Just heard an interesting podcast on a report which covers the past fifteen years of credit unions and technology, with George Hofheimer of the Filene Research Institute and Victor Stango of the Tuck School of Business at Dartmouth College. The podcast and report details the role of outsourcing IT in credit unions.
It seems rather obvious that CUs benefit from outsourcing IT. Namely, none but the biggest of CUs can afford to devote the time and money to developing one’s own core processor solution. Outsourcing to a third-party, who can devote all their time and energy and can spread the cost over multiple institutions, is the natural way to go. But there are indeed certain dangers along this route, one being the lack of integration from the members’ point of view (e.g. my mortgage, CU credit card, and online banking are disassociated from each other.)
Professor Stango says that CUs who outsource their IT spend more per member than CUs who do it in-house. I am not surprised by that finding, but what I really want to know is: Does the higher amount spent per member translate into a superior ROI? Because if it does, than I will continue to spend as many $5 bills as I can if it’s bringing me back a $10 bill each time. But the correlation between increased spending on IT and ROI may be extremely difficult to measure and pinpoint. It may be difficult to show what the ROI would have been had not certain technologies been outsourced.
This brings me to another point brought up in the podcast that savvy business people must consider: Professor Stango states that the outsourcing of IT has enabled CUs to offer a much greater diversity of products than if they had not. While that is true, I’d be remiss if I didn’t point out that diversity of product offering is almost never a good thing as far as businesses are concerned. In fact, usually it’s the other way around. Most businesses thrive with a narrow focus on their most profitable products. A diversity of products is good thing only in an environment where consumers have no other choices. And that’s clearly NOT the environment financial institutions find themselves in.
Which brings me to my final point. In the podcast, Professor Stango talks about the extreme consolidation in the core processor industry. While core processors have incentive to merge for increased profits, it actually could lead to disaster in our own industry. Let me explain: I belong to several financial institutions, if only to keep tabs on what various FIs are doing. And the only online banking service I’ve ever seen comes from ORCC. (Which is a horrid online banking interface — is it the cheapest one out there?) Anyway, online banking is increasingly becoming virtually the only contact the majority of members have with the institution. If all that I know about the institution is what I see via my online banking, and its the same as every other FI, what competitive advantage does my credit union have? If I were a credit union, what I would really want to know is if I spend more for a better online experience for my members, does that translate into increased ROI? I’m curious if the Filene report addresses this question.
I am not saying that the only point of difference a CU has versus a bank is their online interface. Nothing could be further from the truth. But when your members see that the CU’s online banking interface is identical to their banks’ online interface, what are they going to think?
What this means to the CU professional:
1.) Focus on making your best product even better, thereby further differentiating yourself from the competition. Eliminate me-too products, especially the ones that virtually none of your members care about. Those are draining time, energy, and dollars from the credit union. (As evidence, check out the eye-popping 20% loan growth rate of $800M Whitefish CU in Montana that does not offer checking accounts, and doesn’t have a web site that works.)
2.) Yell at the management of your core processor (politely of course): UNDER NO CIRCUMSTANCES ARE YOU TO MERGE. As an industry, because we depend on our core processors so much, we need a diversity of them so that competition and innovation continues to the greatest extent possible. When they merge with each other, they are not looking for the industry’s best interests necessarily (though they will put themselves out of business if they put us out of business), but they are looking after their own (short term) bottom line. In this regard, I agree with those who are calling for renewed commitment to establishing a CUSO-owned core processor. In fact, it would be wonderful to have two or more such organizations.
3.) Hammer on your Core Processor’s rep to allow you to SOMEHOW show your credit union’s difference via your online banking interface. You don’t have to put up with the bland awfulness that I’ve seen so far in online banking interfaces. As far as I can see, there is no reason for this, other than so far we haven’t cared very much about our online banking interface, beyond simply that we have one and it is functioning. If I’m wrong about this, let me have it. Use the new online tools to find each other, and gang up to petition to make this happen. Yes, it’s truly THAT important.