John San Filippo
Taking a Phased Approach to Digital Transformation
By John San Filippo
By all counts, digital transformation in the credit union space is an unwieldy topic to address, due in no small part to the fact that every credit union has a different starting line and there is seemingly no finish line. Yet it’s critical that credit unions of all sizes embark on a digital transformation journey. One way to manage such a potentially massive undertaking is to divide the journey into smaller legs according to business unit.
Finopotamus spoke with Brian Hamilton, president of Origence Lending Services, about digital transformation in credit union lending. Origence Lending Services is the business process outsourcing subsidiary of Origence (formerly known as CU Direct).
“One of my favorite quotes about digital transformation is: That's a hot mess of a term that stirs up lots of emotions and conjures all sorts of dialogue,” said Hamilton, prefacing the discussion. “It’s absolutely the right approach to take it in bites and make it product or channel specific.”
According to Hamilton, many credit unions believe that they have already achieved some degree of digital transformation when they, in fact, haven’t. “I'll talk to a credit union who says, ‘We are well on the path to digital transformation because we went paperless,’” noted Hamilton. “Maybe they can see the paper on their dual monitors now, but they didn't do anything material to transform the experience. It doesn't move loans much faster, it doesn't lead to automation and most importantly, it doesn't lead to an enhanced member experience.”
“We can get there. We just need to take action.” -- Brian Hamilton
He added that some credit unions are falling further behind in their digital transformation efforts due to what he calls “the Amazon effect.” If a member can order something on Amazon and get it delivered in hours, they're expecting they can apply for a loan on their phone, get it approved in seconds, and have the money in minutes. That's just the consumer expectation and that requires significant digital transformation for credit unions.”
A Cultural Transformation
Hamilton recounted how he applied for a personal loan with SoFi while he was waiting in the drive-thru line at Taco Bell—he was approved before his food came out. “The reason I tell that story isn't to bring credit unions down because I care about the movement. We want credit unions to do well,” he explained. “We want them to be more relevant. And there are now tools available and partnerships available for credit unions to do that. But it all has to start with the credit union’s culture.”
That cultural shift needs to start at the top, noted Hamilton, with the board and executive team. “Oftentimes, we'll look at our balance sheets and our growth and think, hey, we're doing pretty well. Our members seem to be happy,” said Hamilton. “However, if we have a three-to-five-year horizon, and we are going to try to mitigate risk for that, but we're unwilling to make strategic bets and take well-mitigated risks on new technology, new enablement, and maybe take some chances with digital transformation, we run the risk of becoming the next Circuit City or Blockbuster Video.”
According to Hamilton, there are plenty of forward-thinking credit union leaders and plenty of tech credit union service organizations (CUSOs) and other organizations that can help credit unions avoid that fate and compete head-to-head with, for example, Venmo and the Apple Card.. “We can get there,” he maintained. “We just need to take action.”
Digital Transformation in Lending
Digital transformation in a credit union’s lending operation is particularly critical because lending is the area with the biggest competitors, both traditional and non-traditional. “How present are we as credit unions in some of these lending marketplaces like Credit Karma or Lending Tree? Are we able to play there? For the most part, we are not because an individual credit union is too small, even the big ones,” noted Hamilton.
“Credit unions are small or too bifurcated with field of membership to be able to play at an aggregated level,” he continued. “And as we see direct-to-consumer financing come out with OEMs like Tesla and Rivian, we are going to have to position ourselves at top of funnel the way.”
Hamilton said that’s a real challenge today because most credit unions don’t have the right people and infrastructure in place. “The solution is to work through new CUSOs and fintechs that are emerging that sit in between top of funnel and the credit union,” he added. “They can provide a consistent experience and then filter those loans to credit unions big or small based on where they sit. So we as a collective movement can be top of funnel. We just have to solve for how we get there.” This is why CUSO and fintech partnerships are so important.
Mobile First, Not Mobile Exclusive
“We need to be mobile friendly, but that doesn't mean we don't do things in person,” noted Hamilton. “That just means that when we build a new product or service, we should be building it with a mobile experience first and foremost. If you are not already thinking mobile first, you're lagging.”
Members borrowing by smartphone app or SMS text expect decisions quickly. The need for a better mobile lending experience leads to the need for better auto-decisioning. “Most credit unions sit somewhere in the 20% to 30% range for automated decisions,” said Hamilton. “If we want to compete at scale in the market as it is today, we need to be north of 70%.”
The first step, according to Hamilton, is simplifying underwriting criteria. There are also plenty of new technology tools available to help make this a reality, chief among them artificial intelligence-based underwriting software. However, legacy lending software can create an obstacle. “Credit unions [with legacy systems] will struggle to integrate new and emerging solutions that are out there because everything new and emerging is cloud-based and API (application programming interface) configurable,” he noted. He added that a focus on cloud delivery and API configurability is essential for any credit union that hopes to grow and scale.
“Digital transformation is absolutely imperative,” Hamilton stated. “It's no longer a competitive advantage; it's a competitive disadvantage if we don't get there. Credit unions should challenge their leagues, their partners, and their CUSOs because we really are all in this together.”