Credit Unions and Wooden Heel Shoe Factories

Are credit union CEOs worried about being in the wooden heel business? This was the kickoff question at a recent meeting I hosted of entrepreneurs and credit union consultants who gathered to discuss the future of the industry.


Excerpted from Callahan's Credit Union Report
"Are credit union CEOs worried about being in the wooden heel business?" This was the kickoff question at a recent meeting I hosted of entrepreneurs and credit union consultants who gathered to discuss the future of the industry. The questioner - the founder of the first Internet-based business for credit unions - told a story about four members of his family who worked at the last wooden heel shoe factory in New York City in the 1950s. The factory's owners assumed heels would always be necessary for women's shoes. And so they are today, but few are made of wood. Credit union members will continue to use financial services, but in five years will they receive them from a credit union?

This question raised a series of issues about how credit unions might compete in the years ahead.

Is There a Core Competency?

One approach to survival is to identify the critical skills that an organization has and adapt them to new opportunities. We asked, "Is there a common thread in credit unions strengths?" Several stated that the answer was service in a defined context, or providing a unique personal service experience for the member.

Others felt that some credit union values are contradictory to building necessary competitive skills, such as marketing. The culture of credit unions opposes the sales world of "making an offer" or "0% financing." In some respects the industry is an opponent of capitalism and of the business drivers in the for-profit sector. Credit unions instead rely on their virtue, seeking to be bastions of wholesomeness in a world of clever-sounding propositions.

The problem of reliance on mission is that financial services have changed dramatically. The virtues that were dominant in the founding years of credit unions - personal access to credit, reliance on a person's reputation, and a focus on individuals outside the financial mainstream - are less critical today. These days, virtually anyone's credit information is readily available to any lending business.

One concept that the group at our meeting felt had promise for strategic advantage was viewing credit unions as "efficient local proxies" for financial services that are promoted nationwide. This approach is based on the assumption that members will shop nationally but prefer to buy locally. If credit unions can deliver, through alliances, the services members read about or find on the Internet, then local presence can be a point of advantage.

How Do You Define Success?

Another issue was raised about how credit unions view success. For many widely used products, credit unions will consider a member-penetration rate of two to four percent a success. For example, credit unions hold only three to five percent of members' mortgages. Over 50% of credit union members own stocks or mutual funds, but finding an off balance sheet program with more that two percent member participation is rare. In the areas of auto and life insurance, only a minority of credit unions offers these products. Member penetration is almost always miniscule compared, for example, with their share of members' auto loans.

The problem, according to one participant, is that credit unions want to generate revenue without having cost centers. Many service extensions into new markets are merely co-marketing arrangements with vendors in which the credit union receives a nominal endorsement fee.

One way of presenting this challenge is to ask how credit unions would spend $100,000 to grow their business. Few would spend it on sales because credit unions do not use sales to validate their business ends. Most would look at areas to improve member service, such as more ATMs or longer hours.

Data: The Missing Dimension

Another conversation covered the area of information management. An IM approach to credit union strategy includes initiatives such as account aggregation which would permit the credit union to become the member's financial information portal, an "infomediary."

One consultant said the problem with this view is that information is in oversupply. What is scarce is human knowledge, the ability to take data and convert it to good choices. The key to serving members is not the amount of data, but the ability to simplify, anticipate and propose solutions appropriate for each person. That capability is not embedded in early-stage aggregation models.

In many instances what credit unions are doing is solving a problem with information rather than developing an opportunity for the member. If account aggregation is inevitable, the key will not be in the aggregation but in the conversion of the data to provide better outcomes for people.

Why Limited Innovation?

One participant compared his view of credit unions to other industries, especially technology-based businesses. He said that he did not see a lot of innovation in credit unions. In many other firms one can see the face of change five years out. In his view, credit unions focus on incremental change only; there being no "gapping" or radical way of envisioning future success.

One theory to explain this conservative orientation had to do with the incentive structure for management. Most CEOs are at the pinnacle of their careers. They are more protective of their status than interested in growing or nurturing a business. There is no incentive to take risks and many disincentives to do so.

Boards were also seen as part of the problem because they neither micro- nor macro-manage. Boards do not see a lot of macro opportunities and therefore accept the current definitions of success. A corollary to this idea was that there has not been enough time spent by the industry trying to change the regulatory environment so that different ways of shaping the future are possible.

One person summarized credit unions as having lost a sense of mission. Members' needs have evolved, but credit unions' business has not.

A Way Forward

Despite the critical tone, each participant at the meeting was committed to finding ways to help credit unions move faster and build advantage. The common theme was using the networking opportunities offered by both the Internet and the cooperative model. "It's a connected world," said one observer. "The network is growing at a faster pace than the content."

For credit unions to thrive, they will have to become "connected" faster than their competitors and individually open their own resources to the network. Not only will this provide scale and scope that can match any national provider, but it also can preserve the local points of contact and knowledge that individuals seek.

Four of the meeting participants were founders of companies that were based on the concepts of networking and scale. Two managed CUSOs with majority credit union ownership. Both were literally reinventing traditional business service models for credit unions. Two others were privately funded but leaders in their areas of activity. In all four, the use of network effects was essential to their success. One case was a technology platform. Another used the Internet to provide real time data exchanges. A third participant built a virtual private network connecting over 100 credit unions with each other and outside resources.

Credit unions' advantage is that they provide "repeated routines" (transactions and settlements) that are all necessary in the networked world. The faster credit unions can connect their members in a network of opportunities, the sooner credit unions will solidify their heel-making business even as shoe styles change.




Oct. 30, 2000



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