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CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group
Building the Credit Unionof the Future
Steve Heusuk, Corp. Strategy & Bus. Dev.
New Ideas ConferenceOctober 10, 2012
2
First the Good News
• The CU system has experienced recent performance gains:
– ROA increased to 84 bps at Q2 2012
– Strong member growth (to 95.3M total)
– Average net worth = 10.1%
• Growing sense the system has “weathered the storm”
• However, improvement has not been universal:
– 50% of all CUs had negative member growth over past 12 months
– 26% of all CUs had negative ROA at 6/30/12
3
Now the Challenges
• Despite gains, longer term challenges remain:
– Regulatory burden
– Renewed spread compression
– Caps on fee income
– Competitive pressures
– Rising operating expenses to fund channel proliferation
– Macro-economic threats
4
Our Agenda
• Does the CU system need a new strategy? A new business model?
• Or is the current model robust enough to survive and thrive for a generation or longer?
• Approach: Use the framework of strategic inflection points:
– What is a “strategic inflection point”?
– Is the CU system at a strategic inflection point?
– How can we manage through a strategic inflection point?
5
Strategic Inflection Points
• Andy Grove, Chairman of Intel, calls a major shift in an industry’s competitive dynamic a “strategic inflection point”
• Others use different names:
– “Strategic crossroad”
– “Tipping point”
– “Critical juncture”
• The meaning is the same: The old way of doing business must give way to the new in order to survive
6
Andy Grove on Strategic Inflection Points
“A strategic inflection point is when the
balance of forces shifts from the old ways
of competing, to the new….It is a point
where the curve has subtly but profoundly
changed, never to change back again.”
7
The Inflection Curve
Inflection Point Business declines
Business goes on to newer heights
Source: Only the Paranoid Survive, Andrew S. Grove, 1996
8
What Causes a Strategic Inflection Point?
• Michael Porter: Six forces determine the competitive well-being of any business:
– Existing competitors
– Suppliers
– Customers
– Potential competitors
– Substitution (i.e. your product/service being built/delivered in a different way)
– Regulation
• Andy Grove says when any one of these factors undergoes radical change, “all bets are off”
– This is the cause of a strategic inflection point
9
Section ICase Studies
10
How Fast Can an Industry Change?
• Four case studies:
– Music
– DVD rentals
– Photography
– Books
11
Music: Wave After Wave of Disruptive Technologies
Tower Records
Liquidated8/2006
Apple introduces
iPod10/2001
Sony introduces Walkman
7/1979
Source: “Publishing in the Digital Era”, Bain & Co., Jan. 2011
12
Case Study: Demise of the Music Industry
• A unique strategic inflection point occurred in the music industry on July 15, 2000:– Location: Sun Valley, Idaho
– Players present:• Hank Barry CEO, Napster
• Edgar Bronfman, Jr. CEO, Universal Studios
• Nobuyuki Idei CEO, Sony Corp.
• Thomas Middelhof CEO, Bertelsmann
– The offer: Hank Barry put $1 billion on the table to convince the music studios to enter into a legal music file-sharing agreement.
– The outcome: No deal.
13
Perspectives on the Music Industry’s Decline
“The record companies needed to jump off a cliff, and they couldn’t bring themselves to jump.”
- Hilary Rosen, CEO, RIAA
“We have to collectively understand
that times have changed.”
- Lyor Cohen, CEO, Warner Music Group
14
Demise of Brick and Mortar DVD Rentals
“When the inefficiencies of having retail locations, moving physical inventory, and maintaining overhead/staff are cut out of the ecosystem, far less revenue is needed to support the system.”
Dr. Augustine Fou Center for Management Development
Rutgers University
Source: “Netflix vs Blockbuster – Perfect example of an industry replaced by a more efficient version of itself”, go-Digital Blog, 2/22/2011
15
Digital Photography: 10 Years to Replace Film
Source: futuresource consulting
16
The Demise of Eastman Kodak
“Kodak first pioneered digital technologies in the 1970s and 1980s but, until relatively recently, the urgency of the challenge was never quite sharp enough to persuade its employees, investors and executives that it had to overhaul – or even sacrifice – time-honored ways of doing business.”
