9/23/2015

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Patrick McElhenieDirector, Product Management

CUNA Mutual Group

Patrick.mcelhenie@cunamutual.com

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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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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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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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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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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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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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

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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

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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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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

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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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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

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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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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

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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

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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:Recognize the

Disruption

Source: CUNA Mutual Group Analysis

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#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

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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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#2) Pay Attention To The Clock

Source: futuresource consulting

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Demise Of Kodak

Demolition of Eastman Kodak’s Buildings 65 & 69

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#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

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#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

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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

Source: American Banker and USAA

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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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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 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?