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9/23/2015
1
Patrick McElhenieDirector, Product Management
CUNA Mutual Group
Financial Services Disruption:Battle For The Consumer Loan
Jamie Dimon on Disruption
“Silicon Valley is coming. There are hundreds of startups with a lot of brains
and money working on various alternatives to traditional banking.”
Jamie Dimon, Chairman and CEO, JPMorgan Chase & Co.
Letter to Shareholders – April 8, 2015
1. What is Disruptive Innovation?
2. Disruption in Financial Services
3. Lending Disruption – The Battle
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2
WHAT IS DISRUPTIVE INNOVATION?
Innovation is Nothing New
TodayTwo-WayTelephone
1876
Wheel3340 BC
MicrowaveOven1955
Printing Press1440
Smart Phone1994
Paper200 BC
Antibiotics1928
Steamboat1873
Light Bulb1800
Radio1900
Internet1969
Steam Engine1698
Nuclear Power1954
Television1925
Airplane1903
Laser Beam1958
GPS1978
Anesthesia1842
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3
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
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
Disruptive Innovation: Automobile Examples
Incumbents Disruptors
Duesenberg Ford Model T
Ford Fairmont Honda Civic
Honda Accord Kia Optima
1920’s
1970’s
Now
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4
What Experts Have To Say
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
Big Bang Market Adoption
Innovators Early Adopters Early Majority Late Majority Laggards
Source: Big Bang Disruption, Larry Downes & Paul Nunes, 2014; Crossing the Chasm, Geoffrey Moore, 1991, CUNA Mutual Group analysis
Classic Product Life
Cycle
Big Bang Disruption Product Life Cycle
The “Chasm”
Characteristics of Successful Disruption
Disruption
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 & regulations
Incumbent decline can be rapid and terminal
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5
Successful Disruption: Smartphones
Successful Disruption: GPS Devices
2004 Garmin StreetPilot
2620
Cost: $1,516
2009 TomTom iPhone Navigation App
Cost: $100
2014 Google Maps App
Cost: Free
Successful Disruption: Uber
Source: “Clarifying Prices When You Hail a Cab with Uber, Other Apps”, WNYC.org, 1/10/2013
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6
Not All Disruptors Are Successful
WebTV Laserdisc Segway
Mobile RFID Payment Fob
Oakley Thump Sunglasses Sony Betamax
DISRUPTION IN RETAILFINANCIAL SERVICES
The BattlegroundFinancial
Institutions
Retailers
Platform Players
New Entrants
Alternative Payments
Telecoms
Card Companies
Non-Bank Competitors
Savings Lending
Investments Insurance
Payments
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7
Non-Bank Competitors Financial Institutions Retailers
Card Companies Telecoms Alternative Payments
New Entrants
Source: BDU Analysis
Platform Players
FinTech Investment: Moving Beyond Payments
Mo
bile
P
aym
en
tsP
2P
L
end
ing
We
alt
h
Ma
na
ge
me
nt
Ins
ura
nc
e
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Case Study: Alternative Payments
"We challenged ourselves to find a better
experience than swiping a credit card. We
figured the only better way to pay would be
to do nothing. Just walk in a store, and, like
magic, when you're ready to pay, money is
transferred securely. No wallet. No card.
Not even touching your phone.“
- David Marcus, President, PayPal
"We challenged ourselves to find a better
experience than swiping a credit card. We
figured the only better way to pay would be
to do nothing. Just walk in a store, and, like
magic, when you're ready to pay, money is
transferred securely. No wallet. No card.
Not even touching your phone.“
- David Marcus, President, PayPal
9/23/2015
8
Metromile: Per Mile Insurance Coverage
Themes in Retail Financial Services Disruption
Use technology-driven business models (platform strategies)
Have 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
Apple Pay Taking Over Financial Services
APPLE BANK
Step 1
Step 2
Step 3
Step 4
APPLE CREDIT CARD AND MERCHANT SERVICES
ADVANCED CONSUMER AND MERCHANT ADOPTION
EARLY CONSUMER AND MERCHANGE ADOPTION
Source: Apple Pay Is The First Step In Apple’s Financial Services Takeover, Oct. 2014
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Apple Pay Taking Over Financial Services
1. Early consumer and merchant adoption
2. Advanced consumer and merchant adoption
3. Apple credit card and merchant services
4. Apple bank
Source: Apple Pay Is The First Step In Apple’s Financial Services Takeover, Oct. 2014
DISRUPTION IN LENDING –THE BATTLE IS JUST BEGINNING
“Our real competition is convenience.”- Credit Union Executive, March 2015
9/23/2015
10
What Experts Have To Say
Ease of transaction. Period.
-Doug Lebda, Lending Club CEO
Consumer Expectations Are Changing
When was the last time you couldn’t … …find your way?…plan your day?…get the best price?…find the best product?…connect to the right person?
Customers are looking to solve real time problems … and expect instant solutions.
