Environment & Competitor Threats

Defining the Environment

Glatt Consulting works with credit union clients large and small in markets across the United States. In this post I’ll share insight gleaned from hundreds of client interactions, taking you through the environmental issues and competitors that clients tend to find most pressing, and illustrating how the evolution of these threats have focused client discussion and decision making in strategic planning processes.

As we dive in, it is helpful to know how we organize/categorize environmental and competitor data, and where our data came from. Let’s explore…

With regard to our data source, the perspectives I’ll be sharing come from our 2021 strategy/planning cycle. Participating client credit unions are distributed in markets across the U.S., and on average are $1.3B in total assets, serve 106K members, support 174 FTEs, and operate 11 branches.

Now for environmental and competitor organization. The “environment,” as we suggest clients think about it, consists of the following four categories:

1. Political/Regulatory

2. Economic

3. Social

4. Technological

Most executives have, at one point or another, completed a PEST assessment, which is exactly what these categories align to. But to make sure we all share the same understanding of what these categories mean, consider the following category definitions:

• Political/Regulatory: Government influences such as policies, legislative priorities, laws, regulatory interpretation, regulatory focus, etc.

• Economic: Financial influences such as interest rates, inflation, growth and productivity, supply/demand, trade, etc.

• Social: Societal influences such as prevailing attitudes, behaviors, workplace and lifestyle trends, demographic characteristics, etc.

• Technology: Technology influences such as changing use cases, trends, innovations, tools, resources, etc.

As for competition, the category contains a wide array of institutions, but generally includes these types of entities:

• Credit Union: Federal or state-chartered not-for-profit, member-owned financial institution insured by the federal government (NCUA) and/or a private insurance entity. Generally offers deposit, loans, and other financial services to consumers and/or businesses.

• FinTech: A shareholder-owned, for-profit company offering technology that seeks to improve and/or automate the delivery and use of financial services.

• Bank: Federal or state-chartered for-profit, shareholder-owned financial institution insured by the federal government (FDIC) and/or a private insurance entity. Generally offers deposit, loans, and other financial services to consumers and/or businesses.

• Other Financial Company: A shareholder-owned, for-profit financial institution not chartered as a credit union or bank, but that offers deposit, loans, and other financial services to consumers and/or businesses.

• Non-Financial Company: A non-financial, shareholder-owned, for-profit company offering products, services, or experiences that influence consumer and/or business expectations.

Strategic Threats

Via our planning process we facilitate the capture of a given client’s ideas about environmental issues and competitors – and also the threat levels of each issue and competitor – so that external risks and opportunities are properly known to planning participants. So what did clients say about environmental issues and competitors during the 2021 cycle?

Let’s start at the macro/category level. The table below shows the aggregate “threat” level scores for each category. The higher the score, the greater the aggregate concern across our client base.

Per the chart, credit unions are more concerned about technology influences such as changing use cases, trends, innovations, tools, resources, etc. than they are about competitors. I think the distribution makes sense given the timeframe.

Last year there was amplified concern for all things technology. Remember the Colonial Pipeline ransomware incident? And how about the acceleration of mobile tech adoption, and the investment in work-from-home tools and resources? All were very important issues that pushed the level of concern for technology higher than other categories.

I do think that the competitors category is underrated, however. Many credit union leaders, and here we’re referencing C-Suite and board members, find it challenging to identify specific competitors – in particular those that are not physically in the same marketplace. As a result, “competitors” too often consists of a couple of other local credit unions, and some banks with local branches. This lack of broad competitor awareness creates a problem in terms of developing proper competitive positioning and/or response strategy – and the low scores potentially indicate a belief that the competition is known and therefore doesn’t represent a high threat level.

Granular Detail

Now on to a more granular level. Within each category, there are few specific areas of consistent concern amongst our clients.

Technology Concerns:

• Systems Stability/Accessibility: Concern that the systems on which the credit union relies will be periodically inaccessible due to factors such as ransomware, grid outages, internet instability, etc.

