Is big data a top priority? – 2016 strategic plan for credit unions

A couple of weeks ago I read a CUInsight article written by Chuck Fagan, CEO of PSCU, called “Data drilled down: Choosing a credit union toolset”. In the article was a quote that did a great job of summarizing the consequences of not having a strategy for Big Data (and Analytics). The quote read, “Without big data, you are blind and deaf and in the middle of the freeway.”

It is a fact that the credit union industry is facing into a “perfect storm” of Big Data, Analytics, and technology that will change the landscape of retail financial services forever. If recent history provides an accurate picture of where things are headed, retail financial services will look very different within the next 3 years than it does today. Many of the existing players will not be able to make the transition. The last 10 years has already witnessed massive cross-industry disruption resulting in the disappearance of giants like Borders (replaced by Amazon) and Blockbuster (replaced by Netflix). The trend continues with newcomers like Air BnB and Uber disrupting the hotel and taxi industries.

In his book, The Innovators Dilemma, Harvard Professor Clay Christensen explores the question of how companies, once dominant in their industries, just disappear. One reason for this is the annual strategic planning process failed to pick up the writing on the wall. As organizations become internally versus externally focused, boards and CEOs become prisoners of the very business models they created. They were blinded to the warning signs of the tsunami headed towards them.

One very notable victim of the Innovators Dilemma was the Eastman Kodak Company. In the late 70’s Kodak was the leader in photographic film technology. What many people don’t know is they were also inventors of digital camera technology. They failed to leverage their own innovation and missed the world-wide transition to digital camera technology.

Disruption has been occurring within business back to the dawn of civilization but the pace at which disruption occurs is increasing rapidly. The pinball industry was vibrant right up until the early 90’s when Sony introduced the PlayStation. Within 10 years, sales of pinball machines plummeted while PlayStation sales skyrocketed. We are now in the 21st century and the pace of this disruption has doubled. Disruptors are taking significant market share within 5 years from the point when they enter the market.

As credit unions dive in to strategic planning for 2016, they need to pay attention to some early signs of disruptive threats to the industry:

1. Mobile banking – This is quickly becoming the new “Branch.” How do you retain the loyalty of members?
2. Mobile Payments – Apple and Google have figured out there is money to be made by “monetizing” merchant payment transaction data. Credit unions sit on mountains of such data today but do very little, if anything, with it.
3. Lending Clubs – Lending clubs are emerging on the internet and have found a way to use an expanded set of criteria to support Character Based lending strategies. They are using analytics to lend money to millennials, borrowers who may not look so good now based on traditional underwriting criteria but have potential to be great customers in the future.

Fortunately, credit unions have two advantages. First, they possess huge volumes of data and, second, they know how to collaborate when faced with difficult challenges. Credit unions need to place a much higher priority on figuring out ways to turn data into valuable information that can be used to create high value relationships with their members. Data is the Holy Grail of the 21^st century. Those that recognize this and move quickly will emerge as the market leaders.

One great example of the value of Big Data and Analytics is the ability to use loan payment data to predict the probability that a member’s loan will charge off in the future. A credit union CUSO has developed a vintage based, loan level, predictive model that is pointing them to new opportunities to sell loans members that would normally be overlooked because of their FICO score. The predictive model, revealed that this lower tier category of credit score was actually less risky than the marketing was pricing for. The model also determined how much should be allocated for loan loss when loans are originated. This was a huge win/win for both the credit union and the member.

The credit union industry is on the cusp of significant change. If you would like to be part of the movement that is committed to making this industry stronger, here are some immediate opportunities:

• Plan to attend the 2015 Credit Union Big Data/Analytics conference, next month, in Minneapolis – October 20^th thru 22^nd.

• Read an excellent white paper on analytics in banking here.