Tech debt is the monster in every credit union’s closet, and eliminating that debt to stay relevant and viable can often seem insurmountable. LendKey’s Chief Technology Officer, Michael Hawkins, believes credit unions will find success with a step-by-step approach and strong partnerships. 

Tech debt is a metaphor initially attributed to software development, describing the operational cost that arises when quick, suboptimal solutions are chosen over longer-term strategies that align with the organization’s goals and sustainability. In a financial context, tech debt manifests when outdated systems, legacy software, or inadequate infrastructure hinder the institution’s ability to adapt to new market demands or member expectations – and if it’s not managed efficiently, it can impede growth and innovation, leading to a loss of member engagement and long-term viability.

The importance of analytics and data sharing

In a tight liquidity environment, it’s more crucial than ever for credit unions to have a comprehensive view of their financial health. “I think it’s key for credit unions to understand FinTechs can be partners, not just disruptors. As partners, they can help credit unions understand that even if you’re not able to transact deals today, you should still have a good understanding of what your position is across all your assets, whether on the deposit side or the loan side.”

Dedicating substantial time and resources to enhancing their analytics capabilities is pivotal for making well-informed decisions. This involves analyzing current financial standings, examining historical data, and predicting future scenarios. The objective is to integrate and leverage data from diverse sources, allowing for a comprehensive understanding of financial positions. By doing so, organizations can assess the implications of potential actions on their capital, interest income, risk exposure, and overall financial health, thereby facilitating a more informed strategy for managing finances and investments. This holistic approach to financial analysis ensures that organizations are better equipped to navigate complexities, optimize their operations, and mitigate risks effectively.

Credit unions often face challenges analyzing their collected data due to a lack of staff, expertise, or resources to effectively compile and utilize it. While FinTechs present an opportunity to bridge this gap, these solutions require significantly more data than credit unions typically can provide. But there’s a promising solution rooted in the credit union sector’s core principle: cooperation. By collaborating and sharing data, credit unions can enhance their capabilities, adapt, and solidify their standing.

“By cooperating, credit unions can look like a national financial institution without necessarily being a national financial institution.” Hawkins continued, “A second solution is realizing there’s no such thing as insufficient data. In a spirit of cooperation, credit unions should agree to collect data, put it somewhere in a cooperative environment, and then constantly feed that data through the AI engine. “Just like credit unions cooperate on operations, they need to cooperate on analytics and technology far more than they are today.”

Reducing tech debt 

Hawkins advises credit unions to take a proactive approach when addressing tech debt. “Remaining vigilant and proactive is crucial; just as credit unions grew complacent with loan pricing strategies, the same principle applies to technical debt, necessitating immediate and consistent attention rather than observation or postponement.”

Continuous evaluation and updates of technology systems rather than delaying decisions are important, but keeping a north star to orient those decisions around is essential. Credit unions should begin by envisioning their business strategy for the next five years and then reverse-engineer what their technological infrastructure must embody to prop up that vision. The pivotal decision revolves around identifying the primary necessity, often referred to as the core banking system. This involves determining whether a singular system will suffice or if a combination of two or more systems is necessary. With this strategy as a foundation, credit unions can then outline their current position, target future state, and devise a strategic plan to bridge the gap, ensuring that technology and business goals are perfectly aligned.

Hawkins elaborated, “Identifying your ultimate goal allows you to segment the work into manageable tasks, mitigating feelings of being swamped. This is crucial since both boards and CEOs often find the enormity of updating core systems daunting when it’s a process of incremental steps. Consider a cross-country drive from Boston to San Diego as an analogy. Facing the entire journey at once may seem insurmountable. Yet, by setting a shorter, immediate goal, say reaching St. Louis by tonight, the task shifts to seeming more attainable, fostering a mindset attuned to gradual progress.”

Looking to the Future

It is a testament to credit unions’ resilience and adaptability that they continue to serve their communities and members with unwavering commitment, even in the face of tech debt. This commitment is the heart of the credit union movement, and with prudent management and the right partnerships, it can flourish in the digital era.

The road ahead has its challenges, but the destination is clear. By confronting tech debt proactively, credit unions ensure their survival and position themselves as leaders in innovation and service excellence. The time to act is now, and by leveraging these strategies, credit unions can pave the way for a vibrant and sustainable future.