Core systems make a big impact for small CUs

You could compare a large financial institution to an elephant. As the great beast shambles along, its heavy footfalls churn up the soil, exposing all sorts of goodies for the hungry birds and small animals trailing after it.

When it comes to core processing systems, the larger institutions are akin to that elephant, while their smaller brethren walk closely behind. Although this means the big institutions get first pick of advanced core processing technologies, credit unions—if they’re willing—can advance to that level soon enough.

“The largest financial institutions play the biggest role in the overall core processing marketplace,” says Ryon Packer, senior vice president of products for Credit Union Solutions at Fiserv. “Their scale allows them to acquire and use the latest technology, while it’s not in most credit unions’ nature to be bleeding-edge, high-tech users. They prefer to wait and see how well the technology works.

“So,” Packer adds, “there’s a lag between market leaders adopting a technology and credit unions adopting it.”

When credit unions adopt the latest core processing technologies, they’re making greater use of an activity they’ve been performing for years.

“While data analytics has always been there, it has never been leveraged so much as it is today,” says Tim Maron, director of business development services at Corelation.

“It’s really upfront now, affecting nearly every department,” he adds. “Every credit union needs to take advantage of this capability to drill down into its data and continue to up the ante in better serving its members. Their larger counterparts are already doing this.”

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While both credit unions and third-party providers push core processing advancements, Packer points to a third player: members.

“Look at what’s common to members’ lives to see how credit unions need to anticipate members’ expectations,” he says. “Recently, I was at a financial industry function where someone asked people in the room, ‘Who here has Amazon Prime?’ Almost everyone raised their hands.

“We’re in an era when people don’t like to wait, and want almost instant gratification—which Amazon provides,” Packer continues. “That kind of consumer expectation has an effect on their credit unions.”

Remote deposit capture represents one easily discernible example of the advancing level of core processing sophistication.

“In four years it has gone from a Star Trek-like capability to something that almost everybody is using,” Packer says.

“Another factor,” says Robin Kolvek, CEO of EPL, “is the entry of large tech companies into the core processing space over the past decade. One result of this phenomenon is that credit unions are increasingly willing to take on risk and have become more accepting of sophisticated data management technologies.”

The biggest spur to advances

Perhaps the biggest factor in credit unions’ adoption of advanced core processing has been the smartphone.

“With the advent of mobile financial services, smaller credit unions found it necessary to exploit the capabilities of more flexible cores to integrate smartphone technology on behalf of members who started demanding these services,” says Maron. “The fear of losing the millennials was a primary driver within the past decade, and certainly the past five years.”

Attracting millennials is a major driver for more flexible core systems for a simple reason, Maron says: “For credit unions to survive and thrive, attracting young adults as members is vital. How do you do it? By implementing a core that allows for the integration of mobile technology.”

Kolvek agrees that rising smartphone use among consumers has been a significant factor in shifting the focus of core technology providers.

“In 2012, 29% of consumers used smartphones for various transactions,” she says. “In just five years, that number has grown to more than 40%. A decade ago, the idea that people would use phones to conduct business with their credit unions was generally seen as lunacy.

“But smartphone use has changed the way we think about data analysis and use,” Kolvek adds. “We’re seeing a significant disparity among generations with respect to expectations about how someone should engage with their credit union. Face-to-face interactions between members and their credit unions have given way to the convenience of mobile devices. Millennials truly rely on the mobile platform, so no longer can you ignore making remote access and ease of use a major goal. A brick-and-mortar location remains important, but much less today than 10 years ago.”

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Maron has seen many credit unions “stuck because their current cores don’t support these new technologies; especially because of the speed. Legacy cores can’t keep up.”

But there’s good news: “Cores with open architectures can keep pace and have the flexibility to integrate with just about any new tech that comes along,” he says. “This flexibility gives the credit union tremendous power to use whatever tech appeals to them and their members—greatly enhancing
their value in the long run.

“Five years ago, credit unions didn’t have this freedom to integrate with any third party,” Maron adds. “Today, we’re seeing more desire for an open architecture that allows credit unions to pick and choose what works best for them and their members’ needs.”

“Core processing is evolving toward more open-solution API [application program interface] architectures, where providers can deliver customized solutions that meet their clients’ unique needs,” says Kolvek. “Software offerings are more modular, trending toward plug-and-play. This gives credit
unions the tools required to present their members with state-of-the-art capabilities and create an enhanced member experience.”

Once credit unions incorporate core processing advances, they’re better equipped to go toe-to-toe with larger financial institutions.

“In terms of functionality, credit unions’ core processing technology approaches that of bigger financial institutions,” says Barb Lowman, vice president, professional services for Credit Union Solutions at Fiserv. She says one approach to motivating small credit unions to adopt advanced core processing is to introduce its leaders to those at other small credit unions already successfully using it.

Maron warns credit unions to avoid too much downtime due to maintenance shutdowns, because doing so denies members service.

“While most of these activities are done in the middle of the night, we live in a 24/7/365 world where members don’t tolerate any downtime,” he says. “Credit unions need to find a way to keep their systems up no matter the operational demands.”

New capabilities

A major trend in the use of core processing, Packer says, is that transactions are becoming almost entirely self-serve.

“It’s close to creating a tipping point that will force branch transformation,” he says. “To make a return on investment, branches will convert from being transactional sites to contact sites. Complex processes, such as setting up a trust or withdrawing large amounts of cash, will still require human-to-human contact. Otherwise, most members will be happy to conduct transactions from wherever they are.”

Credit unions will have to increase the caliber of internal data they’re collecting to serve their members, pushing the data to provide insights into every member’s anticipated needs and milestones.

Maron views machine learning and artificial intelligence (AI) “as the up-and-coming additions to core processing. Like it or not, it’s already here, and credit unions need to embrace it or get left behind—similar to when mobile swept our industry.

“So many disruptors and bigger financial institutions are already in this mix,” he adds. “It behooves credit unions to start checking out this next wave of technology. And, if they have a core that supports it, they’re ahead of the game. The next three to five years will be crucial to get something going in this area, for sure.”

Kolvek’s list of expectations includes creating more open architecture solutions. “There will be a more common framework for linking disparate sets of data, and AI will manipulate data in ways we now consider impossible,” she says.

“Whatever the purpose of a credit union for using advanced core processing—a recent merger, a customized software installation, or a new select employee group—it will only work if the credit union’s top people take ownership of it,” says Lowman. “They have to evangelize the staff, meet deadlines, and become immersed in it.”

This article first appeared in Credit Union Magazine, which showcases innovative practices and people, and provides leaders with the thought-provoking information they need to meet their business challenges. Subscribe now to the print or digital version, and be sure to download the Credit Union Magazine app.