Credit Unions & Distintermediation
A recent series of blogs from @Chris_Skinner on ‘Banks and Disintermediation’ responded to the contention that banks are an unnecessary cog in the wheels of commerce and could be ‘cut out’ of the process by companies such as Google, Amazon or Ebay. Disintermediation is the complicated term for ‘cutting out the middleman’ which is fashionable in our world of removing friction from interactions.
Banks position themselves as customer focused financial management consultants when in fact they are financial product manufacturers delivering all of the supporting compliance, security and reporting in a scalable infrastructure. Many innovators such as Moven or Mint recognise the role of the banks and position themselves between the customer and the bank. They are the new ‘middlemen’ or intermediaries who are augmenting bank services or constructing an interaction framework that is user centric.
Historically credit unions have been laggards of bank innovation, taking a ‘me too’ approach to the technological and service evolutions of the banking sector. This may be the juncture where credit unions stop shadowing the strategy of the major banks. Credit unions do not have the same scale or capabilities in product manufacturing and management although many perform some of those functions internally. This is the point where the difference between banks being profit focused and credit unions being member focused diverges their respective strategies. The mission of a credit union is to serve it’s members. Members are involved in the management and strategy of their institution. Credit unions are less likely to seek out intermediaries that will disconnect them from their community.
If the credit unions want to stay close to their members they will compete less with the main banks and more with the likes of Zopa, Lending Club, WalMart or Mint. Banks have had the disadvantage that ‘big ships turn slowly’, this resulted in a sedate pace of innovation in financial services. Banking alternatives and new intermediaries do not have the same legacy system and process challenges which enables a must faster pace of new and evolved products and services. These agile competitors create a greater challenge for credit unions who want to maintain direct interaction with their members. The same has already happened in high street retail. Take Tile Devil, a leading wholesaler and retailer of tiles in Ireland, who decided to enter the much larger UK market and sell tiles online direct to consumers. Using Stripe as their online payment gateway, they were able to compete in the UK within hours of designing their site, rather than waiting weeks to be set up as a trusted credit card merchant. Changes in business practices will exclude banks and credit unions if they are not able to support such a pace of change.
Credit unions will decide on which basis they can compete with these new innovators to best meet member needs. There is more to selecting a financial service than price, for many credit union members having products suited to their local community, places (both physical and virtual) that match their members' abilities and people that they know and trust are key decision factors.
Intermediaries are a much greater risk to credit unions than they are to banks. The loss of direct member interaction could make credit unions irrelevant. The current evolution in the marketplace could be the impetus that focuses credit unions on their members rather than on imitating the direction of the banks.