Market needs are changing, consumer attitudes and buying habits are changing and our once unassailable business model is under threat. Worryingly, markets are evolving away from the need for traditional financial services providers.
The role that banks, credit unions and savings and loans have played in society since the inception of the banking industry—that of trusted financial intermediaries—is simply not as needed as it was in the past. In every developed country, as financial markets become more efficient, the traditional financial services players are experiencing the disruptive phenomenon called disintermediation.
Data from the Office of the Comptroller of Currency show that in 1970, traditional financial services providers extended about 60 percent of all credit in this country. Today that number is less than 20 percent. Over that period, we’ve seen a steady but relentless erosion of our market share in our core lines of business. A manifestation of this trend is that the member/customer base of most traditional providers is aging along with the institution. The stark reality is that having an aging membership means we have built-in obsolescence unless we proactively strive to keep our organizations relevant in changing markets. As the ultimate leaders of any organization, a board of directors must be involved in spearheading that effort.
Evolve Governance, Too
As these inexorable changes threaten our long-term viability, we need exceptionalism in governance as never before. We need forward-looking board members equipped with strategic thinking capabilities who can understand the evolving competitive environment, who are equipped to knowledgeably discuss trends and can recognize the need for more market-driven strategies. If our business model must change, so must the skills and competencies of board members.
At the typical board meeting, an inordinate amount of time is spent looking backwards—reviewing numbers and ratios of historical performance. Some measure of this rear-view-mirror assessment is obviously required by regulation to fulfil fiduciary responsibilities. However, directors also have a common-law responsibility to attempt to ensure the ongoing viability of the organization they govern. Ongoing viability and market relevance will never be achieved unless a solid portion of a board’s time is spent looking to the future.
In my strategy development work with credit unions and community banks, I find that the main inhibitor of change is an aversion to risk. However, we must acknowledge that risk is equally inherent in inaction because there is no such thing as the status quo if your markets are evolving away from you.
Seize the Day
Practically every strategy textbook tells us to build a strengths-weaknesses-opportunities-threats analysis. While we absolutely need to assess our weaknesses and remain aware of threats on the horizon, one SWOT category matters most in meeting consumer needs and keeping credit unions viable: opportunities. Even existing strengths may not be the relevant strengths for future viability. The forward-looking credit union needs to do a better job of understanding its markets to recognize and seize opportunities. I’m a great believer in the appreciative inquiry approach to strategy that focuses on positives. If you endlessly address negatives (weaknesses and threats), you are guaranteed to come up with only tactical, reactive responses instead of developing forward-looking strategic objectives.
While we cling to outmoded approaches to strategy development and fail to equip our leaders with strategic thinking skills, the disruptive companies that are thriving at our expense are adept at assessing market needs, recognizing opportunities and proactively finding market niches in which to excel. The potential for serious disruption from fintech companies is not something we can ignore.
Every aspect of our business—from payment systems to lending activities and advisory services—is experiencing disruption. How and when are we going to respond? While deregulation has opened unlimited possibilities for traditional providers, we have held ourselves back from capitalizing on them and allowed a plethora of other players into our markets.
Better, more professional, more effective strategy development is the only way we can address these game-changing challenges. Market-driven, whole-system planning is imperative. Any organization that isn’t meeting either a need or a desire in its marketplace cannot be viable long term.
The search for ongoing viability demands that a major component of governance must involve strategic thinking. I always suggest that board members attempt to understand the seismic shifts that are being wrought upon us and then ask themselves the question, “Does our future look brighter than today?” If the answer raises any doubts, it is the board’s responsibility to take action.
John Oliver is president of Laurel Management Systems Inc.