Factors Driving Credit Union DP Decisions

Whether to stay with your current host DP system or to change, has many implications for a credit union’s future. What are the key questions ask when evaluating DP alternatives?


Whether to stay with your current host DP system or to change, has many implications for a credit union’s future. Beyond technology issues, the most important factor is the ongoing relationship with the DP provider. What are the key questions ask when evaluating DP alternatives?

Each year approximately 5% of all credit union core vendor contracts come up for renewal. But this is not the sole event causing credit unions to look at alternatives. Acquisitions have caused an acceleration of DP evaluation when the new owners phase out support for the acquired system. Finally, a number of long established data processors have gone through internal operating system upgrades which often spurs current users to evaluate all options.

Even though only a small number of credit unions will change core processors in a year, the combination of all three factors has caused a continuing flow of RFP’s and internal reviews of DP relationships.

External Drivers of DP Alternatives
Many credit unions today are evolving their business model. They are expanding to new markets, with new products, adding branches and trying new media channels. Virtually all face the difficulty of innovating within their expanded market. Differentiation among financial firms becomes a blur. Since much innovation comes from outside the industry, a credit union’s ability to partner becomes critical when new solutions or business models are introduced.

Participating in the emerging networks is a primary factor in strategic change. Some of these are CUSO’s organized within and for credit unions. CUSO’s such as CUDL, FSCC, Prime Alliance, PSCU, the CO-OP Network and many others give individual credit unions national reach. In other instances, credit unions partner with outside parties for a solution. Connectivity to these networks as a source of loans, new members or just to communicate to potential members is a critical competency.

Security issues and multifactor authentication have added an additional level of complexity to transactions initiated by or through these networks. A good example of this connectivity challenge and innovation is the emerging use of cell phones for mobile banking.

Some financial institutions are rolling out mobile banking to build a base for future services which todays home PC cannot perform. A mobile phone will in all likelihood, be a source of contactless payment, perhaps replacing the debit card, a way to make Peer-to-Peer transactions or even potentially a digital “wallet.”

One reason for mobile banking’s increasing importance is that convenience is changing. In the past, consumers needed their information far ahead of or after their transaction. Now changes in settlement make it possible for a user to check their available balance before the transaction to avoid overdrafts or to authenticate the transaction. Instant interfaces at the point of sale could make cell phones a key relationship requirement for some demographic groups and for transactions such as micropayments.

The Ownership and Support Decision
There are three models of DP ownership in credit unions, not including the in-house proprietary models developed by a few large credit unions. The three options are a solution provided by a private third-party vendor; a solution provided by a credit union-owned CUSO; and a vendor solution which has additional CUSO applications or partnering possibilities. This last option, a hybrid model, is an effort to combine both vendor capabilities and a credit union development focus.

DP Solutions as a Tool to Enable Business Strategy
Ultimately most credit unions try to align their core DP selection with their views about the future of their credit union and the cooperative system. Since most DP choices last at least 15 years or longer before a change is made, a whole new generation of strategy is likely to evolve during the period of ownership.

Today’s DP solutions must encompass the changing expectations of Generation Y users (mobile banking and social networking sites), tiered service models in which members can elect different relationship and pricing models, and ultimately an ability to put the user in control of their experience. One DP vendor has called this experience the “It’s me,” focus. This is a new way to think about financial transactions whether at the point of sale, on the net or in a proprietary channel.

If the future of financial services is driven not by what a credit union can own but rather the activity a credit union enables members to accomplish, than the DP model that fits that future may be much less focused on the core solution and more on applications and network connections. Connectivity versus core functionality becomes the dominant driver in system selection.

The Critical Factor: The Vendor Relationship
Although DP selection is described as technology and applications, the critical choice is what kind of relationship will the credit union have with the vendor. Will the firm “help turn the tables for me?”

A credit union needs to be clear about what they are buying for. Is something broken or not? Is there new wind needed in the credit union’s sails or is this just a task on the way to the future?

Tools can inspire new ways to do business, not because of operational differences, but more by motivating the users. The right vendor partnerships can seed new organizational goals and intentions.

One dimension of this relationship is how a credit union participates in the invention, in innovation and in projects beyond their scale, but intended for their scale. This suggests the following questions when changing vendors:

  1. How is the credit union insulated from unexpected investment or external forced changes?
  2. What is the contractual path for internal changes from mergers to partnerships and other adjustments? Is it clear?
  3. How simple is the contract-are there complex overlaps?
  4. Are solutions extended to where members transact business with third parties? Are these virtual and can these third agents be incorporated in the model?
  5. Are credit union owned networks an integral part of the solutions?

Ultimately, like many other decisions, success depends on continuing interactions, not just a replacing one set of tools with a later version.




Sept. 15, 2008



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