Case Study: New Entrants
• Leading P2P lender
• Google took a $125M stake in the company in May 2013
• Majority (82%) of borrowers using their loans to consolidate debt / pay off credit cards
• Facilitated $258M of new loans in January 2014
*FICO score of 660+ Source: Lending Club, lendacademy.com
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11
Lending Club Leverages WebBank’s Bank Charter
Investor Member
Investor Member
Investor Member
Promissory note and monthly payments
Funds to purchase notes + 1% service charge
No Bank Charter
Borrower Member WebBank
Monthly payments of principal and interest
Loan funding
Promissory note
Loan proceeds
Promissory note
* Utah has no usury lawsSource: Lending Club; CUNA Mutual Group analysis
Utah-chartered* Industrial Bank
Kabbage Tries To Disrupt Small Business Lending
7 MinutesSite: Kabbage.com
SoFi: Expands Beyond Student Loan Consolidation
9/23/2015
12
The Demographic Driving Lending Disruption
• Are the largest population cohort in US history
• Will outnumber boomers 78 million to 56 million by 2030
• Are in their prime borrowing years
• Are 10 times more likely than boomers to consider using P2P lenders
• Account for most of the traffic in digital banking channels
• Are the most likely demographic to embrace mobile payments
Millennials:
Almost ___% of Millennials say their phones never leave their sides.
A
B
C
D
75%
90%
50%
80%
USA Today
According to a CNN Money report, ___% of small business owners in this age cohort (Millennials) have used nontraditional lenders.
A
B
C
D
3%
7%
14%
19%
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13
Average Age Of Borrowers Among P2P Lenders
Lending Club: 34
Credit Unions: 47
The Battle: Online Access Revved Up
ProsperLendingClub
SoFi OnDeck
Biz2
CreditPave
Big Retailers As Lenders
9/23/2015
14
A recent report in American Banker showed online lending doubling in volume to ___ in 2015.
A
B
C
D
$96 Million
$7 Billion
$50 Million
$25 Billion
Source: Online Lending a Disruptive Innovation, Credit Union Times, Dec. 2014
Key Influences
Advances in integrating big data into personalized, preapproved loan offers via mobile and online channels
New payment offerings driven by shift in card fraud liability to merchants as of 10/31/2015
Continuing innovation to streamline online lending processes
Widening acceptance of mobile banking/payments
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15
How To Fight Disruption
Rule 3:Use Defensive
Strategies to Buy Time
Rule 2:Build an
Offensive Strategy
Rule 4:Pay Attention to the
Clock
Rule 1:Be Alert
Optimize or Lose Business Opportunity
of shoppers admit mobile purchases are impulse-driven and they’re more likely to purchase from and interact with a brand that offers an engaging mobile experience
80%
of mobile users will abandon your website if it takes more than 3 seconds to load
57%will abandon a
purchase transaction if the shopping cart isn’t optimized for mobile devices
30%
Source: 5 Reasons You Absolutely Must Optimize Your Website for Mobile, Huffington Post, 4/16/2014
Consumer Lending Strategies – Reduce Friction
REACTIVESIT AND WAIT o Initiated by customer (fundamental flaw) o Application required
• Online applications• Instant approval• Many providers • Little differentiation • Little/no competitive
advantage
PROACTIVE
ASK FOR BUSINESSo Promotions (seasonal or need driven)o Targeted pre-approvals & pre-qualificationso New account cross-sell (application
required)
• Spray & Pray” marketing initiatives
• Advertising & promotions• Teaser rates & incentives• Segmentation & targeting
strategies • “Instant” applications w/
cross sell
PREEMPTIVE
EMPOWER THE CONSUMERo Comprehensive Pre-Screened Lending
(CPL)o NO Applicationso Perpetual loan approval statuso Multi-product o Omni-channelo Customer-centric
• Constant/consistent messaging
• All touch points• All direct channels• Instantly actionable
response
9/23/2015
16
Omni Channel
Experience
Invest in Digital
Channels
Reform Physical Channels
Initiate Personalized Marketing /
Data
Be Alert
Consult Your Truth-Tellers
Determine What is Signal vs.
Noise
Distinguish Between
Sustaining vs. Disruptive
Technologies
Confront the Brutal Facts
48
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:Recognize the
Disruption
Source: CUNA Mutual Group Analysis
9/23/2015
17
49
#1) Recognize the Disruption
Source: CUNA Mutual Group Analysis
Consult Your Truth-Tellers
“When you’re the incumbent, your key decision is to choose carefully what you view as disruptive or not.”
“The Four Stages of Disruption”, Steven Sinofsky, Board Partner, Andreessen Horowitz, 2014
Distinguish Between
Sustaining vs. Disruptive
Technologies
Confront the Brutal Facts
Determine What is Signal vs.
Noise
50
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
51
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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18
52
#2) Pay Attention To The Clock
Source: futuresource consulting
53
Demise Of Kodak
Demolition of Eastman Kodak’s Buildings 65 & 69
54
#3) Use Defensive Strategies to Buy Time
Possible Defensive Strategies
Mount Blocking Challenges
Acquire or Partner with the Disruptor
Be a Fast Follower
Source: CUNA Mutual Group Analysis
9/23/2015
19
55
#4) Build an Offensive Strategy
Identify Pockets of “Non-Consumption”
Re-examine Your Priorities
Cannibalize Your Own Business
Look for Platform Solutions
Recognize the Need for Collective Action
Source: CUNA Mutual Group Analysis
56
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
57
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
9/23/2015
20
58
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
59
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
Source: American Banker and USAA
60
Recognize the Need For Collective Action
Real Disruption May Require a True Concentration of Resources and Effort
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61
Collective Action: Airlines Launch Orbitz in 2001
62
Perhaps The Biggest Threat Of All
“I am dying to fund a disruptive bank.”
Marc Andreesen, 2/9/2014
63
Questions To Consider
1. Are we prepared to defend our market position versus a truly disruptive bank?
2. Will our current value proposition still resonate with members ten years from now?
3. Do we have a clear vision of what retail financial services will look like in ten years?
4. What would a disruptive credit union look like?