As credit unions continue to celebrate Leadership Month, Doug welcomes three credit union advocates in the fintech space to “C.U. on the Show” who believe leaders should get comfortable taking risks, innovating, and making bold strategic decisions if the credit union movement is to stay competitive—and survive. The conversation invites listeners to embrace bold leadership and ask hard questions about how credit unions will remain relevant in a rapidly changing technological landscape. The guests also discuss how credit union leaders can build a foundation of bold leadership that’s forward-thinking, progressive, and competes with larger financial institutions.
Doug’s is joined by:
- Omar Jordan, the founder and CEO of Coviance, a fintech that’s improving the home equity and HELOC lending experience. Omar has an emotional connection to credit unions, which provided him with opportunities during various chapters of his financial life. His work seeks to give back to credit unions with technology that will allow them to compete with fintechs.
- Kristopher Kovacs, the president and CEO of Constellation Digital Partners, Inc., which gives credit unions access to the latest innovations from fintechs and fintechs access to credit union decision-makers. Kris has three decades of experience working with credit unions, remembering first observing the “people helping people” philosophy through his grandmother, a former employee.
- Jeff Kline, the president and CEO of Members Development Company (MDC), a credit union network that connects industry leaders, pools resources for research and development (R&D), and identifies strategic products and services. MDC also launched Curql, a venture capital fund that invests in technologies that positively impact credit unions. Jeff has over 35 years of financial services experience, having aligned with the philosophy and culture of credit unions throughout his career as a CPA and auditor.
The Current Credit Union Challenge
While credit unions have sustained solid growth over the last 30 years, there has yet to be substantial development of new products, services, and experiences that capture members of the digital-first generation. This is ironic, considering credit unions began as disruptors on the financial scene over 50 years ago.
Generally, credit unions are financially conservative, seeking low-risk initiatives that help offer their members safety and security. However, it also means credit unions fall behind the technological curve, often playing catch-up. And with the rise of fintechs that outpace credit unions with their experience and R&D budgets of big banks, it’s happening faster and faster. The legacy structure baked into the industry and the slower adoption rate of credit unions are making them less experienced and efficient partners to potential members than their competitors. So how can credit unions mitigate the risk of falling by the wayside?
How Credit Unions Can Build a Foundation of Bold Leadership
According to Omar, Kris, and Jeff, credit unions must shift their status quo mindset when it comes to innovation, which can begin by building a foundation of bold leadership. In their conversation, they offer insights into how credit unions may start to do this with efforts such as:
- Board member engagement. Board members have the power to accelerate or stagnate organizational growth and innovation. However, credit union leaders must find ways to educate, incentivize, and gain buy-in from their board to get the support to take more risks and drive their credit unions forward.
- A culture that fosters innovation. Currently, credit unions are following, not leading, in innovation. The guests discuss how CEOs and senior management must take strategic risks, get laser-focused and selective on direction and tech requests that will provide large-scale benefits, and embrace failure for the sake of progress.
- Fintech collaboration. Developing new member products, services, and experiences with cutting-edge technology takes time, sometimes a decade or more. With limited IT and R&D resources, credit unions can leverage strategic partnerships with fintechs already answering integration and UX questions.
- Ambitious long-term planning. Another issue involves leaders who refrain from taking bold moves as they near retirement to avoid job and income risks. While a valid concern, credit unions must create environments in which leaders feel supported and have opportunities to take balanced risks while also understanding they may never see the completion of their efforts during their tenure.
With time on the line, the guests discuss that credit unions must ask hard questions now because the stakes are more significant than ever. Hear more of their conversation about pushing boundaries and giving the industry the permission to go in new directions so the movement can reach its fullest growth potential.
Omar Jordan, Coviance, Kristopher Kovacs, Constellation Digital Partners, Inc., Jeff Kline, Members Development Company, and Curql are not affiliated with or endorsed by ACT Advisors, LLC.
Audio Transcription (pulled from the podcast)
Doug English (00:01)
Welcome to today’s podcast! I’m excited to introduce our guests: Jeff Kline, Omar Jordan, and Kris Kovacs. All three of these guys are prominent figures in the credit union movement, known for their innovative ideas and leadership. In this episode, we’re going to have a discussion of bold leadership in the credit union movement. Talking about working with fintechs and how to deal with change in the system. So get ready for an interesting discussion; let’s get started.
Jeff, Chris, and Omar, I’m delighted you could join me on “CU on the Show.” Today, we’re here to talk about bold initiatives, bold leadership in the credit union movement. But first, tell us a little bit about you. How did you get started working with credit unions? What is your connection? What is your emotional connection to this movement that we think so much of and want to drive forward? Why don’t we start with Omar since he’s the one that got this idea started.
