Embrace the Moat

Originally appeared in CUES Credit Union Management

Regulation has protected CUs from market disruptors. How else can the 'burden' of compliance be used beneficially?

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In a 2011 Wall Street Journal opt-ed piece, famous technologist and venture capitalist Mark Andreessen opined about “Why Software is Eating the World." Andreessen described in great detail how software companies are disrupting incumbents. It’s common knowledge, for example, that Amazon displaced Barnes & Noble, Apple’s iTunes displaced physical records stores and Netflix displaced Blockbuster.

What’s most curious to me, though, is how regulated industries have been largely insulated from software’s relentless attack. Uber (a personal ride service) and Airbnb (which connects travelers with unique, local places to stay) are notable exceptions that are beginning to chip away at the taxi and hotel industries, respectively. But they are both having a tough time battling against the juggernaut of powerful incumbents and deep regulation in the United States.

In the financial services industry, only a few consumer-facing software start-ups, mostly in the payments space, have had a real impact. PayPal comes to mind. While Square recently announced a chip card connection even before U.S. financial institutions are fully on board with this technology, it also has hinted recently that it is not making enough profit to go public in the foreseeable future.

Why is this? It is hard to start a bank or credit union or to disrupt the way things are traditionally done in the financial services space. Even neobanks like SimpleMoven and Bluebird are really just slick online consumer banking applications.

Yes, they have awesome technology, user experience and marketing. But in each case, these companies have had to partner with an insured bank, use an existing ATM network, and strike a deal with one of the major credit card networks. It’s simply not as easy to displace the current financial institution model as it is to enable movie rentals or music sales online.

It turns out that most venture capital-backed software startups are looking for massive investment multiples and unorganized industries to target. Financial services, with its long history, powerful players, crowded marketplace and heavy regulation is not that attractive for savvy start-ups looking to strike it rich. Look no further than the recent stumbles in the Bitcoin arena. (See http://tinyurl.com/bcprobs for an example.)

In the financial services industry, regulation is in place to insulate consumers from the bank failures that ruined so many during the 1930s. In the United States, credit union deposits are covered up to $250,000; in some Canadian provinces, the deposit cap is unlimited. Government regulators are involved to make sure these insurance funds and the century of trust credit unions have built up is protected. Again, this may seem overly burdensome, but this environment makes for a highly defensible position in the financial marketplace.

Ironically, the endless rules, tight oversight, politics and complexity that have many CEOs pulling their hair out could very well be a moat that’s keeping them in business and the software start-ups at bay.

If I have convinced you that regulation is actually your CU’s friend (or at least not as evil as you thought), here are strategies to embrace it and use it to your advantage.

Clue in to CUSOs

Half of the 7,000 U.S. CUs are below $50 million in assets. These smaller CUs are feeling the weight of regulation, compliance and keeping up with technology. Their boards and executive teams are looking for ways to remain viable and relevant. Before throwing in the towel and looking for merger candidates, look to the industry’s answer to entrepreneurship and innovation—the CU service organization.

For-profit organizations owned by one CU or several CUs, CUSOs are formed for all sorts of reasons and can provide avenues for innovation and creativity that would not typically occur within the confines of a CU. They can provide additional revenue streams for founding CUs and reduce service costs incurred by participating CUs. Generally, these outcomes are the result of collaboration and the cooperative spirit inherent in the industry.

Large-scale CUSOs like CUES Supplier member PSCU, St. Peters-burg, Fla.; CUES Supplier member CO-OP Financial Services, Rancho Cucamonga, Calif. ; and CU*Answers, Grand Rapids, Mich., have cost-saving technology solutions that cover almost every aspect of the CU business. Offering payments, ATM networks and app development, CUSOs are a way for CUs to compete on a level playing field with Bank of America and the next hot Silicon Valley start-up.

While CUSOs are regulated, they can help CUs flex their entrepreneurial muscles. To gain a better understanding of what CUSOs exist and what they can do for your CU, visit the National Association of Credit Union Service Organizations website. There are thousands of CUSOs already; the next one could be started by your CU.

While Canadian CUs don’t have a robust CUSO environment, they do have great resources offered by their central CUs. Five centrals cover the nine English-speaking provinces and these CU-owned organizations provide trade, technology and back-office services to their members. Chances are, if your Canadian CU has pain points in technology or compliance, your central may have a solution to help.

Leverage Compliance Software

In addition to solutions provided by industry-owned CUSOs, CUs have a number of powerful software options to help them deal with their unique regulatory challenges. A great number of these providers exist. If this is a path you’re considering, check out the story about automated compliance solutions in this issue.

Partner With Disruptors

Once you are leveraging CUSOs and compliance software to your advantage, you may think there’s time to take a breather, but not so fast! You still need to stay ahead of the curve on technology and innovation.

One way to do this is to partner with the very disruptors that used to worry CUs. Fortunately, my observation of such potential disruptors at Finovate, a demo-based financial technology conference series that started in 2007, is that they are becoming more willing partners.

At one time, the start-ups on stage at Finovate were making grandiose claims about disrupting the consumer finance space and looking for venture capital to make it happen. But this has given way to most of the companies that demo at the event looking to license or partner with established companies, including CUs.

These would-be disruptors have learned it is extremely difficult and expensive to build a successful business-to-consumer finance brand from scratch. Instead, they are now offering business-to-business, white-label solutions (to which you can add your own brand) to institutions with established customer bases.

More specifically, personal financial management software companies like Money DesktopBancvueGeezeoAndera and dozens more are building innovative technology solutions that CUs can leverage. These companies know that to reach critical mass, they need to work through regulated entities with established distribution channels that are trusted by the public. CUs fit this description perfectly.

Do yourself a favor and review the vast video library of past demos on the Finovate site. You will be blown away with the solutions you can potentially bring to your credit union.

A Final Thought

There is a lot of speculation that the big tech titans (specifically Apple, Amazon and Google) are interested in becoming banks, but why would they want to subject themselves to increased financial regulation? It would seem to me that they are very happy to simply facilitate payments on existing credit card rails.

Apple iTunes has almost 800 million registered users who have an active credit card associated with their accounts. Every song, movie and app purchase is processed automatically. Apple has no accounts receivable on these purchases, plus it is making 30 percent from every transaction from the content creators. Google and Amazon have similar scenarios with their digital marketplaces. Why would any of these companies want to be regulated and assume the risk involved in being a financial institution?

As consumers move more of their purchasing behavior online, the real opportunity for CUs is to embrace this change and make sure to position their credit cards as the best choice for members who want to link to these new digital marketplaces. Make sure your staff is suggesting that members link their CU credit card to the Internet services they use regularly.

Fact: Ostriches run much faster when their heads are not stuck in the sand. We can complain all day about how tough it is to be a CU—or we can embrace the moat that being heavily regulated has provided us and master our situation!

I am not advocating hugging your examiners, but at least understand why they are there and that we are actually all on the same team.


Tim McAlpine is president and creative director of Currency Marketing, Chilliwack, British Columbia, and chairman of $45 million, 1,800-member Mt. Lehman Credit Union, Mt. Lehman, British Columbia. He is a CU advocate best known for developing CUES Next Top Credit Union Exec and the Young & Free program that CUs from around North America are using to connect with new young adult members. He blogs at www.currencymarketing.ca and his Twitter handle is @CurrencyTim.