- Financial Times, April 4, 2012
17
eBooks Dominate the Book Business
Source: “The Incredible Growth Of Amazon's Kindle Book Sales”, businessinsider.com, 9/29/2011
18
Amazon vs. Brick and Mortar Book Stores
Source: “Amazon, Barnes & Noble and Book Store Sales Numbers Annual Update“, Foner Books
19
What Can We Learn?
• In each case the primary product or content could be digitized
• Can money be digitized?
• What does your credit union do that cannot be digitized?
20
Section IIIs the Credit Union System
At a Strategic Inflection Point?
21
Andy Grove on Strategic Inflection Points
“Strategic inflection points are not limited
to the high-tech industry, nor are they
something that only happens to the other
guy…..It is at such times of fundamental
change that the cliché ‘adapt or die’ takes
on its true meaning.”
22
Are We at a Strategic Inflection Point?
• Today we will focus on three of the six competitive factors:
– Customers
– Existing competitors
– Potential competitors
• How rapidly these are changing?
– Where are the opportunities?
– Where are the threats?
23
Convergence - 2012
ISIS Mobile Wallet Walmart
Apple / GoogleMobile Wallets
Mobile Networks
Retailers(e.g., Target Debit)
Giants
Alt. Payment Providers
MCXMobile Wallet
Starbucks / Square Alliance
24
Sources of Non-Interest Income in 2010 (Large CUs)
NSF/Courtesy Pay Fees
28%
Other Misc. Fees16% Other Credit
Card Fees2%
Other Checking Account Fees
4%
Insurance and Retail Investment Services Income
6%
Mortgage Fees11% Debit Card
Interchange Fees21%
Credit Card Interchange Fees
12%
Source: National Credit Union Roundtable Business Outlook Survey, March 2011Note: Above results summarize respondents’ evaluations of their own credit union.
25
Typical Credit Card Transaction
Source: United States Government Accountability Office
26
Typical ACH Debit Transaction
Source: “Understanding The Ach Network: An Ach Primer”, NACHA, CUNA Mutual Group analysis
Originating DFI Receiving DFIACH Operators
$$
$
Merchant Customer Account
27
Target’s Push into Payments
•Linked to Checking Account•5% Off & Up to $40 Cash withdrawal
•Free shipping for purchases made on Target.com
• “Take Charge of Education” donations to school of choice
•Target Pharmacy® Rewards – additional 5% off after 5 prescriptions
Source: Target.com
28
Retailer Benefits of Decoupled Debit Cards
Source: Finventures Blog
• Eliminates interchange fees
• Builds loyalty
• Offers merchant-designed promotions
• Drives more store sales
• Enables targeting of specific customer segments
• Leverages ‘spend information’
29
REDcard Increases Engagement
• REDcard customers compared to non-REDcard customers: – Shop Target 21 times more per year– Shop 2.5 more departments per week
Source: Target presentation at ISI Group Inc. Retail Summit, 4/17/12
REDcard Debit:
Share of New Card Accounts: 67%Incremental spend lift: +52%
REDcard Credit:
Share of New Card Accounts: 33%Incremental spend lift: +57%
30
How Do Payments Support Target’s Mission?
“The full integration of our financial services operation and core retail business helps ensure that we’re focusing our efforts on financial products that deliver the most value for our guests and the company.”
-Terry Scully, President, Financial and Retail Services, Target
31
Target and Other Retailers Announce New Mobile Wallet
Source: MCX.com
32
Technologies for Making Mobile Payments
QR Codes / Bar Codes NFC – Near Field Communications
SMS Text Messages
Payments Apps
NFC – P2P Mobile Browser
P2P Online / In-Store
33
Mobile Payments – Select Competitors
34
Channel Shifts: Forecast to 2015
35
Teller Transactions: Volume Declining – Costs Rising
36
Coastal FCU Leads Branch Transformation
Source: Banks Join the Do-It-Yourself Craze, Wall Street Journal, 5/15/12
37
CUNA Mutual’s Smartphone Loan Program
38
Section IIIHow Do We Manage ThroughA Strategic Inflection Point?
