Sea Change Seen in Core Processor-Credit Union Relationship

COLUMBIA, S.C. – Next to the relationship with members themselves, perhaps the most valued tte–tte in the credit union industry in recent years has been that between the credit union and its core data processor. Long an exclusive province in which the data processor was the primary, if not sole, provider of core technology, that equation has rapidly changed for many credit unions as their need to integrate multiple solutions and offer new products forces the continued opening of both proprietary platforms and the competition for contracts. One participant in that process is Suzanne Wright of The Wright Consultants, who makes her living helping credit unions choose vendors, among other things. Once able to reside comfortably in a world of long-term relationships and closed software systems that helped reinforce them, core data processors now must contend with winds of change coming from two directions, Wright says. “Over the past five years, core processing providers have been challenged by both a rapidly evolving credit union industry, capable of offering services not contemplated in their vendors’ original design strategy, and a technological environment that has seen increasingly rapid development of new, and the obsolescence of `older,’ hardware and database platforms and infrastructure,” the Texas-based consultant says. “As long as five years ago, each core processing provider made a conscious decision to either begin immediately, or defer to some point in the future, the fundamental design and infrastructure required to insulate their platform from these issues,” the Texas-based consultant observes. “It is only in the past two years that the consequences of the choices made by the core processing vendors have become apparent to credit unions wising to remain on the leading edge of financial services providers,” she says. “These credit unions have found it necessary to either change core processing providers, or, where their current provider was unwilling to accommodate their business needs, adopt a `best of breed’ application product strategy long favored by the banking industry,” Wright says. GOING IT ALONE Seeking the “best of breed” is now a way of life for Boeing Employees Credit Union. With assets exceeding $4 billion and more than 320,000 members, BECU is an industry leader that’s also not afraid to strike out on its own. Butch Leonardson, the big CU’s IT chief, puts it bluntly: “For BECU, the role of a relationship with a proprietary vendor is over. We took over the systems integration problem and now buy only open-standards solutions,” Leonardson says. “We went live with seven new applications last Nov. 12.” While Seattle-based BECU might appear to be empowered by size and resources that most other CUs can’t claim, Leonardson says that’s not necessarily so. “IT staff size and IT budget is not the issue,” he says. “Too many CUs are risk averse. Their fear limits their opportunities to give `wow’ service to their members. Sticking with a proprietary vendor helps enable this fear.” BECU has grown what Leonardson calls a “hub and spoke” arrangement of solutions centered on “an intelligent message broker.” “The idea of a core processor is no longer a relevant concept,” Leonardson maintains. “As CU’s expand their offerings, they become more network-centric than core processor-centric. “Their integration strategy needs to be the core, not their transaction system.” For its transactions, enterprise database and consumer loan servicing functions, BECU turned to Open Solutions Inc., whose name speaks to its approach: A core platform that revolves around integration of solutions from multiple vendors. While he says his firm is winning converts, and he agrees that “the proprietary nature of the relationship is a thing of the past,” OSI’s chief executive says the industry’s new business proposition is “not necessarily new.” What is new, Louis Hernandez says, “is that the competitive pressures have intensified to a degree where it’s made the nagging problems of legacy and proprietary relationships a question of severe competitive disadvantage. “While we like to take credit for that, in reality the industry dynamics are changing the way credit union board members and other leaders are thinking about their core relationships.” The core relationship is with members, and this “sea change that is sweeping all of community banking hasn’t changed that,” he says. The technology, however, is changing. And quite rapidly. “The 40-year-old COBOL-based technology is basically gone,” Hernandez says, but that doesn’t mean working relationships can’t remain close. “We work to have true partnerships with them,” he says. “We’re going to listen and provide them with technology that can be open and flexible, and not force them to pay every time they have to make a little change in the application.” Connecticut-based OSI has 14 credit union clients on its core platform but relationships with “a few hundred,” Hernandez says, and he says “we’re winning a lot. Sixty percent of our backlog is credit unions.” Industry veteran FedComp, meanwhile, has about 2,700 credit union clients, the most in the business, and many of them are small, more traditional organizations that one might not think would be out looking to quickly expand product lines or change long-time relationships with core vendors. Derrick Smith might beg to differ. “Boy, I don’t know if it’s a thing of the past, but it’s sure well on its way,” the FedComp president says of the traditional DP-CU ties. “It’s much more open and competitive market than what has ever been before,” he says. That said, he still sees his Virginia-based company striving to be the primary solution provider for its clients, while letting some of the peripherals go. “At FedComp and other vendors you see some of the traditional back-office processing chores, things like printing that you wouldn’t really think of us as technology, going to subcontractors,” Smith says. “And companies like us are restructuring our traditional technology staff to offer a broader base of systems engineering and integration, so we can deal with a broader base of technologies through our core system,” Smith says. “So in that sense, I’m not sure the role of primary technology provider has changed at all. Credit unions still generally begin or end their searches with us and we’re continuing to work to be their one-stop technology shop.” Still, things are not the same. “The relationship is not the same, but that’s because it has evolved to a more strategic level, capitalizing on the traditional core vendor role,” says Anne Stauch, client executive for the 1,500 credit unions served by the Texas-based EDS Credit Union Industry Group. “When credit unions are considering alternative products and services, they look for a more consultative relationship with their core provider,” Stauch says. “At the same time, they like to pick and choose the products that add the most business value. “Today, the most successful relationships are focused on the best way to address the credit union’s future business needs – from the front office to the back office,” she says. That consultative process works both ways, adds another core processing mainstay. “We have found our clients to be a valued source of ideas for the creation and integration of ideal business solutions,” says Joe Antellocy, president of AFTECH, a Pennsylvania-based Fiserv unit with 85 core CU clients. “Likewise, it seems our clients are open to sharing their strategic plans, as many of their objectives are tied to automated business processes,” he says. “I think this signals a change from a buyer-seller environment, which can be adversarial, to a partnership environment.” Antellocy reinforces his point by noting that “the business relationship is changing to one of shared risk and reward. Our clients are now willing to support creation or integration initiatives with funding on the front of the project. “Previously the entire risk associated with product and integration ventures were the sole burden of the vendor.” That change in emphasis shows up in the vendor selection process, too, Stauch says. “We’ve seen the selection criteria change somewhat to focus on providers that can help credit unions mitigate risk, manage growth and improve efficiency,” the EDS executive says. “As the economy improves, credit unions will likely shift their priorities to how to best manage growth – for example, with a focus on wallet share, the most profitable members and new revenue streams.” DP RELATIONSHIPS: A NEW FORUM New revenue streams and new kinds of cooperation are a way of life at another credit union known for technological and business innovation: FORUM Credit Union in Indianapolis. Through its FORUM Solutions subsidiary, FORUM offers its internally developed solutions to other credit unions, and now lives in what its chief IT strategist calls “a world of co-opetition.” “We are a customer of a core provider, we have marketing alliances with other core system providers and we compete with several others,” said Doug True, FORUM’s senior vice president and CIO. “From this perspective, we do believe that the long-standing traditional roles between credit union and core processors are a thing of the past,” he says. True invites the rest of the industry to join the ride. “Many of the core system providers have now developed interfaces built on industry standards that enable credit unions to choose the solutions they desire to complement their core system,” he says. “We are seeing more and more credit unions having the freedom to finally allow their business plans drive their technology decisions rather than having their technology options driving their business plan,” True says. “This is long overdue.” – [email protected]