2020 was a year like no other. At a macro level, there were the societal, global, and economic challenges created by the COVID-19 virus. While those are important issues, the personal issues for many Americans were employment and personal income. The ramifications of that aspect of the COVID virus created a ripple effect through the American economy, from businesses that could not survive, to restaurants that were forced to close, small companies struggling due to no internet presence and the decimation of the travel and entertainment industries.
The financial services industry has known disruption to its business model was inevitable. It watched in-branch services first move to remote distribution models via debit cards and ATMs. That transformation accelerated with the introduction of online banking in 1997. The internet has been and continues to be a channel business model that had to be reckoned with. Some industries recognized the power of the internet early - social media companies like Facebook, search aggregators like Netscape, and email providers like AOL. The point here is that all of the traditional business models around these functions, such as in-person social meeting organizers, encyclopedia companies, and the postal service saw their business models erode, if not disappear, through the new business models introduced by the channel. Perhaps the most important point is that the public gravitated en masse to the new internet channel because that channel introduced an extraordinary new level of convenience.
Fast forward a decade, and we saw further disruptions from the iPhone (well, cellular service in general), the iPad, the iPod, and iTunes. OK. It sounds like I am an Apple fanboy (I am not), but let's face the facts; one company disrupted the PC, search, and musical distribution/consumption business strategies in a matter of years. Disruption, quite often, is the ability to see a future trend and adapt to it early, thus creating market share, consumer usage, revenue streams, and longevity. Industries can only be disrupted if they do not anticipate the changes to their business models from new technologies or ignore those changes thinking that loyal consumers will never leave them.
Changing Business Models
Major retailers like Macy's, Nordstrom, and JCPenney kept their anchor mall distribution model even though business was shifting to eCommerce. Traditional retailers laughed at early eCommerce pioneers like Overstock.com and never thought the online auction market like eBay could take business away from them. And yet they watched their in-store foot traffic (and sales) erode year after year. Even disruptors like FedEx, who were market behemoths, who had earlier disrupted the USPS, did not foresee private distribution models (Amazon Prime) as a threat. And the convergence of these models created a new business model through a little known company called Amazon. There is no point in rehashing the incredible business trajectory of Amazon. Suffice it to say that if there was a business model that met the needs created by the COVID virus's ramifications, Amazon was it.
This leads us to the financial services model. Credit unions have always been at the forefront of technology investments in financial services. Credit Unions were early adopters of debit cards, created a network of ATMs (shared among them), created a business model where they could offer service to each other's members through a nationwide shared services model, and were major players in online banking and eStatement adoption. Individual credit unions have never had the traditional banks' branch footprint, so there was always the need for a convenient service channel that would create an even playing field in the competitive financial services vertical. Along came the internet. Credit unions were one of the first movers to adopt online banking, and the rest is history. While many banks were somewhat reluctant to embrace this new channel due to their branch distribution networks (think about the lessons learned from the anchor department store model), credit unions saw the internet as a new dynamic service model for their members to create a competitive differentiator for their industry.
ADOPTING NEW SERVICE MODELS
Over time, the online banking channel was adopted by every type of financial institution charter, so there was a need for additional features within the channel to keep the competitive differentiation factor. There were disruptive services along the way like bill payment (especially if you were a check printer) and eStatements (especially if you were a statement printer). Still, those services became ubiquitous as every online banking provider adopted them.
Looking back on the disruptors like Netflix, eBay, Apple, and Amazon, it is easy to say that their business models were born out of applying the unique advantages of a new channel like the internet to disrupt companies entrenched in traditional business models. An often-overlooked advantage of the internet channel is the destruction of the cookie-cutter approach that early business models utilized. Twenty years ago (well, maybe a year ago), a consumer would walk into any major department store, and the layouts and products offered were essentially the same. Sure there were sometimes different brand names represented, but generally the environment was indistinguishable from one retailer to the next. The point here is that a cookie-cutter approach breeds convenient familiarity initially but becomes an impediment to competitive differentiation over time.
How can we learn from the past and apply those painful lessons learned to the future digital banking model? We know a cookie-cutter approach for any business layout creates a slow death as there is eroding differentiation over time. We know that consumers will gravitate to new channels and distribution models that meet their needs (Apple, Amazon). We know that any industry that uses technological adaptation as a business model has a better opportunity to retain its consumer base (hello credit unions).
No business can predict a significant societal event that instantaneously tests the mettle of their business model. COVID 19 was the societal event that pushed digital commerce into the mainstream and proved investment in a digital strategy was a prudent business move for any industry. Further, the permanent shift of all generational segments to the digital channel means that the traditional branch model will be a shadow compared to former days. Any financial institution that staked its claim in the large branch distribution models while sacrificing investment in the digital channel is likely having difficulty pivoting quickly enough to the new model that consumers are using. As we have seen with businesses that ignored emerging channels, that mistake can result in closure.
At Connect, we knew that the digital services platform would one day be a major, if not primary, distribution model for the financial services industry, and so did our credit union investors. Connect and the investors also recognized that the traditional digital services model's cookie-cutter approach was no longer a differentiator, nor could it serve each credit union's specific needs on the platform. Connect and our credit union investors set out to create a unique digital banking experience for their clients.
Connect also knew that another limitation of the cookie-cutter approach was third-party services "selected" by the digital banking provider. Henry Ford once stated that "you can have a Model-T in any color you want…as long as it is black." That translates to a digital banking provider saying you can offer any third-party products you want, as long as they are products or services from a provider that the digital banking company has selected. Connect believes you should have the ability to choose any product or service offering or provider to meet your organization's strategy, and we will integrate that service into "your" digital banking platform.
We also recognize that there is a difference between wallpaper on a digital banking screen of some companies, and the robust technology architecture Connect has developed to enable a tailored user interface, and to provide the foundation for advanced functionality in the digital banking application over time.
Our 2021 product roadmap will further increase the digital app's convenience for the end-user, creating a more efficient and pleasurable experience. As we learned from the internet's consumer adoption, increased convenience means increased usage and attracts prospective clients.
Finally, a business prerequisite in the digital model is the ability to move quickly (adapt) to meet the changing needs of the consumer, as COVID has highlighted. Innovation is the ability to create products and services that meet an unforeseen demand. Agility is the ability of a company to create those products and services in an efficient timeframe. Connect prides itself on operating as an innovative and agile company.
Shift to Digital Commerce
2020 will be seen as a year that disrupted the way that people live their lives. It will be seen as the year that proved the shift to digital commerce was inevitable and that those companies with a digital mindset in both culture and investment are the competitive players.
It has been said that an applied change in behavior over thirty days will create a new habit. If that is true, then the consumer behavioral changes "forced" by COVID-19 means the consumer shift to the digital channel is permanent. The game has changed, and those businesses that positioned themselves early for the digital transformation are the winners. Go credit unions!
Thank you for being a loyal partner of Connect. Our success represents the collective success for each of your institutions and your members. We also want to say a "huge" thank you to the Connect staff for working tirelessly to support and enhance the digital banking platform investment. Not only did the Connect staff work through the challenges created by COVID-19, but they also welcomed the Symmetry product and clients to Connect this past year, which would have been a significant feat in itself without a pandemic.
We wish you, your families, and your credit unions a great 2021!