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CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group

Disruption: Are We Next?

John LassSVP, Strategy & Business Development

Presented to 2014 Defense Credit Union Council

Conference & Showcase

Dallas – August 25, 2014

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Agenda

• What is Disruption?

• Disruption in Retail Financial Services

• Potential Responses to Disruption

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Section IWhat is Disruption?

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Joseph Schumpeter: Creative Destruction

Creative destruction is the "process of industrial

mutation that incessantly revolutionizes the economic

structure from within, incessantly destroying the

old one, incessantly creating a new one.“

Joseph Schumpeter, 1942

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Innovation Is Nothing New

Today

Two-WayTelephone

1876Wheel

3340 BC

MicrowaveOven1955

Printing Press1440

Smart Phone1994

Paper200 BC

Antibiotics1928

Steamboat1873

Light Bulb1800

Radio1900

Internet1969

Steam Engine1698

Nuclear Power1954

Television1925

Airplane1903

Laser Beam1958

GPS1978

Anesthesia1842

Source: BDU Analysis

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Joseph Schumpeter: Incumbents’ Challenge

“It is not the owner of stage-coaches who builds railways.”

Joseph Schumpeter

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Clayton Christensen: Disruptive Innovation

“An innovation that is disruptive allows a whole

new population of consumers at the bottom of

a market access to a product or service that was historically only accessible to consumers with a lot of

money or a lot of skill.“

Clayton Christensen, 1997

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Incumbents Disruptors

Duesenberg Ford Model T

Ford Fairmont Honda Civic

Honda Accord Kia Optima

Disruptive Innovation: Automobile Examples

Source: BDU Analysis

1920’s

1970’s

Now

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Big Bang Disruption

Big Bang Disruption is “an innovation that, from the moment of its creation, is both better and cheaper than the products

and services against which it competes. Using new technologies in the Internet, cloud-based computing, and increasingly powerful and ubiquitous computing devices, Big Bang Disruptors can destabilize industries in record time, leaving incumbents and their supply chain partners

dazed, and, soon after, devastated.“

Big Bang Disruption, Larry Downes & Paul Nunes, 2014

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Innovators EarlyAdaptors

EarlyMajority

LateMajority

Laggards

Classic Product Life

Cycle

Big Bang Market Adoption

The “Chasm”

Big Bang Disruption

Product Life Cycle

Source: Big Bang Disruption, Larry Downes & Paul Nunes, 2014; Crossing the Chasm, Geoffrey Moore, 1991, BDU analysis

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Characteristics Of Successful Disruption

Source: BDU Analysis

All-new technology or business model innovation

Provides better value than existing product / service offered by industry incumbents

Adoption extends beyond early adopters into mainstream consumer segments

Incumbents’ response is hampered by legacy cost structures, infrastructure and regulations

Incumbent decline can be rapid and terminal

Value Benefits Cost

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Is This Model Still Valid?

Product Innovation LeadershipWe win because the market perceives our brand as having the cutting-edge (often overkill) products with superior features – justifying premium prices.Example: Apple Computer

Operational Efficiency LeadershipWe win because the market perceives us as having the lowest prices. Based on cost and process efficiencies that still allow us to return profits.Example: Dell Computer

Customer Focused LeadershipWe win because we are so customer-intimate that we are already there when the customer need arises. We offer tailored solutions before the customer feels like shopping around.Example: IBM w/ enterprise customers

Middle ground of mediocrity:Trying to lead

on all fronts

Source: The Discipline of Market Leaders, Michael Treacy & Fred Wiersma, 1995

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Disruptors Compete On All Three Value Disciplines

“Big Bang Disruptors are thoroughly undisciplined. They start life with better performance at a lower price and

greater customization. They compete with mainstream products on all three value disciplines right from the start.”

Big Bang Disruption, Larry Downes & Paul Nunes, 2014

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Successful Disruption: Smartphones

Source: BDU Analysis

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Successful Disruption: GPS Devices

2004 Garmin StreetPilot 2620

Cost: $1,516

2009 TomTom iPhone Navigation App

Cost: $100

2014 Google Maps App

Cost: Free

Source: BDU Analysis

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Successful Disruption: GPS Devices

0

10

20

30

40

50

60

70

80

90

100

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2008 2009 2010 2011 2012 2013

Ap

ple

iP

ho

ne

Net

Rev

en

ue

($ B

illio

ns)

Tom

Tom

An

nu

al R

eve

nu

e (€

Bill

ion

s)

TomTom International BV Apple iPhone

GPS Device Manufacturers Struggle; Smartphone Sales Grow

Source: TomTom International BV and Apple Inc. financial reports

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Current Disruption Case Study: Uber

Sources: “Clarifying Prices When You Hail a Cab with Uber, Other Apps”, WNYC.org, 1/10/2013; “Leaked Uber Numbers, Which We’ve Confirmed, Point To Over $1B Gross, $213M Revenue, techcrunch.com,

