Cooperative Investments Today Build Tomorrow’s Industry

How credit unions can become preeminent financial institutions for American consumers.

Credit unions have never had it so good.

This should come as no surprise even given the recent economic recession. Credit unions, after all, are counter-cyclical. When the Great Recession descended, the industry was not only inherently better positioned to weather it but also better prepared to respond constructively. Credit unions are typically more conservative with their assets than other financial services institutions. They are also more focused on consumers. When other institutions and industries turned to Washington for assistance, credit unions kept operating without costing taxpayers a dollar. Consumers across the nation protested bank bailouts and soaring fees by organizing events such as Bank Transfer Day, a national movement that urged consumers to leave their bank and join a credit union.

Over the past few years, credit unions core deposits, membership rosters, and deposit market share have grown as never before. Credit unions have also extended credit as never before, including to those who lost their jobs, had their bank loans called, or were turned down for financing because of tightened restrictions. As banks said no, credit unions grew their mortgage market share. Collectively, credit unions are now the third-largest originator of mortgages in the country and the fifth-largest financial institution in the United States by assets.

To paraphrase Fredda McDonald, an executive vice president at PSCU, while banks worked to collect mortgages and protect their collateral, credit unions worked to keep families in their homes.

That small distinction makes an immense difference. Credit unions don’t say, We are different from banks, they live it. As a result, all data points, media coverage, and expert opinion point to the same conclusion:Credit unions have become more prominent than ever before among the financial institutions that serve American households.

We are in what Callahan & Associates co-founder Chip Filson characterizes as Chapter 5 of the evolution of the credit union movement. In that context, prominence represents a great achievement. Now, credit unions need to focus on Chapter 6.

It’s a fundamental principal of strategic planning that today’s decisions help shape things 10 and 20 years into the future.[*] This is as true for the movement as it is for individual credit unions, so it was the primary topic of conversation in July at the semi-annual meeting of the CUFSLP partnership. Attendees discussed what they wanted the industry to look like and what kinds of investments they needed to make to get it there. Overwhelmingly, the partners want Chapter 6 to be a time when credit unions are preeminent financial institutions for American consumers. Is that possible to achieve in a single generation? Absolutely.

In 1996, when Steve Jobs once again assumed control of the consumer electronics company he founded, Apple had prominence. Its narrow product line of expensive, high-quality, high-performance machines had a cult-like following among users. By 2011, Apple was the world’s preeminent technology company.

In 15 years, Apple transformed the personal computer world, making its high-touch, high-quality, high-utility machines available in so many shapes, sizes, permutations, and price points that they offer something for just about everyone. But Apple did much more:

The iPod and iTunes did not just turn the music industry on its head; they created a new mass media distribution channel, the podcast.

The iPhone not only transformed the cell phone turning it from a utilitarian appliance into an easy-to-use hand-held computer with leading edge communications and camera capabilities but also made it a style statement and fashion accessory.

And with the iPad, Apple invented a new market segment. Operationally, the iPad is an oversized iPhone; in usage, it’s a small, light, and affordable portable computer.

If Apple can do all this in 15 years, then credit unions can become preeminent in the same timeframe. The recipe isn’t magic, but it requires focus:

Embrace what makes you different; it’s your competitive advantage.

Become one with the consumer watch, listen, learn, test, and communicate. Then repeat.

Provide superior quality, thoughtful design, and personalized solutions.[]

Be bold and creative. Invest, experiment, test, and try. Don’t be tied to existing models.

As cooperative institutions, credit unions are already doing or should be doing much of what Apple does. The Seven Cooperative Principles give the credit union movement an advantage in areas like research and development. What can be difficult for individual institutions to achieve can be accomplished collaboratively for a fraction of the cost. And if credit unions organize initiatives using open-book management principles, where every contributor is a fully informed and empowered participant, then they can accomplish more goals at a faster rate and lower cost.[]

So the question is, where do credit unions invest? Fertile ground for dramatic innovation lies in three areas: Mortgages, Payments, and Big Data.

Mortgage Liquidity

For most credit union members, their home is the most important, most valuable financial asset they will ever own. This alone makes the future of home mortgages a critical success factor for the credit union movement. But mortgages present funding, ALM, and regulatory challenges, and today, the basic systems for addressing mortgages are under fire. If the industry can’t find new options, credit unions could have no choice but to sell their mortgages, service released, to a secondary market controlled by a handful of megabanks.

