Why are credit unions changing vendors at a higher rate than banks?

Why are credit unions changing vendors at a higher rate than banks?

Credit unions are almost twice as likely to change vendors as banks, with competitive churn rates of 7.6% compared to 2.7% for banks.  Churn Rate measures the number of institutions in a given time period that either change or drop a vendor contract.  Churn is broken down into two components: competitive churn, which measures the rate at which institutions are opting to change vendors, and consolidation churn, which measures uncontrollable factors like acquisitions or liquidations. The figure below (powered using data from FI Navigator) references total churn for the year ending March 31st, 2016.

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The figure reveals significant differences in churn between banks and credit unions.  But why is this difference so large? There are two possible drivers:

  1. Customer centricity: A focus on the customer could be a driver for higher churn. Banks and credit unions operate differently, and Celent has explored the variations in blogs and publications.  The mission statement of the credit union market has historically revolved around extreme customer centricity.  Over the last decade, mobile has become a critical component in quality customer service.  Emphasizing the needs of the customer could be driving credit unions to take more concerted efforts to maximize mobile/ digital, exploring competitive options more frequently than banks. Credit unions are low margin businesses that often give higher interest rates for products like auto-loans or deposit accounts through non-profit tax breaks.  Being member-owned, most of the smaller profits also go back into the business.  This creates a natural incentive to streamline the back-office, and credit unions have adopted cost effective technologies at higher rates. Thin margins combined with a focus on customer service could mean credit unions are more likely to evaluate provider options more frequently.
  2. Solution providers: Another perspective is that it’s the vendor market, not the CUs that are driving the churn. The vendor spectrum for credit unions in the US is much more diverse, with 43 vendors compared to 22 selling to banks.   This would reinforce the argument that competitive dynamics are more intense, and it would be reflected in sales cycles. With cost pressures that originate from their smaller size and lower margins, credit unions are more likely to look for alternative ways to provide products and services, leveraging mechanisms like Credit Union Service Organizations (CUSOs) to enhance the business.  Other similar joint ventures leverage cooperative arrangements to develop homegrown software products.  Consortiums not present in the banking market would introduce more competitors into the market, and as a result impact competitive dynamics.

Credit unions skew much smaller than banks (the mean credit union asset size is  $200 million vs. banks with around $2.5 billion), leading to a noticeably higher consolidated churn. Celent examined the pressures on credit unions here. As minimum viable institution size continues to get bigger, smaller institutions will be challenged to stay afloat. Vendors will face the risk that their customers are becoming targets for M&A activity resulting in more vendors competing for a shrinking demographic.

Credit unions need to think about how to best streamline their operations to remain viable.  This includes a mix of cost-effective customer service technologies like mobile banking.  Vendors need to have a better understanding of the competitive landscape into which they sell, as competition is intense.  Better data and detailed benchmarks can help vendors plan their strategy.

Celent is collaborating with FI Navigator to analyze the mobile banking market in financial services (in fact, FI Navigator wrote a great piece about credit unions and banks last year).  FI Navigator assembled a platform that leverages a proprietary algorithm to track every financial institution offering mobile in the US, as well as nearly 50 vendors.  Beginning with the first report at the end of April, Celent will be releasing a biannual examination of the mobile market. FI Navigator will also be making the platform available for further custom reporting and data analysis.  For more information on the nature of the collaboration and availability of data, go here.

Digital banking is ready to take off in Latin America

Digital banking is ready to take off in Latin America

Digital is the new reality in Latin America. In a recent Celent survey 100% of the participants recognized that a scenario where all financial products get digitized needs to be addressed sometime in the next 7 years and 59% of them believe it needs to be addressed immediately. There is also a general consensus that most banks are entering into Digital late, despite some are already moving in that direction. Threat of fintechs is also a reality. Over 80 fintechs in Brazil and 60 in Colombia are a good sense that the industry is already being challenged beyond incumbents.

In other geographies Banks have responded to this threat by becoming extremely digital and also neo-banks have been launched to attract those customers seeking for a more friendly and digital relationship with its financial institution. Atom Bank in the UK, Fidor Bank in Germany, and mBank in Poland are only a few to mention. In Latin America the major milestones in Digital development we had seen were Nubank (Brazil – Market Cap $500M) and Bankaool (Mexico – ~$142M in assets), until March of 2016 when Banco Original (~$1,67Bn in assets) launched in Brazil.

While Nubank is focused entirely in offering a credit card with a customer friendly personalized real-time view of expenses and modern contact channels (email, call or chat), Bankaool is mainly focused in a checking account with a debit card, SME loans and investment vehicles.

Banco Original is the 3rd step in this digital only bank strategy in the region, becoming the 1st universal digital only bank in Latin America.  As part of its strategy to position the bank as different and innovative they launched this advertising campaign featuring Usain Bolt. As part of a strategic definition in 2013 the bank started a ~$152M investment over the period of 3 years to become a digital bank. They launched in March of this year . The bank has no branches and the interaction is 100% through digital channels and a call center. This move was central to its strategy of becoming a universal bank moving away of being solely focused in agribusiness.

While most of neo-banks and fintechs looking to change the customer experience in financial services have adopted in-house development to support their digital strategy, this is not the case of Banco Original which relied in a 3rd party Open API solution. Commercially available solutions that can support a digital only bank means that as an industry we are ready to take off. There is no reason now why other banks should not follow, and software vendors will do their part pushing their offering into banks of all sizes.

I believe that we are in a tipping point were banks in Latin America will need to re-think their investments and strategies towards digital: the threat is now real.

Two upcoming reports will be covering Digital and a couple of disruptive scenarios in the banking industry in Latin America, so expect to have more information soon if you are a Celent customer. If you would like to become a Celent customer please contact Fabio Sarrico (fsarrico@celent.com).