NAFCU Services Blog

Dealing with disruptive change is an ongoing strategic challenge for credit union executives. What, for example, does the prospect of NFC transactions by cell phone and the potential entry of companies like Verizon and AT&T as gatekeepers in financial services mean to your business five years from now? Or ATM technology that allows a member to talk directly to a member service rep via videoconference to a branch-centric organization? Or peer-to-peer and micro-lending networks to your core business?

In the short run, a dominant paradigm for commerce can be defended against technological innovation. But in the long run, winners are those that embrace innovation and adapt their business models and their organizations. If it helps you feel any better, this is not the first time executives have struggled with these issues:

"In the 1600s, the Spanish grandees [wealthy noblemen] had no reason to innovate since their wealth was already assured, and they were suspicious of the newly invented technology of the printing press. As a result, the economic leadership of the world shifted to northern countries, like England and Holland, where weavers and other tradespeople reorganized to take advantage of the new capabilities that the press afforded them. …  Similarly, in the 1840s, it was better in the short run to be a Massachusetts mill owner than a Pennsylvania Railroad managing engineer drawing an early organization chart. In the 1970s, it was better in the short run to be the president of General Motors than a college student writing computer code. In each of these cases, the member of the existing elite had little incentive to change the way the system worked, or to “mess with success,” but the member of the “out group” — the weaver, engineer, or student — had little to lose and much to gain through being innovative. These out groups ultimately change the way the system works."

This quote comes from an article in Strategy + Business (published by Booz and Company) called “A Long Wave Theory on Today’s Digital Revolution,”, by Art Kleiner. The article is an interview with Elin Whitney-Smith, a historian who views history through the lens of information revolutions. Called the ‘long-wave’ theory, she postulates that mankind has faced six prior “waves of change’ like we have been experiencing with the digital revolution.

The six waves of change –

1. Hunter–gatherers just before the invention of agriculture
2. The rise of counting and written language
3. The fall of Rome
4. The invention of the printing press
5. The electric information revolution that accompanied trains, telegraph, and telephone
6. The digital information revolution that we are now living through.

It’s important to note that Elin-Smith makes a distinction between information technology (the toolset, if you will) and the way that it is used and its impact on an organization. She notes that “ … an information revolution isn’t always associated with an information technology. It is about how information 'works' in a culture.” Much of her focus is on how organizations and societies adapt to change.

Consider, for example how alien the concept of open source development was until the Firefox browser came along, where teams of people across the globe worked together for free to develop a browser that competes with Internet Explorer, developed by one of the largest software companies in the world. Or think of Wikipedia, the same free open source model applied to educational and historical content, versus the model used by Encyclopedia Brittanica and Collier’s.  I know I’m dating myself here, but when was the last time you went into a grocery store and purchased this week’s volume of an encyclopedia?^[1]

In each wave of change you can find multiple examples of short-term organizational strategies that seem perfectly viable that neither account for threats nor leverage opportunities inherent in innovations in information technology.  Fast forward a few decades, and those are the companies that are no longer serious competitors, if they even exist.

Look at the Recording Industry Association of America, and their lawsuits of illegal downloaders as a prime example. The paradigm shift was one of information and technology – the ability of any individual to bypass the well-established structures organized by the recording studios and access just the music they want, whenever and wherever they wanted it (as opposed to walking into a music store and paying exorbitant fees.)

The recording industry had essentially two options – they could recognize the activity as a new business model and the most compelling market research I’ve ever seen for a new business, and look for ways to leverage it.  Or they could hire a gaggle of lawyers and sue their customers to stop the activity. By selecting the latter option they allowed an entrant from outside their industry (Apple) to quickly establish a dominant position in the field of music (and also alienated their customers).

At the NAFCU CEOs and Senior Executives Conference I had a conversation with a credit union CEO who was building a new branch in a newly acquired community. He indicated that it was essential to his expansion strategy – that a physical presence was a key success factor in building a membership base.  I absolutely respect his expertise in this area, and have no doubt whatsoever that he is correct based on historical data. But the fact that online banks like ING Direct and HSBC Direct have been able to grow so dramatically with an online strategy gives me pause – could this be an example of a ‘short-term versus long-term’ strategy?

Another credit union CEO indicated what great results his credit union was getting with remote teller technology that allows a member to communicate directly with member service rep via videoconference. Compare the cost of a video-enabled ATM versus a branch – and can it be too much longer before we see that model applied to remote deposit capture, webcams and a browser?

There have been many books written about how difficult it is to incorporate disruptive technologies into an existing business model (see The Innovator’s Dilemma by Clayton Christenson, or practically anything else he has written -- www.claytonchristensen.com).  So this process is not easy.  But the digital revolution is well underway, and it is a clear question – do you want to be a Spanish grandee or an English printer?

Post written by David Frankil, President, NAFCU Services Corporation

Related Preferred Partner Resources:

• NCR Corporation
• NCR lets you talk to a teller through the ATM