise, these can easily become one of the biggest barriers for digital transformation.

Existing Processes

Credit Unions have built their processes many years back and they have continued to patch new steps to the existing processes as they continued to seek improvements. Every time a new system upgraded, credit unions tend to enforce implementing those old processes on new systems. As time goes-by, a simple one-step process turns into a complex hairball process. These processes become impossible to understand by any employee. However, they are forced to follow them through employee onboarding training programs.

The study made by Filene Research Institute on Operational Efficiency: Process Improvement Opportunities for Credit Unions provides number of examples of credit unions being carefully studied down to the granulated processes and costs. One of the examples demonstrating the power of improvement suggests that the process improvement skill led one credit union to reduce its credit card losses from a projected $800,000 to just over $200,000 by creating a central “losses” team, adopting more fraud detection tools and tracking member activity in real time. Another credit union reported that it used quality principles to completely re-engineer the way it originated consumer loans in its 12 branches. This financial institution had assets of over $600M. The organization was able to reduce the steps in its loan process from 110 to 42. This initiative saved them $750,000 annually, a significant figure for a financial institution of this size.

Before credit unions get on the digital transformation bandwagon, they must document their current processes and simplify them. Credit unions must redesign these processes with digital and mobile in mind and first transform these processes to support members through digital channels.

Another major change of process is required in establishing a strong product management and project management practices. Credit unions must use modern digital product management practices like building a product backlog, backlog prioritization, practicing agile for project management and working very closely with all business units to define business needs and score business value for each requirements gathered. This will help set right priority across all business units and minimizes chaos of 40 projects with high priority running in parallel that might eventually lead to 80% of project failures or delays.

People

People are the most important assets of any organization and it is no different for a credit union. Credit unions value people more and this is one of the reasons we will find employees that are working for 20 or even 30 years in the same credit union.

In one of the credit unions, there was an employee who joined the credit union while studying in high school and worked through her college, marriage, first kid and the second kid. She spent more than half of her life working at the credit union. Change is hard in credit unions just because the employees who have done things in a certain way for many years believe that it is the way things should be done and there is no need to change. People are threatened by transformations on the organizational level. They resist change and eventually can become a roadblock for the company's digital transformation journey.

It is important to transform the mindset of employees before the organization can start transforming the way they do their job. The team has to be introduced to agile terms like prototype, iterations, daily standup, sprints, retrospect, continuous development, continuous testing, continuous deployment and the “fail-fast” concept, encouraging people to think “highest business value in the shortest period.” Credit union employees are used to the “student syndrome”; instead, they need to start sprinting and collaborating more with business users, team members and partners to work as a team and not try to solve the world hunger on their own. Training and encouragement will build digital transformation champions across all business units and those champions will kick-start the digital transformation journey for the whole organization.

Budgeting

Credit Unions run on a lean budget due to the nature of their operations. They are not open for big investments on technology transformations without a strong business case. Before starting the digital transformation journey, credit unions need to restructure the budgeting. The board has to be onboard for a successful digital transformation deployment. Credit unions need significant investment to go through modernization.

Banking sector has already realized the necessity of budgeting a major transformation journey along with credit unions. According to the IDC Financial Insights report, retail banks (including thrifts and credit unions) in the US will spend nearly $16.6 billion on hardware, software, services and internal IT staff in order to develop and implement digital transformation initiatives in 2015. Using 80% of the IT budget to pay for mandatory improvements in compliance, risk, security and just keeping the lights on, it does not leave a lot to invest in the bank's future. Only 24% of the total IT budget in US-based banks and credit unions is being used to enable digital transformation.

According to the report results, the growth of spending on digital transformation is outpacing aggregate IT spending by more than 2.5 to 1. IDC Financial Insights estimates that in five years, fully one-third of the IT budget at US banks will be dedicated to achieving digital transformation.

It is crucial that credit unions are willing to invest and develop financial models to demonstrate NPV and ROI for digital transformation. There is a necessity to transform budgeting on continued investment for improvement because digital transformation is not another core upgrade; it is an ongoing initiative for continued improvement. For the digital transformation initiative, it is more beneficial and effective to budget a team instead of budgeting a project. Credit unions have to form a digital transformation team that will be able to bring innovation and change to the organization and industry.

Conclusion

Digital transformation is a crucial necessity for financial institutions in order to stay relevant. Moreover, the transformations may happen differently for the various types of institutions. There are certain hallmarks of credit unions that have to be changed before the organizations can enter the digital transformation loop. In a fast changing marketplace of financial services in order to provide the superior value credit unions have a long way to go. In following articles we will explore the tactics for credit unions to go through digital transformation in each crucial area mentioned in articles on the industry overview.

Rajesh Patil & Elena

Elena is a contributing writer for MEDICI based in Seattle, Washington. She is a young marketing enthusiast skilled in data analysis and visualization. With background in social sciences and research, she has an extensive experience in consumer behavior studies and marketing analytics. She is passionate about disruptive startups with innovative business models that are having a powerful impact on the industries.

Rajesh Patil is a Sr. Director of Implementation at Terafina Inc and an Advisor for Digital Align Inc. He is an accomplished Digital Transformation Leader with both Strategic and Tactical experience in leading and building Omni-channel digital platforms for Credit Unions and Banks.

Apply to Become a Contributor