The move to Open Banking poses both a threat and an opportunity for small banks and credit unions. The opportunity lies in the separation of manufacturing and distribution. The smart credit union can see that its strength lies in its link to its customers – so by distributing more products manufactured by other banks it can both serve its members and specialise in what it is best at. The opportunity is for Credit Unions to leverage Open Banking to take away bank customers. The threat is that this requires investment.
Making major changes is, for credit unions, challenging, and making major changes quickly is doubly difficult. However, the period of change which Open Banking is ushering in can lead to one of great opportunity, and change plays to their strengths.
Open banking separates distribution services from manufacturing services and introduces a layer between the channel and the intervening service. In addition, if the credit unions (and banks) are not to be disintermediated by merchants, then they need to start becoming more intimate with their customers. The good news is that they are ideally placed to do so because the main reason anyone banks with a credit union is to take advantage of their closeness to local business.
So firstly, they have to show their customers that finance is not all they can offer. Secondly, they have to make it clear that they can help their customers with their life goals, not just with purchases. Life goals are things such as, having a baby, getting married, moving house, having a holiday, educating a child, and even death, death. All of these events necessitate their clients finding local services.
Think global, act local
When you die your family needs a local undertaker, if you buy a car you need a local dealer, if you go on holiday, you want a local travel agent, if you are educating a child you need a local school. Therefore, the move to have distribution separate from manufacturing plays to the strengths of the credit unions if they can build their new services quickly and cheaply. Temenos’ Infinity provides distribution services and T24 Transact provides manufacturing services.
The threat can be mitigated by distribution as a service. Temenos can offer Infinity as software as a service (SaaS) in the cloud and so the Credit Unions can start migrating to the new banking model on a ‘pay as you go’ basis, minimising the investment needed. In addition, for a community bank, because SaaS can be easily customised, the platform will have many of the third party services already built into it whether for banking or non-banking products. This saves them having to build the entire suite of products for themselves, for example they can avoid having to build out payment services; local non-banking products; and interfaces to all the manufacturing banks in their region.
Driving revenue and growth
Among the most exciting trends of the recent period is the evolution of payments. Payments are moving from focusing on transactions to being a strategic driver of revenue. One of the most important questions to arise from this trend is what credit unions will have to do to take advantage of that opportunity — more specifically, to improve their visibility in payments with potential customers.
A growing number of credit union members manage their financial relationships through their smartphone or tablet. They expect their experiences to be fast, friction-free, personalised, secure and dependable, and this includes payments. Credit Unions, therefore, need direct participation in instant payments, which they can do more easily in the SaaS model.
Digital access provides the data and analytics needed for Credit Unions to offer personalised experiences to their members. Credit unions can grow revenue through more in-depth and valuable connections with their members.
A cloud-based platform provides members of credit unions with a tightly integrated and contemporary experience that delivers personalised member interactions rivalling that of larger institutions. These include cards, payments, analytics and contact centre support. Credit Unions can provide better services than larger institutions through local non-banking partnerships.
Credit Unions should be saying to their members: “We will help you to achieve your life goals.” If one of those goals is to go on Safari in South Africa, then they could keep monitoring the prices of safaris and monitoring their member’s savings. They can give you advice: “If you keep saving the way you are at the moment Ms Member, next summer, you can go on safari to South Africa with a company we have a deal with and have a great time earlier and at less cost.”
Since they are wired into the world of local business, they can offer a better service on mobile and internet to the people in their locality. And theoretically, better than the big bank can. They can be a full-service distributor without being a full-service provider.
The credit unions can afford to fund this move to cloud because Temenos can offer them the ability to migrate on a pay-as-you-go basis. So there is no huge initial outlay, there are no servers to acquire, there is no licence fee to pay and the service can be provided in-country. The credit union decides what services it wants. They would need distribution services to act as a third party payment provider either to their own payment services, if they have them, or to other banks’ payment services. Faster payments will soon become a significant differentiator – why would you wait any longer than you have to before your payment goes through?
The credit unions also have a unique opportunity with the unbanked. It costs the big banks about $100 per year to run a bank current account. With SaaS they should be able to do it for $1 per year – 100 times cheaper. At that low price-point, it becomes feasible to provide bank accounts for the claimants of Government benefits, providing a key conduit for the payment of benefits, pensions and tax. That way the unbanked get a fully-functioning bank account, a better benefits service and valuable help in managing their money.
This way, we can keep people out of rent arrears, help them save and eventually they will come off benefits and pay taxes.
The combination of inexpensive, flexible cloud banking via SaaS and the wealth of new opportunities which make themselves available as Open Banking develops are major opportunities to bring credit unions into a new era of profitability and value for their customers.