Omar Jordan (01:17)
All right, well, if it wasn’t for credit unions, I wouldn’t be where I’m at today. On a personal level, and on a professional level, I remember just having a high interest rate, personal loan debt, unsecured debt—looking for ways to pay it down—and a credit union reached out and said we can do it better. My first car loan was from a credit union, my first house loan was from a credit union after I was turned down everywhere else. Credit unions took a chance on me as a member, every time in every chapter of my life. And I feel like I owe it to the industry to give back somehow with what I do today, which is building technology. It allows them to compete in the landscape of fintechs that want to go after their members. And it’s an intimate relationship between me and credit unions. I’m grateful to be in the industry.
Doug English (02:12)
Yeah, thank you Omar. Kris, go ahead.
Kris Kovacs (02:17)
Doug, thank you very much. So I’ve been in the industry for three decades now. And in that experience, I do not count the fact that when I was very, very young, probably four or five, my father was a deputy sheriff in Fairfax County, Virginia, and my mother was a nurse. And when they had to swap me, hand me off, sometimes between shifts, they would drop me at my grandmother’s, who worked for Navy Federal. And when I was four, I would stamp loan paperwork on her desk waiting for her to be done so we could go home and I could get into whatever four-year-old Chris got into. So I’m a legacy, a credit union legacy. And from my perspective, I have worked almost entirely within the industry and just adore it, worked through college and obviously all the way up until today. So credit unions mean a lot to me. Today, I’m the president and CEO of Constellation Digital Partners. We’re a CUSO that was spun out of Coastal Federal Credit Union when I was there as the CIO. We offer an open digital platform for connecting fintechs and credit unions today. So thank you very much for having me.
Doug English (03:28)
Kris, let me get this right. You are approving loans when you’re four years old?
Kris Kovacs (03:32)
No, disapproving stamping disapproved loans. She’d give me a stack of loans that needed to be disapproved that had already been disapproved by the actual adults in the room. And my job was just to stamp them with the big red disapprove stamp.
Doug English (03:50)
Wow, there’s a lot of those available to you, huh? Interesting. Go ahead, Jeff.
Jeff Kline (03:59)
Well, Kris, now that makes sense that I heard the three-decade thing last week. And now that I know you started when you were four it all makes sense. And yes, I have Kris beat and I will just say more than more than three decades. And honestly, I could talk about this for 10 minutes but I was just one of those hotshot young auditors who worked for one of the Big Eight accounting firms back then. And one of my clients was US Central Credit Union. Anyone who’s been around more than 15 years remembers US Central. And so I went from finance to finance, not a very heartwarming story. But as I traveled around and got to know all the corporate credit unions and the leagues, I finally got what this natural person credit union thing was, started checking into that and said, yeah, I think I’d like to try that; this feels like a place I might be able to make a career. I was blessed that my first CEO came from a smaller credit union; he was in the HR department at Dillon Food Stores and they started a credit union and he went from HR to being the president of the credit union to being president of 66 Federal where I started my career in my first natural person credit union. So it was a blessing not only because he really believed in credit unions and believed in the philosophy, but he had that HR background. And so at that time, 26 years old, I was asked to run his branches. I was a CPA and worked at US Central, where the whole credit philosophy thing didn’t make it up to. So it was a real blessing to get to work for someone like that as my first foray into credit unions. And it really helped me see the other end of the spectrum, focusing on people helping people and driving culture and leadership. So I was very, very lucky.
Doug English (05:45)
When we set up this podcast, we put out a bold idea, and that was that we’re going to talk about what bold leadership means in the credit union movement. And I would say, and why that’s important. So who wants to go first? Maybe Jeff, since you’ve just warmed us up, keep on rolling. What does bold leadership mean in the credit union movement? And why is that important today?