However, today’s situation also presents an opportunity to rethink the entire secondary market structure and mortgage funding process. Mortgage delinquencies at credit unions are lower than at banks, which makes their paper more valuable a fact GSEs have privately acknowledged. But credit unions must find a way to leverage their paper and our other advantages to create a viable option that supports the cooperative financial services business model.


The payments system is in a time of transition. For several generations, it was a simple process that used reliable partners and technology to deliver a significant stream of revenue. No more. New entrants are cherry-picking the business, new technologies are disrupting the process, and new regulations and economic reality are reducing revenue.

Payment transactions are the most frequent interaction credit unions have with members. Members expect their financial institution to protect personal and financial information while providing simple, safe, and secure errand support. If disruption continues and it will the ability of credit unions to meet member expectations could be at risk. More importantly, credit unions could lose access to members’ valuable transaction data. That data has the potential to show an institution how to recoup some of the lost payments revenue stream and enable a more intimate and powerful member relationship.

Because the payments environment is fast moving and unpredictable, the CUFSLP partners are pursing multiple paths and pilots. Down one path, two small groups of credit unions will approach two major vendors to explore the potential of a credit union-branded processing network that would allow credit unions to control the rail and the data. Down the other, two small groups of credit unions will work collaboratively on pilot projects built around member and merchant relationships.

Big Data[]

In simple terms, big data is the vast amount of real world, real-time, incomplete, inconsistent, and even inaccurate information about everything and everyone. With big data, predictive sampling makes no sense. Instead, credit unions can search for distinct correlations and conduct probability analysis on a person-by-person basis. The tools and techniques of big data offer credit unions the potential to know and serve their members in innovative and valuable ways.

Competitors are already using big data to wring more profitability from their customers. Credit unions should use big data not to exploit or manipulate, but to deepen the member relationship. Big data can help credit unions micro-market loans, CDs, services even a merchant’s wares with specific rates, terms, and information that is tailored to the needs, preferences, and circumstances of individual members. Big data can also help credit unions become true financial partners that are able to advise members in real time on significant financial decisions and provide financial counseling and other support to members facing challenges.

Like any process, big data requires equipment (computer storage and processing power), craftsmen (data scientists and other specialized experts), and raw material to turn into useful, actionable information. The raw material is data:

Internal data Data that credit unions already accumulate, including transaction data.

External data Data taken from other sources that collect data, such as public records, demographic data, and credit bureau files.

Scraped data Data combed from the Internet, social media, and other sources.

The first two kinds of data are structured and neatly organized in powerful relational databases. Credit unions use this kind of data every day in traditional applications. The real power of big data comes from unstructured data, much of it in the form of notes, conversation fragments, and other inconsistent, incomplete chunks of information. Customer relationship managers offer a major source of unstructured data, and big data tools can make extracting and analyzing information from their interactions easier, cheaper, and more worthwhile than ever before.

The cost and complexity of big data cries out for a cooperative approach in which multiple credit unions share expenses, collaborate on design and management, and contribute their data, expertise, and other capabilities into a collective resource. Pursuing this together, whether through direct collaboration or a CUSO, can provide a broader base from which to build models and feed the grass roots of the credit union movement.

So should credit unions accept their well-earned prominence or strike out to become preeminent financial institutions for American consumers? To realize such an ambition, individual institutions must draw on strategies and make investment decisions that support the cooperative credit union movement. The bottom line for all three of these collaborative efforts is that they represent positive action credit unions are taking today to invest in the future of the industry.


It’s a fundamental principal of strategic planning that today’s decisions help shape things 10 and 20 years into the future.

The Seven Cooperative Principles give the credit union movement an advantage. What can be difficult for individual institutions to achieve can be accomplished collaboratively for a fraction of the cost.

Fertile ground for dramatic innovation lies in three areas: Mortgages, Payments, and Big Data.

[*]For more on Bold Strategic Planning, please see Jay Johnson’s piece in last month’s Callahan Report.

[]For more on tools to test and improve performance in these areas, please see Scott Patterson’s piece in June’sCallahan Report.

[]For more on Open-Book Management, please see Alix Patterson’s piece in July’s Callahan Report.

[]For more on Big Data, please see Jon Jeffrey’s piece in April’s Callahan Report.

June 29, 2018

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