Caution: Disruption Ahead

It's no longer IF, but WHEN. Autonomous cars are coming. Are credit unions ready to respond?

One of the best parts of my job is listening to credit union executives talk directly with one another about issues of importance.

At the Callahan Risk Roundtables, we spend a lot of time discussing NCUA’s seven areas of risk. Credit unions track, measure, and model credit risk, liquidity risk, and concentration and interest rate risk, and they share best practices and insightsfrom doing so. But the conversation gets really interesting and sometimes quiet when it turns to strategic risk. After all, what are the emerging risks that could threaten a line of business, an institution, or an entire industry?

A study by CEB, now Gartner, shows this reticence is not unique to credit unions. According to the research and advisory firm, auditors spend a disproportionate amount of time examining risk types that cause the least amount of damage.

As reported in the Harvard Business Review, risk managers and auditors spend more than half their time on financial reporting, legal, and compliance risks, even though the vast majority of big losses in market value occur because of mismanagedstrategic risks.

Callahan & Associates spends a lot of time thinking about strategic risks. We help credit unions think about them, too. And today, there’s one risk on the horizon that has the possibility of disrupting the cooperative business model and wreaking havoc on liquidity in unprecedented ways.

Managing day-to-day operations effectively requires a strategic mindset, but making time to talk about strategy is difficult. Learn how Callahan can help your team focus on the most important topics for your credit union based on long-term goals and member environment.

Autonomous vehicles, also called driverless cars, will not only fundamentally change how people get around, they’ll change attitudes and behaviors toward owning a car in the first place.


As far back as 2015, Harvard Business Review has been talking about the shift in risk management from a legal, compliance, and financial focus to a strategic and operational one. The graph below ran in the HBR article How to Live with Risks.

Source: CEB

Disruption is a popular term for anything new that impacts business. In financial services, that has typically meant innovations like mobile apps or interlopers like non-bank competitors.

Driverless cars might seem like a disruption geared toward the auto industry, but it could also cost credit unions a full one-third of the loan portfolio and a sizeable chunk of membership.

As of second quarter 2017, auto loan penetration at credit unions nationally was 20.03%. Compare this to first mortgage penetration of 2.35% where, admittedly, the total amount loaned is much higher and the reach of credit union auto lendingbecomes clear.

A full one-fifth of all 111 million credit union members have financed their transportation through a credit union. If autos change, so does the fundamental relationship between member-owned financial cooperatives and their member-owners.

Of course, risk also brings opportunity. And with autonomous vehicles, figuring out how to respond to new realities is going to take new ways of thinking, talking, and sharing.

Auto loans comprised more than one-third of the total credit union loan portfolio in the second quarter of 2017. Only first mortgages account for more.

It’s time to recognize there’s a greater smart machine revolution going on, and driverless cars are just a part of that revolution.

Signs that show how smart machines already are impacting society are all around. For example, automakers are steadily introducing advanced features like self-parking cars, lane-drift alerts, and, now, cars that brake themselves when they seea pedestrian in the road.

Companies are investing billions of dollars in driverless technology, and all the major automakers and tech giants are involved. Predictions vary, but there’s a general consensus that millions of fully driverless cars will be on the road within a couple of decades.This will change the rules of the road dramatically when it comes to vehicle ownership, insurance, safety, and regulations. Jobs will be lost, especially among professional drivers, and neighborhoods and property values could be greatly impacted bychanges in commutes.

Such a shift will affect every financial institution in America in myriad ways portfolio management, branch placement, and services for newly unemployed members are just a few examples for credit unions.

Along with advancing technology, though, this coming disruption is as much the result of changes in attitude.

Even as new car sales soared after the Great Recession, analysts noticed a shift. There has been a notable increase in the average age of new vehicle buyers, so says the Federal Reserve in its report, The Young and the Carless. This increase seems tobe largely the result of an aging boomer population, which purchases new cars at a solid rate, coupled with a decline in new car purchases by those 35 to 50 years old.

Although post-recession economics has a lot to do with the behavior of would-be car buyers, other factors also play a role. There’s the availability of ride-hailing services such as Uber and Lyft, whose impact on the taxicab medallion business iswell-documented. Telecommuting is more widely available. And other expenses, such as student debt, are making car payments and ownership an excessive financial burden.

And then there’s the rise of the sharing economy, which underscores a new attitude about ownership in general.

According to a new report from Mastercard titled The Sharing Economy: Understanding the Opportunities for Growth, the sharing economy is forcing a reimagination of the way we experience, own, and buy.

The rise of the sharing economy underscores a new attitude about ownership. According to Mastercard, a socio-economic ecosystem built on sharing empowers people to share assets directly with one another.

Source: Mastercard

If society went from owning cars to sharing a car that was available only when needed, there would be a fundamental shift across multiple industries, economies, and society, the report says.

That new outlook on ownership is already helping to turn driverless cars from science fiction into looming reality.

Of course, none of this is happening in a vacuum.

Depictions of a new world are either brave or frightening, depending on perspective, as automation assumes from human beings ever more duties and functions.

So, how to respond? There’s no clear answer, but credit unions need to be ready to think differently and embrace a level of collaboration and experimentation that’s unlike anything the movement has undertaken so far.

Now’s the time to start a new kind of conversation, beginning with how to adapt to the coming revolution in autonomous vehicles. Successfully doing that will create the capacity to imagine and engineer solutions for still-unseen challenges lurkingaround the corner.

Alix Patterson, Partner, Callahan & Associates

Many of us will have to fundamentally change our views of what it means for humans to be smart’ and what it takes for humans to succeed and reach their fullest potential, say authors Edward Hess and Katherine Ludwig in theirbook Humility is the New Smart: Rethinking Human Excellence in the Smart Machine Age. To do otherwise to ignore the impact of and fail to prepare for what’s to come would indeed be a foolhardy exercise in humanarrogance.

Financial cooperatives were created to provide opportunity, hope, and access to material progress that would otherwise be denied to everyday people. To turn the coming challenges into unforeseen opportunities, credit unions must now take this spirit of cooperation and innovation to new levels.

Solutions will come from collaboration and agility, and they’ll begin with recognizing new realities.

To form the best solutions, credit unions also need to leverage a critical, natural strength: The amount of trust they’ve built with members.

The currency in the sharing economy is not just the payment but also trust, the Mastercard report says.

Now’s the time to start a new kind of conversation, beginning with how to adapt to the coming revolution in autonomous vehicles. Successfully doing that will create the capacity to imagine and engineer solutions for still-unseen challenges lurkingaround the corner.

Strategy Lab, a new offering from Callahan & Associates, helps credit union leadership teams focus on issues of strategic importance, such as autonomous vehicles. Find out if this program is a fit for your credit union. Visit to learn more.

Strategy & Performance 2Q 2017

Credit unions are indeed having an outstanding 2017 right on the heels of a very strong 2016 and 2015. Eliminating barriers and connecting with members distinguishes credit unions from other financial institutions and makes the movementstronger than it’s ever been. Learn what the industry’s most successful credit unions are doing in this issue of Strategy & Performance.

September 1, 2017

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