Jeff Kline (06:11)
Well, the first two things that popped in my mind don’t feel very bold, but they feel foundational. One is you really gotta lead with culture first. I think the next thing is that we really need to educate our board. And again, this is not very bold, but I hear over and over and over again, that in most credit unions, the board can be an impediment, or they’re just sort of rubber stamping, if you will. And my attitude is if you can really educate your board, bring them up to a level where they really understand your business, it does a couple things for you. One, they recognize when you’re kicking ass, right, if you’re doing a great job, they’ll recognize that, they know the difference. And I think the second thing is that you can be bolder, you can make bigger decisions, and you can take risks. A lot of times the boards they hear from the NCUA about what their job is, and if they can support your ability to take risks, because really, to me, that’s the third thing is we really need to take more risks. As an industry, it’s like if something fails, we did something wrong. And my answer is, if nothing ever fails, you’re not pushing the boundaries enough. Because we’ve got a lot to contend with here. And if we don’t start taking some chances, and quite honestly, my definition of risk might be different if I was the CEO of a credit union, but I have done that. And I think when we take risks, they’re awfully small bets. I would love to know the last time somebody said I’m willing to run at breakeven this year to move this initiative forward. And I’m gonna give up 100 basis points of ROA, or I’m willing to settle for 60 basis points ROA for the next three years to push this initiative that’s going to make a difference for our organization. And I’m sure there’s some people out there who have done that. But that’s a really, really, really small percentage.
Doug English (08:00)
Very well said. Very interesting in making sure the board is educated, of course, very much also goes into if you are considering changing jobs, and the recruiters are calling you, and you’re looking at where you might go, making sure that board is deeply educated gives you the springboard to take more risks, and boldly lead that institution forward as a great takeaway. Omar or Kris?
Omar Jordan (08:30)
Yes, Jeff, I am curious, from your perspective, and maybe for Kris, since you have more experience in this space than I do. Can a CEO of a credit union be selective to some degree as to who sits on their board? And I think maybe before I even go any further, let’s just say to whoever is listening to the podcast that this is all about transparency, and just calling it what it is. There are board members who go to GAC for the free pens, and there are board members who go to GAC to be strategic. And so can a CEO be selective and resurface or surface up the ones he or she is targeting to be on that credit union’s board?
Kris Kovacs (09:23)
Omar, what I would say is remember that a board member is elected by the credit union membership and not by the executive team, right? Hire the executive team to be able to do that work. That having been said, I’ve seen credit unions prioritize the type of involvement, and look for the type of involvement in potential board members that would be more indicative of somebody who was going to push the organization versus corralling a group full of knowledge of nominees who were there for the chicken dinners. It’s really a partnership between the CEO and the chairperson to really define what the culture of the board is going to be. And then ultimately, I think it’s really the responsibility of a credit union board chair to drive that culture into the board itself, right? Certainly the CEO can be supportive but it’s not the CEO’s job. The CEO’s job, though, in working with the chairperson, should be to develop the next best version of the board. It’s a little bit different from where you and I sit right now. And you in particular, as a startup, in the startup world we try to find people who can add some piece we don’t have inside of our company to really help us drive our business forward and drive to those new things. I’ve met board members who do exactly that for credit unions, because obviously I’ve spoken to a lot of credit union boards over the years. And I’ve met some who don’t. And I think, in the end, it’s a matter of what culture the chair and the CEO want to create. You know, for state-chartered credit unions that actually pay their boards, they tend to be a little bit more startup-like in some cases. So that’s probably part of it. Board members give up a great deal of their time and effort to participate inside the credit union governance structures. And in my opinion, one day, I think if we want professional boards they should be paid.
Doug English (11:34)
Do you guys have any feeling for how frequent that is seen in the credit union movement? Paid boards?
Jeff Kline (11:40)
Well, my understanding is a federally chartered credit union can’t do that. So that eliminates a good swath of them. I would have to guess that maybe 15 states probably allow that. And I would suspect that not all the credit unions in those states take advantage of that. And the ones that do, what they do is all over the place. I’ve seen a credit union that just offered healthcare benefits for its board members, which is not a bad thing. I’ve seen some that might offer a couple grand a board meeting or so much for a board meeting, so much more for the chair, so much for committee meetings, which to me feels like it aligns really well with what happens in the corporate world. And in my three-plus decades, I’ve been in six different boardrooms. And it’s all over the place, how they move, how they govern themselves, how they hold each other accountable, how they improve and strengthen. And I’ve been in some phenomenal boardrooms, and none of them were being paid. But I’ve been in some incredible boardrooms; I wouldn’t say I’ve ever been in a bad one. But I’ve been in some tough ones that migrated toward better.
Omar Jordan (12:54)
I wonder if there’s some data on that, to say 15 states X amount of credit unions, this is what came out of paying the board. Because I feel like to your point, a federally chartered credit union does not allow for that. But it’s 2023. And business is done way differently than it was. And therefore some of these things could be revisited. Maybe if the data shows, the proof is in the pudding, so to speak.
