The Wanted List
Why credit unions are holding core technology providers to a new standard of innovation and engagement.
By Scott Patterson
The core systems marketplace is a different playing field today than it has been in the past, and evolution within the industry is bringing about both new opportunities and unforeseen frictions.
According to Callahan & Associates' 2014 Market Share Guide to Credit Union Core Processors, 32 companies currently serve the 3,562 credit unions with $20 million or more in assets. Slightly more than half of those companies, 18, provide service to credit unions with assets that range from $250 million to $1 billion. Just six of these providers serve the nation's 211 largest credit unions — those with $1 billion or more in assets.
Maps Credit Union
HQ: Salem, OR
Assets: $467M
12 Month Share Growth: 3.64%
12 Month Loan Growth: 7.40%
Many of these companies are growing their market share by single or even double-digits. However, activity such as mergers, purchase and assumptions, and liquidations in the credit union space has decreased the number of financial cooperatives by nearly 300 in the past year.
This distorts market share figures over time, creating the impression of negative growth, and covers up another important trend. As larger providers increasingly acquire their small and mid-sized peers, the same process of consolidation that is responsible for shrinking the credit union industry is also shrinking the number of core providers.
Consolidation among technology providers can create many advantages — such as new capabilities or product lines, expanded expertise and support, and better pricing — for their clients. However, in addition to obviously reducing choice for credit unions, consolidation can also marginalize or complicate existing core relationships.
Provident Credit Union
HQ: Redwood City, CA
12 Month Loan Growth: -1.69%
Cooperatives don't expect successful core companies to stop growing, but they do want to decrease the number of missed opportunities that result from a shrinking marketplace. Here, two chief technology decision-makers — CJ Daiker of Maps Credit Union ($467M, Salem, OR) and Connie Finch of Provident Credit Union ($1.9B, Redwood City, CA) — talk about the often-unforeseen impacts these shake-ups have on credit unions and highlight the key elements they look for among technology partners.
Wanted: Choice, Not The Illusion Of ...
"As an IT person, you don't want your core, or any provider, to be the ceiling to your technology," says CJ Daiker, vice president of IT at Maps Credit Union.
But more frustrating than technological limitations is a limbo bar that changes over time. Unfortunately, core acquisitions can create this type of environment.
"The majority of our vendors have been acquired by someone else over the past couple of years," says Connie Finch, vice president of IT at Provident Credit Union.
For example, on the same day in February 2013, Provident learned one company had acquired its home banking provider and a
second company had acquired its mobile provider.
The transfer of key technology relationships over the course of a few months, weeks, or even days can put a credit union's ability to provide seamless service and plot a successful course for its future in real jeopardy.
Wanted: Local When You Can, Accessibility When You Can't
Credit unions need allies, not adversaries, in the regulatory space. Yet some common core practices and business models, coupled with a lack of communication, can make that peace of mind harder for cooperatives to obtain. For example, remote operations provide a host of valuable benefits for credit unions, such as 24-hour support and nimble backup and recovery capabilities. But the fact many offerings are now based in the cloud raises questions among regulators and members as to where all that sensitive data ends up.
"Especially in the case of acquisitions by companies with an international presence, there are concerns about security and regulatory compliance as well as potential language barriers and other remote support issues," Finch says.
Whether they extend across state lines or across the ocean, open lines of communication are always a basic requirement for success in such complex arrangements. But the ability to access the right people at the right time can be an issue, particularly with large technology companies that have hundreds or even thousands of clients. And although core companies typically reach out to their larger clients directly, Provident has found these institutions often keep smaller credit unions in the dark — even when they try to solicit meetings.
"Too often, we hear about vendor acquisitions or other big changes by reading about it first in the news, not from the vendors," Finch says. "In some cases, we attend client conferences so we can get more information about the acquisition, roadmap, and possible support changes."
Wanted: Investments That Last
Rapid-fire changes in a partner company's business model can be another major roadblock for credit unions, especially among those who have invested their own employee time and members' dollars into shared initiatives or an otherwise complementary trajectory.
For example, in the past, Provident worked as a beta partner with one of its key vendors to co-develop a solution that would work better for both parties' needs. But when that vendor was acquired, the fruits of this collaboration quickly fell to the chopping block. "The collaboration time and efforts spent resulted in a solution that the vendor will no longer support, forcing the credit union to find a replacement solution," Finch says.
Likewise, many credit unions are wary of making changes at the behest of core providers when these companies' own implementation strategies are still in flux. This was the case in 2004, when a large core vendor asked all of its clients on a then commonly used legacy platform to acquire a brand new solution or risk losing the vendor's support. After several credit unions made the switch, the provider announced it would instead implement a different option to upgrade legacy units into a more manageable HP 9000 system.
"If we'd been an early adopter of that initial solution, we would have been on a platform that was almost immediately discontinued," Finch says.
Wanted: A Core That Plays Well With Others
During any core upgrade or conversion, it is an all too common experience for credit unions to discover that some key modules will no longer be available to them on their new system.
When the core itself becomes the gatekeeper to — rather than the enabler of — important and innovative capabilities, institutions are forced to go one of two directions:
A) Become a development shop and try to build out new resources themselves, often at a significant cost for talent acquisition and knowledge development.
B) Increase their reliance on third-party vendors to fill in the gaps, in some cases continuing to pay maintenance contracts on core services they no longer receive.
For a majority of institutions, neither approach is ideal nor foolproof. The first option requires an investment that many institutions simply cannot afford to make. And with the second option, many incoming third-party vendors find that certain core providers won't support their products or services, which creates an education burden for the credit union.
"New solution providers come in thinking core system integrations will be easy," Finch explains. "However, they are not prepared for the subsequent challenges in dealing with some of the core system providers and antiquated technology."
When a complete core conversion failed to yield the type of real-time, analytical results Maps was hoping for, this institution also had to forge its own path to more effectively collect and distribute member information.
"When possible, we decided we'd rather use our own resources than go to the core and say, 'We need 80 hours of development time. What's that going to cost us?'" Daiker says. "By investing in the right people, who can build the right infrastructure, we're
hoping to turn what is normally a cost center into a profit center."
When it comes to fueling innovation, Finch does not believe the burden lies solely on credit unions, yet she does think small changes at the client level can shape the direction of future research and development among core companies.
"We were way ahead of the curb with implementing a SAN solution," Finch says. "We had initially tried to work with our core provider, but it wasn't willing to address that need. So we did some work on our own to implement it, and now we have our provider's support because it has started seeing the value there as well."
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Maps Credit Union Provident Credit Union
One of the paradigms that needs to shift in the industry is that the "Core" is at the center of the Credit Union's Universe. This is simply not the case anymore, although the core is obviously key to the transactional and financial nature of the Credit Union, it is by no means the only critical component. I believe many credit unions mistakenly assume that anything offered by the core will work best for their needs. Not true anymore, way too many specialties, integration may or may not be important but an "Enterprise" mindset is what is needed now, not the one size fits all the "Cores" would have you believe.
30 year industry Veteran
Those really hurt by the consolidation by large companies are the smaller credit unions that can not afford the resources to develop solutions in house. They are typically sold ancillary products to the legacy solutions they are on because the company is not interested in enhancing the solution they are running. And, as more of the ancillary products are sold off to other companies they are constantly being forced to upgrade to the new ancillary solution being offered.