By Milind Pathak
Source: www.cutimes.com, June 2021
Consumers’ heavy reliance on digital channels and capabilities pushes CUs to the forefront of change, demanding evolution.
Consumer experience standards have drastically changed in the last decade. Expectations for fast, streamlined service are now the norm as consumers do everything from buy groceries to send money to a friend through the palm of the hand.
This heavy reliance on digital channels and capabilities has pushed credit unions to the forefront of change, demanding digital evolution today even as financial institutions struggle with the legacy of the past.
Research revealed in a recent Digital Banking Report indicated financial institutions are ill equipped to make an instant migration to digital channels. The biggest hurdle for most is on the back end, where outdated core systems are inflexible and unable to adapt to today’s digital environment.
While legacy cores have stood the test of time and served credit unions well for many years, they were never built for speed or adaptability. In fact, a closed system such as a legacy core limits credit union capabilities in multiple ways.
First, it is difficult to adopt best-in-class products and applications. Legacy cores require custom-written software, binding the credit union to a limited selection of products. The second is time to market and the ability to meet consumers’ rapidly changing expectations. When new products are required, the credit union must make a request from the core provider, then wait as the product moves through multiple cycles of testing and revisions. Given the lengthy timeframes, products can become outdated before a credit union has the chance to employ them.
Emerging cloud-based services and open APIs will help credit unions overcome these challenges, allowing for the simple adoption of new products without the need to change existing systems. By moving to the cloud, credit unions will also gain better control over data and realize the power of detailed insights.
Pack Your Bags, We’re Moving to the Cloud
According to the Bank Director 2020 Technology Survey, 50% of financial institution executive respondents named digital channels as the biggest driver of growth. However, limited product selection and existing capabilities still stand in the way of achieving the expected outcomes.
Credit unions that invested in cloud-based platforms prior to the pandemic were able to rapidly respond to changing demands. Cloud-based platforms utilize APIs to connect financial institutions with an ecosystem of products. In simplest terms, an API tells one system how to interact with another, allowing credit unions to quickly and easily connect to new products without making changes to existing systems and processes.
This open platform environment makes it easy for credit unions to invest in the future, providing an answer to rapid product innovation. The plug-and-play adaptability of the cloud makes it possible for credit unions to easily adopt new offerings and change up products as consumer interest shifts.
Cloud-based services also remove much of the burden associated with technology adoption. Taking advantage of emerging technologies, such as artificial intelligence, or even offering the basics, such as mobile experiences, requires extensive resources and talent.
By moving to the cloud, credit unions are no longer required to manage hardware and network infrastructure, including updates and maintenance. This leaves the financial institution free to concentrate on the needs of its members.
Taking on Challenger Banks in the Cloud
The global fintech market is estimated to grow at CAGR of 23.58% by 2025, according to the 2020-2025 Global Fintech Market Report. A key component of this market growth will come from banks as they invest in technology firms to build and strengthen product lines.
However, within this sector is a growing number of digital banks. Natively built on cloud-based structures, these emerging competitors are nimble and quick, seizing market share at a growing rate. Last year, seven American challenger banks grew their combined user base by 40%, grabbing consumers as they defected from traditional financial institutions that were unable to meet their digital needs, Crowdfund Insider reported.
As credit unions seek to compete, the same cloud-based technology is leading the way toward growth and greater profitability. In addition to rapid product adoption, credit unions realize the advantage of automation to streamline workflows, reduce costs and deliver a better member experience.
At the heart of automation is data. By automating key workflows, credit unions can reduce input errors, resulting in cleaner data output. This data is then used to fuel analytics functions and in turn, feed higher levels of automation. For instance, with more reliable data, credit unions can automate lending decisions, resulting in faster turnaround times and closing cycles on loans.
Richer data also informs more targeted marketing decisions, making it possible for credit unions to direct communications to the members and potential members most likely to act. And, digging deep on data reveals unprecedented insight into financial performance, informing better decision making that also promotes growth.
The Future Is Built in the Cloud
While open banking has been widely accepted in many areas of the world, U.S. adoption has been much slower, largely due to fears around data security. Fortunately, a better understanding of cloud-based protocols and data sharing is emerging.
Open banking doesn’t mean sharing data without restriction. This would be against many federal regulations and certainly inhibit growth for financial institutions.
Instead, open banking enables sharing within a closed and protected ecosystem, limiting access to rigorously vetted and approved platform participants. For instance, if a credit union wants to provide member access to Acorn, a service that automatically invests spare change, data is encrypted and securely transferred via automated processes between banking platforms and the associated product.
Currently, a growing number of consumers are turning toward third-party apps, granting access to critical banking data to streamline financial management. As credit unions move to the cloud, they can provide simpler access to these products in a safer and more secure environment. It’s a win for credit unions as well as the members they serve.
Milind Pathak Senior Director, Product Management North American Community Markets Core Solutions Finastra Lake Mary, Fla.