• Data Trust: Concern that underlying member data could be made inaccurate due to the efforts of bad actors perpetrating system hacks, manipulating data, etc.

• Cost: Concern that the costs for hardware, software, security, etc. will consistently, if not rapidly rise thereby demanding a much larger share of operating budgets.

Economic Concerns:

• Global Financial System Stability: Concern that the interconnected global financial system becomes unstable and/or inefficient and consequently more costly for all system participants.

• Employee Compensation and Benefits Costs: Concern that wage and benefits cost pressures will result in substantially higher compensation costs, and also persistently high rates of turnover with corresponding increases in related operating expenses (recruitment, training/onboarding, etc.).

• Supply Chain: Concern that lack of available assets for purchase (homes, cars, etc.) will drive prices too high for members to qualify for corresponding loans thereby slowing the rate of credit union loan growth. Also, concern that operating expenses will increase due to increasing costs for office equipment impacted by supply chain issues.

Political/Regulatory Concerns:

• Legislative/Regulatory Threat to Non-Interest Income Sources: Concern that revenue streams that supplement interest income on loans and investments will be severely impacted by either legislative action, or regulatory pressure. In particular, concern for interchange income on debit and credit card usage, and overdraft protection services.

• Taxation of Credit Union Income. Concern that government spending and commitments will require new sources of tax revenue, such as tax on credit union income. It should be noted that this specific topic often gains prominence amongst credit union leaders whenever government spending increases and tax revenues dip – as during Covid – and politicians start discussing ways to increase tax revenue.

Social Concerns:

• Quickly Evolving Consumer Expectations: Concern about the speed with which consumer expectations are changing, in particular with regard to service quality parameters and delivery channel tools, features, and functions.

• Consumer Behavior: Concern that consumer behavior, already impacted by Covid frustrations, will get worse, thereby straining credit union/member trust and relationship.

• Employee Choice: Concern that employees have such an abundance of employment options that demands (pay, benefits, accommodations) will increase and potentially strain credit union/employee trust and relationships.

Competition Concerns:

As noted earlier, many credit unions have a hard time identifying competitors beyond the common and ordinary – in particular FinTech competitors. That said, Rocket Mortgage routinely showed up as a competitor of concern with the “concern” identified as Rocket’s influence on consumer expectations regarding mortgage processes. Rocket’s mortgage experience is perceived as the gold standard; whether that perception is truly earned can certainly be debated.

Planning Context

When you boil these issues down, you establish a variety of contexts within which to plan, or to challenge the resilience of existing plans. Here are a few examples:

Context: Geopolitical strife heightens systems security/stability risk (including power grid).

• Threat Outlook:

  • We will see multiple threats/attacks rather than one-off threats/attacks.

  • There will be disruption to the systems on which we rely.

In this situation a credit union would want to discuss how it might respond to sustained systems disruptions. Specific topics might include appropriate “cost-effective” responses to disruption, expectations for “outage resilience,” etc.

Using Covid as an example, in the period immediately following Covid lockdowns in early 2020 service delivery at many credit unions was a mess. It took some time to develop new processes to get back up and running in an acceptable fashion, which for some credit unions meant a couple of months. In the future, is such a long period of diminished service acceptable?

Context: Employees will continue to fall for malicious emails.

• Threat outlook:

  • Employees trust the protections we’ve put in place (e.g., virus scan, email source trust, etc.), perhaps too much, and often fall prey to malicious messages.

The same scenario plan described for the geopolitical context above can apply here – meaning identifying the pathways to get back up and running as quickly as possible when/if an employee action results in something like a ransomware lockdown. Part of this dialogue could cover the credit union’s appetite for paying ransomware. The FBI “does not support paying a ransom in response to a ransomware attack.” However, the FBI isn’t facing members’ increasing loss of trust with each day of downtime caused by a ransomware issue. What credit union priorities should drive the credit union’s response to ransomware demands?

