The Threat And Opportunity In Financial Services Disruptors

Non-FI players are raising the bar for user experience and expectations. Now, credit unions must respond or retreat.

In January, Business Insider published an article that led with the acknowledged fear of Mark Carney, governor of the Bank of England, that technology disruptors will soon be wreaking havoc on traditional financial services before governments can step in to regulate.

Tech startups or fintech startups, as they’re called in Europe are working as fast as they can to turn traditional banks into the steam-engine manufacturers of the 21st century, writes Jim Edwards in That $1 Billion TransferWise Deal Is Exactly Why Mark Carney Worries About An Uber-Type Situation’ In Financial Services.

The effects of iTunes on the music industry, online media on newspapers, and sites such as Orbitz, Expedia, and Kayak on the travel industry are well documented. After all, when’s the last time you bought a CD at a music store or called your travel agent to book your next vacation?

Now, newcomers such as Uber are turning other industries on their heads. The taxi alternative experienced breakout growth during 2013 by offering high-end transportation options, traditional taxi service, and access to SUVs, luxury vehicles, and everyday cars. Users process the payment, including tip, through the credit or debit card linked to their smartphone Uber app. No muss; no fuss.


Lessons From The Uber Business Model

The Kids Want Cars, But Only When They Need Them

Closer to home, the financial services industry is seeing an uptick from friendly fintech competition. Lending Club, On Deck, ApplePay, Bitcoin these all operate on the periphery yet still leave open the need for traditional financial services.

Just this month, the Wall Street Journal reported on a partnership between Lending Club and a group of small banks that aims to loosen the consumer-lending stronghold held by the largest U.S. banks.

The effort is aimed at helping small banks overcome the cost of underwriting a large pool of loans while also meeting regulatory requirements, which have increased in recent years, writes Ryan Stacy in the Feb. 9 article Lending Club, Small U.S. Banks Plan New Consumer-Loan Program.

This partnership represents two worlds coming together, a marriage between a disruptor and traditional financial services.

That’s not the case with TransferWise, the startup that has Carney’s hackles up. TransferWise allows users to easily exchange foreign currency without the aid and associated costs of a financial institution.

A typical FX transaction costs a consumer 5% and TransferWise profitably charges 10 times less for the exact same transaction, writes venture capitalist Ben Horowitz in a Jan. 26, 2015, blog posted on In addition, the customer experience is amazing, yielding an 80% NPS score, which is unheard of in financial services.


Banking has evolved throughout history into the model that we know today, one that offers a range of deposit and lending options for people of all means, yet it has never suffered a major external business model shakeup.

Until now.

The business of banking is changing. How financial institutions make money is being disrupted. What will financial services look like when the spread between loans and deposits is irrelevant?


Entrepreneurs and startups are taking a fresh look at consumer needs, and the solutions they are deploying exist independent of the net interest margin.

In the case of TransferWise, one company identified an opportunity in currency exchange and completely reinvented how it’s done.

Currency transfers might not represent a large enough business to cause alarm, but what about student lending? As of fourth quarter 2014, the credit union industry held more than $3.1 billion in private student loans. It’s a growing segment of the credit union portfolio and represents a significant opportunity for institutions to help members meet the financial demands of higher education.

Enter SoFi, a peer-to-peer lending alternative that claims to be the largest provider of student loan refinancing. P2P lending is not a new concept, but it’s catching fire as more people are willing to invest their money and look for loans outside of a traditional financial institution.

Social financing is taking off in other areas as well, like small business lending. And of course new competitors are entering the world of financial services through mobile wallets and money-sending services ( only Venmo truly solves a significant problem that makes my life easier and less stressful on a regular basis, Jillian D’Onfro writes in a Jan. 24, 2015, Business Insider tech post). But few have dared to challenge the traditional brick-and-mortar financial institution.

ING and its online-only Orange suite merged with Capital One in early 2013. Virtual checking and savings offered a replacement for account holders who didn’t need, or want, the bells and whistles not to mention fees and depressed interest rates that come with traditional FI accounts.