39
Making Strategic Choices
• Strategy is iterative - strategies of the past may not work in the future
– Complacency is not an option
• Strategy is about making choices:
– What are the prerequisites to compete (i.e. table stakes)?
– Where will you invest to excel and differentiate?
– What will you choose to not do?
• Von Clausewitz: “He who defends all borders defends none.”
40
The Role Of Strategy
Vision
Values
Mission
Objectives
Strategy
Action Plan
Measurement
Controls
Iteration
41
The Cooperative Principles
• Voluntary, open membership: Open to all without gender, social, racial, political, or religious discrimination.
• Democratic member control: One member, one vote. • Member economic participation: Members contribute equitably to, and
democratically control, the capital of the cooperative. The economic benefits are returned to the members, reinvested in the co-op, or used to provide member services.
• Autonomy and independence: Cooperatives are autonomous, self-help organizations controlled by their members.
• Education, training and information: Cooperatives provide education and training for members so they can contribute effectively to the development of their cooperatives.
• Cooperation among cooperatives: Cooperatives serve their members and strengthen the cooperative movement by working together through local, regional, national and international structures.
• Concern for the community: Cooperatives work for the sustainable development of their communities through policies accepted by their members.
Source: International Co-operative Alliance (ICA)
42
Strategy Options: What Customer Value to Lead in?
Product Innovation
LeadershipWe win because the market perceives our brand as having the cutting-edge (often overkill) products with superior features – justifying premium prices.Example: Apple Computer
Product Innovation
LeadershipWe win because the market perceives our brand as having the cutting-edge (often overkill) products with superior features – justifying premium prices.Example: Apple Computer
Operational Efficiency LeadershipWe win because the market perceives us as having the lowest prices. Based on cost and process efficiencies that still allow us to return profits.Example: Dell Computer
Operational Efficiency LeadershipWe win because the market perceives us as having the lowest prices. Based on cost and process efficiencies that still allow us to return profits.Example: Dell Computer
Customer Solutions LeadershipWe win because we are so customer-intimate that we are already there when the customer need arises. We offer tailored solutions before the customer feels like shopping around.Example: IBM w/ enterprise customers.
Customer Solutions LeadershipWe win because we are so customer-intimate that we are already there when the customer need arises. We offer tailored solutions before the customer feels like shopping around.Example: IBM w/ enterprise customers.
Middle ground of mediocrity:Trying to lead on all fronts
To compete, a business needs to perform in all three disciplines.To become a market leader, it must outperform competitors in one discipline.
Source: “The Discipline of Market Leaders”, Michael Treacy and Fred Wiersema, 1995
43
Points to Consider
• The cooperative model provides credit unions with powerful competitive advantages:
– Customer-friendly ownership structure: one member, one vote
– Ability to take long-term view
– Focus on community
– Transparency
– Reasonable rates and fees
• Challenge: Adapt to the new competitive dynamic without sacrificing core values and attributes
44
The Final Word
“Directors ought to keep asking
themselves this question: What is our
Kodak moment, and how can we avoid
it?”
Financial Times, April 4,
2012
45
Important Disclaimer
CUNA Mutual’s analysis is based upon certain publicly available information and data, including NCUA 5300 Reports, and is subject to risks, uncertainties and other factors which could cause actual results or performance to differ from the future results or performance expressed or implied in this analysis. We disclaim any representation or warranty, express or implied, as to the accuracy or completeness of our analysis, as well as any obligation to update our analysis. Each recipient should conduct its own independent analysis of relevant information and data, and should base any business decisions upon such independent analysis.
www.sustainablegrowthblog.blogspot.com