Context: Partnering is a desirable strategy for the development of more robust solutions.

• Threat outlook:

  • Go-it-alone strategy for service expansion, delivery channel optimization, market segmentation engagement, etc. could become cost-prohibitive or substantially lag competitor innovations and marketplace demands.

Most credit unions partner in some way, whether it be for a core system, support for complex services such as mortgage or commercial loans, etc., but partnerships have not been a driving strategy for that many credit unions. Given the challenges of go-it-alone, it may be wise to discuss whether partnerships should be a more important driver, in particular whether establishing partnerships that result in more rapid idea development and execution should be a defined strategic objective.

Context: Business model evolution is necessary.

• Threat outlook:

  • Continued pressure on revenue streams and cost structures means a direct impact on the credit union business model.

When credit unions are flush with income, it is fairly easy to make the decision to add new products, implement new services, add branches, increase headcount, deploy new systems and technology, and the like. It is less easy to take these things away; yet given the revenue and cost challenges embedded in nearly every environmental and competitor category, it is wise to discuss business model evolution – which gets into what is and isn’t worth doing.

Such discussion could start with identifying elements of the business model that are “extraneous,” and then exploring whether such “extras” are driving real member value. If not, can they be eliminated and at what cost (member satisfaction, employee headcount)? Could some other business model element be introduced as a replacement that does drive value?

As an aside, this presumes knowledge of what comprises the credit union’s business model. This isn’t always so clear to credit union leaders.

Context: Good talent will cost a lot of money.

• Threat outlook:

  • Wage pressure to attract/retain good people will escalate, with or without inflation.

Discussion in this area is similar to the discussion pertaining to the business model, meaning that the discussion is about more than simply managing costs vs revenue. Think about what value proposition or promise you are making to your members (value proposition is a business model element). Now think about the people you have on staff. Do their jobs align with your value proposition? Are they the right people to deliver that value proposition? If the answer is “no” to either question, then something in the business model itself needs to change – such as the value proposition, staff structure and responsibilities, the people, etc.

Though this area of focus suggests “operations,” something many boards shy away from discussing, this is actually an appropriate strategic conversation as it gets to the foundational purpose of the business model and how it is to be leveraged in support of member interests (allocation of resources in relation to delivery of organizational value).

For clients that dive into this kind of discussion, a more clear picture of what “service” actually is, and the kind of people (and related expertise) needed to deliver it, emerges – which consequently helps in redefining how much employees should be paid in order to be consistently great at executing the value proposition.

Context: Staff “relationship” responsibilities are evolving.

• Threat Outlook:

  • Consumer/member patience will remain thin, inspiring “negative” engagement with staff.

  • Staff are more responsible for the “social relationship” that exists between the credit union and its members.

Tying into the commentary on talent above, many clients recognize that employee skills have to evolve, and are discussing the kinds of skills that must be present in order to support value propositions. For some credit unions, this has led to an acknowledgement that, in today’s environment, employees need to be skilled at de-escalating uncomfortable and tense situations when member emotional expression is high.

There have also been related discussions about the need to develop staff “emotional intelligence” skills overall so that they are better prepared for emotional conversations and engagement internally with one another, and with members. In other words, to be better equipped to build lasting relationships.

Summary

At the start of this post I promised that I would take you through the environmental issues and competitors that clients tend to find most pressing, and illustrate how issues and competitors have focused client discussion and decision making in strategic planning processes. Know that what I have shared here just scratches the surface. But hopefully you get an idea of the kinds of issues of concern, and the nature of responsive discussion, at other credit unions.

One of the chief reasons we are called in to assist with strategic planning processes is because we can bring other voices into the room – meaning the broader concerns and perspectives of credit union leaders nationwide. Hopefully the voices I’ve shared here give you food for thought and a starting point for strategic dialogue at your credit union.

-Tom Glatt