Credit union executives and teammates have gone to extraordinary lengths to address the unique safety challenges of the pandemic while providing seamless service quality to their members. From credit union-branded masks, waiving fees, and new, flexible lending products to significant participation in the SBA Paycheck Protection Program (PPP), credit unions have delivered on their members’ financial needs in a time of crisis.
As the country takes steps toward reopening, credit unions have developed new safety and business processes deployed during the crisis and they will continue to utilize these to effectively serve members with a new set of constraints that upend the way business was conducted just earlier this year. The pace at which the pandemic evolved surprised us all.
Throughout the rapid course of the pandemic credit unions fulfilled a crucial role in facilitating lending and stimulus aimed at aiding widespread economic recovery. Government orders and voluntary initiatives to close businesses nationwide to control the spread of COVID-19, the disease caused by the coronavirus, have delivered negative economic and societal impacts that must be addressed in the foreseeable future.
With the global financial crisis in recent memory, we recall a time when governments and businesses worked together under dire circumstances to plan and execute a path forward to new prosperity. We will repeat that process to chart a new course out of this health and financial crisis and return to economic growth once again. Credit unions will play an important role in the recovery.
Focus Now On Cutting Costs
In an environment of declining interest rates and reduced business activity, financial institutions, like many businesses, must focus on cutting costs. With few exceptions office operations (including data processing) expenses are among the top three expenditures, along with employee compensation and benefits and office occupancy, that a credit union incurs on an ongoing basis. Data processing expenses, which include an institution’s spending on core processing and ancillary systems, are easily addressable cost reduction targets, if the timing is right.
So-called ancillary systems are key applications that surround and interact with the core system. They include important services like ATM/EFT, credit card, digital and mobile services, loan origination and servicing, payments, wire transfer, cash management, document management, BSA/AML, IT security, and check processing, among others. With the trend toward outsourcing, IT managed services has also taken on greater importance as a key service and expense for financial institutions.
These ancillary systems are as important as the core system because they not only support the key business functions of the credit union, but also serve as touchpoints for members. Such member-facing applications have grown significantly in popularity and use during the health crisis and will remain the foundation on which credit unions will serve members well into the future.
Credit unions are working diligently to continue serving members under constrained operating conditions while processing record volumes of PPP loans. The SBA stated that it had processed more than 100,000 PPP loans through more than 4,000 lenders by Monday, April 27, 2020. In the first phase of the program the SBA administrator reported that the administration processed 14 years of loans in 14 days — an unprecedented volume.
A Focus On Office Operations Expenses: Now’s The Time
To address the challenges ahead and muster resources to weather a downturn, institutions have been building reserves for loans and looking for ways to address costs amid the revenue impact caused by deteriorating existing loan portfolio quality. As suggested, the office operations expense area is a top category to hunt for cost savings. We also see credit unions aggressively pursuing new strategies to expand and emphasize digital channels — many that shrewdly started such projects prior to the onset of the pandemic.
In modernizing their digital channels credit unions are not only reaching more members, they are doing so with more innovative and integrated applications while potentially reducing data processing spend. Furthermore, they are making a sound investment in what will become a vital channel through which members will be served in a post-pandemic business environment.
Credit unions are also making changes to the digital channel to address a changing mix of commercial or consumer business, integration to the core system and even more because of shifting vendor product and support plans. When reviewing data processing systems contracts, grouping ancillary products that serve the digital channel with other important applications and especially the core system will naturally increase the purchasing power and thus negotiation leverage for the credit union. We commonly recommend this holistic approach to our clients as it tends to yield the best results.
Credit unions will do a great service to their member owners by closely examining and monitoring office operations and specifically core processing and ancillary systems expenses. There is a wide range of pricing models in the industry and to gain insight on comparable market prices it seems the best way to do so is to conduct a competitive evaluation of alternatives. The credit unions that take the time to do so and start the process 24 to 30 months prior to contract expiration will see the best outcome in finding solutions that effectively serve members and address the institution’s business requirements at the best price and terms.
This goal can be mainly achieved by either negotiating new technology contracts or renegotiating existing technology contracts. While some executives deem the technology review process painful, it nevertheless remains an important part of appropriate due diligence by the institution in a key area that is the foundation of efficient and cost-effective operations. Unless the financial institution enjoys annual contracts, most credit unions maintain multi-year contracts with the vendors of core processing and ancillary systems. With the opportunity to review alternative solutions and/or address costs only every five, seven, or 10 years, it is wise to take advantage of the typical contract cycle to carefully review these business-critical applications. If not then, when?
Bryan T. Di Lella is Senior Vice President at ICI Consulting.
Since 1994, ICI Consulting has been a leading credit union advisor nationwide. ICI is a consulting firm that supports financial institutions by providing core processing assessments, gap analyses, vendor evaluations, contract negotiation and conversion services. ICI Consulting is well known for saving clients time and money during core processing & ancillary systems evaluations and negotiations with the providers of these business-critical solutions.