Acting DISRUPTIVE

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When credit unions were founded in the U.S. in the early 20th century, they were a "disruptive technology."

The challenge now, says one person, is to continue to disrupt their own business model or fall prey to the same complacency that caused other, well-managed organizations to fail.

Speaking to a group of volunteers from Texas' credit unions, the Madison, Wis.-based Filene Research Institute's Mark Meyer challenged the group often least comfortable with change-board members-to develop new business models based on the idea of disruptive technology.

The field is one that has been championed by Dr. Clayton M. Christensen, author of "The Innovator's Dilemma." Christensen, who has been profiled in The Credit Union Journal before, has made a career of examining why once successful businesses eventually failed.

Meyer wasn't suggesting credit unions are about to fail. But he does believe growth will stagnate unless credit unions have the courage to confront such disruptive technologies with disruptive innovations.

"The management practices that have allowed some companies to become the industry leaders also make it extremely difficult for them to develop new business models that will be the success of the future," Meyer told the meeting.

He noted that often disruptive innovators enter at the bottom of the market (Honda is one example) and then start moving upscale. Another example: credit unions. But as credit unions evolve to serve higher-income populations, they move away from the populations they were originally chartered to serve.

"Generally, established financial institutions have had a poor track record with disruptive technology," Meyer said. "If you think back to your roots, originally credit unions were a disruptive technology. What did credit unions initially offer? Basic services-shares and loans. But over time we've become pretty established players and now we need to take stock. Are we leaving people behind as we move forward? I would say we are. One example is the modest to low-income household. There are also the young adults and new Americans."

Meyer noted that nearly 40% of U.S. households earn $34,000 or less per year. "That's a lot of people," stressed Meyer. "Wal-Mart has done extremely well serving this market."

"Our research indicates that low to moderate-income households are good members," he told the Texas volunteers. "First of all, there's lots of them. They will concentrate their business with the credit union. They have fewer GOOD choices in the financial world. They are loyal. They are borrowers and future borrowers, and they are good and manageable risks."

Where credit unions "struggle" in this area, according to Meyer, is in the "not for profit" aspect of the credit union motto.

"I think we fall victim in credit unions sometimes to believing it has to be a giveaway. That's not right for the other members. Credit union philosophy is not philanthropy. There is no correlation between member income and charge-offs."

If credit unions are interested in seeing a disruptive innovation that has emerged quite recently, he asked his audience how many had seen payday lenders and check-cashers in their neighborhoods just 10 years ago?

"What happened?" he asked. "Some people have been left behind in the last decade. Do you know how many people are using check cashers for their payroll checks? Twenty-five to 30 million people! That's the population of Canada. The market is speaking to us, folks. There is demand. These people need access to a financial institution.

"You say we can't afford to serve these people, people who have $5 in their account and just cash checks," he continued. "I agree. I think you should charge them for cashing the check. Forty-percent of those who actively use a check-casher would convert and use the credit union, according to a study we did."

Doing so requires more than just a willingness to cash checks, he added, noting a credit union must also be open when this market needs those checks cashed, such as later at night and on weekends.

Meyer said this isn't a market in which credit unions need to compete against check-cashers, noting he recently attended a check-cashing industry conference where credit unions were mentioned approximately a dozen times, "indicating they want to partner with credit unions. There are 11,000 alternative financial outlets in the U.S., and margins are being driven down."

"Check cashers want to become your transactors, your manned ATMs," he noted, before cautioning, "I'm not saying it's a bad thing, but you do want to make sure you're like-minded."

Opportunity No. 2

America is currently undergoing an influx of immigrants not seen since the 1930s, a group now described as "new Americans."

"This is 33-million folks, a big opportunity," said Meyers. "Your competitors get it. BofA gets it. Who did the banks leave behind in 1908 (when the nation's first credit union was founded)? Remember your roots."

Opportunity No. 3

Another market credit unions should look to is young adults, according to Meyer. "The young adult market is changing, and I think we're being left behind," he told the group. "They've got access to information and one another. So why invite these people in? They've got purchasing powers and influence, and in the future they are going to inherit big. And they have huge financial needs."

One subgroup of young adults Meyer urged credit unions to chase is newlyweds, suggesting credit unions go as far as to offer some type of gift. "You want to catch someone at a life event. What better time is there to do a needs assessment?"

Meyer reminded his audience of credit union volunteers to keep in mind his opening remarks: That the best of conventional, good business practices may ultimately weaken a great organization, and that even the best run credit unions and corporations are vulnerable to disruptive innovators.

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