12/04/2013; “Uber value hits $18.2bn on fundraising”, Financial Times, 6/6/20104

• Latest funding round in June valued Uber at $18.2 billion

• 2013 revenue reported to exceed $200 million

• Gross bookings reported to have exceeded $1B

• As of Q4 2013:

• ~80,000 new signups each week

• ~1 million requests for pick up per week

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Uber Flattens The Competition

Source: “Uber/Lyft vs. taxis: Let the market decide, not taxi cartels and their government enablers —bureaucrats and legislators”, Carpe Diem Blog, 7/12/2014

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Kodak Could Have Been The Disruptor

First digital camera developed by Kodak in 1974

George Eastman with an early Kodak camera model

Source: “20 Years Ago, Apple and Kodak Launched the Digital Camera Revolution”, Mashable.com, 6/21/2014; “Profiles in Greatness: George Eastman”, Success.com, 6/23/2011

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But Fear Got In The Way

Kodak “was afraid the new invention would cannibalize

its foundational film business — and they were right. But instead of controlling the cannibalization, Kodak

allowed other manufacturers to steal its thunder.”

“20 Years Ago, Apple and Kodak Launched the Digital Camera

Revolution”, Mashable.com, 6/21/2014

Kodak’s 1994-97 partnership with Apple

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Demise Of Kodak

Demolition of Eastman Kodak’s Buildings 65 & 69

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Not All Disruptors Are Successful

Mobile RFIDPayment Fob

LaserdiscSegway

Oakley Thump Sunglasses Sony Betamax

Source: BDU Analysis

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Some Disruptors Were Ahead Of Their Time

2001 Compaq Tablet PC

2009 Archos 9 PC Tablet2006 Toshiba Portege

Tablets

1998 Diamond Rio

2000 Creative Nomad Jukebox

2000 ArchosJukebox 2001 Apple iPod

MP3 Players

2010 Apple iPad

Source: BDU Analysis

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Section IIDisruption in Retail Financial Services

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Financial Institutions

Retailers

Platform Players

New Entrants

Alternative Payments

Telecoms

Card Companies

Non-Bank Competitors

The Battleground

Savings Lending

Investments Insurance

Financial Services

Payments

Source: BDU Analysis

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Key Competitors - 2014

New EntrantsTelecoms

Retailers

Alternative Payments Source: BDU Analysis

Platform Players

Financial Institutions

Card Companies

Non-Bank Competitors

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FinTech Investments Have Tripled In Five years

Global financial technology investments hit $3B in 2013

Source: “The Boom in Global Fin Tech Investment: Fin Tech Grabs $3 Billion in 2013”, CB Investments, 3/27/2014

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Lending Club Quarterly Loan Issuance

Source: Lending Club

0

100M

200M

300M

400M

500M

600M

700M

800M

900M

1000M

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Lending Club facilitated $1.0 billion in new loans in Q2 2014

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Lending Club Leverages WebBank’s Bank Charter

Investor Member

Investor Member

Investor Member

Borrower Member WebBank

Promissory note and monthly payments

Funds to purchase notes + 1% service charge

Monthly payments of principal and interest

Loan funding

Promissory note

Loan proceeds

Promissory note

No Bank Charter

Utah-chartered* Industrial Bank

* Utah has no usury laws Source: Lending Club; CUNA Mutual Group analysis

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Lending Club’s Lower Cost Model

0

200

400

600

800

1000

LendingClub

CUs -Assets< $20M

CUs -Assets $50-

$100M

CUs -Assets

$100-$1B

CUs -Assets $1-

$5B

CUs -Assets> $5B

Op

erat

ing

Exp

ense

/ L

oan

s O

uts

tan

din

g

(bp

s)

Source: Lending Club; NCUA 5300 Q4 2013 Call Report Data

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Kabbage Trying To Disrupt Small Business Lending

7 MinutesSite: Kabbage.com

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Themes In Retail Financial Services Disruption

Disruptors seek to:

Source: BDU Analysis

• Use technology-driven business models, e.g., platform strategies

• Have a lower cost structure

• Find ways to bypass relevant laws and regulations

• Utilize low cost ways of moving money

• Aggregate customer data and monetize it

• Enter a single financial service before moving to other categories

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Section IIIPotential Responses to Disruption

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How To Fight Disruption

Rule 3:Use Defensive

Strategies to Buy Time

Rule 4:Build an

Offensive Strategy

Rule 2:Pay Attention to the

Clock

Rule 1:Be Alert

Source: BDU Analysis

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#1) Be Alert: Consult Your Truth-Tellers

“Find industry visionaries who see the future more clearly than you do, and who won’t sugarcoat it even when you

want them to.”

Big Bang Disruption, Larry Downes & Paul Nunes, 2014

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Determine What Is Signal vs. Noise

“How do we know whether a change signals a

strategic inflection point? The only way through is the process of clarification from

broad and intensive debate.”

Only the Paranoid Survive, Andrew S. Grove, 1996

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Distinguish Between Sustaining vs. Disruptive Technologies

vs.