Now, former ING Direct CEO Arkadi Kuhlmann is having a go at international banking via the smartphone with his startup ZenBanx. According to a Feb. 2, 2015 American Banker article, ZenBanx’s digital-only, multicurrency savings account became available to select Canadians in January and the startup has plans to expand its service into the United States and beyond later in 2015.

ZenBanx’s model includes no physical cash transactions, writes Mary Wisniewski. While the startup plans to add mobile deposit capture for checks, it has no cash deposit venues on the agenda.

It all sounds so simple, and to some extent, it is. These disrupters offer an easy-to-use product that harnesses better technology. They can do this because many are not claiming to be a bank they’re just the technology middle man which means they are not subject to the regulatory overhead of a traditional financial institution. And that’s what has many people, including Mark Carney, crying foul.

His trepidation is likely warranted after all, according to a December 2014 BloombergBusiness article, four of the five largest IPOs in 2014 were for financial services companies but the appearance of disruption on the horizon isn’t a horseman of the apocalypse. Far from it. Uber’s rapid rise, for example, offers many lessons and best practices, both in terms of customer service as well as business model management. Of course, that means credit unions must be ready to reflect and react.

This has the ability to impact our business in the longer term, and we’re doing things now to position ourselves to deal with the unknown future, Keith Troup, CFO at Washington State Employees Credit Union ($2.2B; Olympia, WA), says in a 2014 interview with Troup was referring to the ability of younger members to put off major purchases, like a car, until later in life thanks in part to services like Uber or car-sharing services like ZipCar.

The needs of younger members and potential members now are different from those 20 years ago, Troup adds.


The needs of younger members are changing because their makeup is changing. According to a 2014 Pew study, the millennials those born roughly between 1981 and 1993 have fewer attachments to traditional political and religious institutions, are more burdened by financial hardships, are less likely to be married at this age than in previous generations, are more racially diverse than other generations, and are less trusting than older Americans.


Source: Callahan & Associates

So what would happen if financial services changed with them? What would happen if credit unions decided to offer noninsured checking accounts? What would happen if credit unions decided to offer the same products but without a charter? If they gave back their charter, could FIs deliver more on their value proposition? What do credit unions need from a legal perspective?

Some members will absolutely opt out because they want insured deposits and they don’t want to conduct business with a company that has such a different model.

Without legacy systems, processes, and regulations holding them back, disrupters can offer a better user experience.

But the model is the beauty of today’s disruptors. These organizations operate outside the traditional banking regulatory framework. They’re more nimble because they don’t have legacy systems, processes, and regulations holding them back. Consumers, meanwhile, are getting exactly what they want through an easier process.

To date many of these start-ups have been niche players. They have different motivations, and they’re making new markets. For example, disruptors are thinking about the underbanked market in a new way.

This approach should speak volumes to credit unions, who could end up fighting with one another over the same pool of users. So why not attract new people that aren’t being served today? Credit unions can do this, but not without thinking differently about their value proposition.

Find emerging specialists that serve a market the credit union is not interested in entering and become a business partner. Turn fringe competition into a way to better serve the market.

Reach out to younger members and strive to understand their financial motivations, regarding both product and provider. Talk to members that took their relationships elsewhere. Talk to members to get ahead of disrupters and understand how to improve the credit union’s value proposition.

The best way to avoid being disrupted is to walk a mile in the members’ shoes. Figure out what they need and how to deliver an extraordinary experience. One of the reasons financial services is so ripe for disruption is because the experience is so bad. Disruption doesn’t have to be about price, but it does have to be about ease and experience.

Finally, use member feedback to make informed decisions. No strategic planning session should omit a discussion of scenarios under which disruption will be a threat and how to maximize opportunity.

Credit unions are at the crossroads of disintermediation and opportunity. Your action or inaction will determine your results and your future.

April 27, 2017

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