Remote Deposit Capture Peer-to-Peer Lending

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Be Alert

Consult Your Truth-Tellers

Determine What is Signal vs. Noise

Distinguish Between

Sustaining vs. Disruptive

Technologies

Confront the Brutal Facts

Source: BDU Analysis

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#2) Pay Attention To The Clock

Source: futuresource consulting

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#3) Use Defensive Strategies to Buy Time

Possible Defensive Strategies

Mount Blocking Challenges

Know When to Exit a Business

Acquire the Disruptor

Be a Fast Follower

Source: BDU Analysis

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Mount Blocking Challenges: Taxi Protests Against Uber

Washington D.C.

MadridBerlin

London

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Mount Blocking Challenges: Walmart

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Be a Fast Follower

Fast Following

Source: Crossing the Chasm, Geoffrey Moore, 1991, BDU analysis

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Financial InstitutionsFinancial Institutions

Card Companies

Acquire the Disruptor

New EntrantsTelecoms

Retailers

Alternative PaymentsSource: BDU Analysis

Platform Players

Non-Bank Competitors

Retailers

Platform Players

New Entrants

Non-Bank Competitors

Card Companies

TelecomsAlternative Payments

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Know When To Exit The Business

Inflection Point Business declines

Business goes on to newer heights

Source: Only the Paranoid Survive, Andrew S. Grove, 1996

The Inflection Curve

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#4) Build an Offensive Strategy

Source: BDU Analysis

Identify Pockets of

“Non-Consumption”

Re-examine Your Priorities

Cannibalize Your Own Business

Look for Platform Solutions

Recognize the Need for Collective Action

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Identify Pockets of “Non-Consumption”

“Established companies are held captive by their customers and so routinely ignore emerging markets of buyers who

are not their customers.”

Clayton Christensen, Harvard Magazine, Aug. 2014

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Re-examine Your Priorities

“Most successful companies are so focused on maintainingtheir core business that when push comes to shove, the core will almost always kill off the disruptive innovation -

the new thing.”

David Duncan, Innosight, Harvard Magazine, Aug. 2014

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Cannibalize Your Own Business

“If you don’t cannibalize yourself, someone else will.”

Steve Jobs

Source: “Chart of the Day: Tracking iPhone, iPod sales”, CNBC.com, 1/4/2014

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Look for Platform Solutions: USAA’s Mobile Apps

• Banking• Get account balances• View account history• Transfer funds• Pay bills• Remote deposit

• Insurance• View policy details• Review coverages and

discounts• Get an auto ID card• Pay your premium• View past statements

• Investing• View real-time stock quotes• View market activity• Place a trade

• Advice and planning• Articles• Videos

Source: American Banker and USAA

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Credit Agricole’s App Store

Source: Credit Agricole

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Recognize the Need For Collective Action

Real Disruption May Require a True Concentration of Resources and Effort

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Some Notable Efforts Thus Far

Source: BDU Analysis

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Collective Action: Airlines Launch Orbitz in 2001

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Perhaps The Biggest Threat Of All

“I am dying to fund a disruptive bank.”

Marc Andreesen, 2/9/2014

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Questions To Consider

1. Are we positioned to successfully defend against a

truly disruptive bank?

2. What would a truly disruptive credit union look like?

3. Who has the vision to lead us in that direction?

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Important Disclaimer

CUNA Mutual’s analysis is based upon certain publicly available information and data, including NCUA 5300 Reports, and is subject to risks, uncertainties and other factors which could cause actual results or performance to differ from the future results or performance expressed or implied in this analysis. We disclaim any representation or warranty, express or implied, as to the accuracy or completeness of our analysis, as well as any obligation to update our analysis. Each recipient should conduct its own independent analysis of relevant information and data, and should base any business decisions upon such independent analysis.

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Disrupt The Disruptors: Innovate Organically

Source: “Talking to Tellers Remotely”, WSJ.com, 5/15/2012

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Fast Following: Remote Deposit Capture

0

2,000

4,000

6,000

8,000

Fin

anci

al In

stit

uti

on

s A

do

pti

ng

Historic Remote Deposit Capture Adoption

Source: “State of Remote Deposit Capture 2011: Signs of a Maturing Market”, Celent, 11/7/2011

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Music Industry: Waves Of Successful Disruption

Source: “Publishing in the Digital Age”, Bain & Co., Jan. 2011

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Music Industry: The Next Wave

Source:ubergizmo.com, BDU analysis

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Music Streaming Is The New Disruptor

50%

35%

-15% -13%-20%

40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

% Change in Music Streams and Unit Music Sales in the US (First Half of 2014 vs First Half of 2013)

On-Demand Streams (Audio)

Digital Album Sales

Digital Track Sales

CD Album Sales

Vinyl Album Sales

On-Demand Streams (Music Video) Source: “CHART OF THE DAY: Music Streaming Keeps Growing, But Vinyl

Isn’t Going Anywhere”, Business Insider, 7/7/2014