Jeff Kline (13:30)
So, Omar, I would say the proof is not today. I think one of the things is that paid or not paid, we really have to align metrics and performance. And there are some great boards that are not paid. And I’m sure there are some great boards that are paid. You know, if you put that in place, and let’s just say you have a very mediocre board and you put in pay, if you think you had a problem with board members staying a long time before each other got paid—I mean, most of them stick around for the free trip to Hawaii or I know that’s not fair to paint them all with the same brush but we’ll just call it the stereotype and stereotypes are stereotypes for a reason. But the opportunity to go to Hawaii once a year, or whatever they may do and again, that’s not to condemn the quality of the work that person does. But the point being, does the board have term limits? Does it have performance expectations? Do they have performance evaluations? Does the nominating committee take those things into consideration when they’re nominating current board members? And there’s a lot of things. I don’t want to turn this into a board member conversation because that’s not fair; there’s a lot of other leadership issues.
Kris Kovacs (14:40)
I was gonna kind of step off of the board train as well. And here’s why. I liked the idea when you’re thinking about bold leadership to start with the board because the board’s going to grant their CEO some degrees of latitude. They’re gonna set the expectations and they do the evaluation on the CEO for how they have done their job or not. The opportunity, I think, is for the board and for the people who hold those roles and CEOs to really push beyond the boundaries of where we are today. We tend to start with, here’s the economic performance we want to do, and then we back into the rest of the business. The challenge with that is that’s always playing from the back of the field. We were sitting in a meeting last week in regard to a NMDC thing with Jeff. And one of the things that popped in my head was we haven’t had a new product since the debit card.
Jeff Kline (15:38)
We didn’t invent that, Kris. We followed somebody else.
Kris Kovacs (15:43)
We as an industry don’t have a new product since debit cards.
Jeff Kline (15:50)
I would say overdraft protection is newer than that, if you call that a product, not to split hairs.
Kris Kovacs (16:01)
Not to split hairs, right? If we’re not giving permission to the leaders who are out there thinking differently to drive the entire industry in new directions, we’re always playing with the last set of products somebody else created, and we’re trying to play catch-up. We’re not leading, we don’t understand the economics of it in some cases. So what I see a lot of today is we’re following, we’re not leading. I wonder if because of our lack of innovation from a product perspective, if we aren’t tapping out, reaching our fullest potential for growth from that perspective, while you have new folks come in, like Chime and others, that completely refactor it, they come from a first principle standpoint—challenge every assumption, begin with a completely blank slate. We’re so tied up in what we’ve done in the past that we’re unwilling to let go of those things to try new stuff, right? I mean, we have conversations all the time with folks who are like, I want to do all these new things. But I can’t let anything go that I’ve ever done before. And that’s not a recipe for success.
Jeff Kline (18:03)
What’s sad, and Kris has heard me say this before, but we were a disruption; the creation of credit unions was a disruption. We’ve done a handful of cutting-edge things. But for the most part for the last 50 years, our innovation was just bringing the next banking product into credit unions. None of you can probably remember when share drafts were new, and everybody fought over whether if you call them checking you were a heretic, you know—“no they’re share drafts.” And that’s just our innovation. We bring in mortgages, we bring in HELOCs, we bring in debit cards and overdraft protection.
Omar Jordan (17:45)
So, Kris, when you say we, you’re right, this is not necessarily an industry where the board necessarily runs the credit unions. The question is, then who runs that credit union? And if it is the CEO, then who allows the CEO to create these products? Is there a governing body that prevents us from creating the next big debit card technology or concept?
Kris Kovacs (18:15)
That’s an interesting question, Omar. I think the opportunity is for folks at the board level and in senior management to really focus on things like product management and product development, right? We’ve met a lot of folks in our industry who have product manager titles.
Omar Jordan (18:34)
The definition of what that means is miscued.
Jeff Kline (18:37)
Well, they manage products.
Kris Kovacs (18:39)
Jeff Kline (18:40)
It’s not product development.
Kris Kovacs (18:42)
They manage products created by other people and they just try to replicate them.
Omar Jordan (18:46)
And then they somehow get creative with the interest rate and $5 here, $5 there but not a true innovative product that’s never been done before.
Kris Kovacs (18:56)
That’s right or taking an existing product and repackaging it, right? Like Chimes’ credit builder solution is just a charge card. Those have been around since the ‘80s. But somebody repackaged it, rethought about how to use it and said, “Hey, how about instead of making a transfer every month, I make a transfer every day.” Oh, it’s almost like a secured card, then super easy. We don’t give ourselves enough slack to really be thinking about those things. And then oh, by the way, having the idea’s one thing, and then putting it into practice and making changes to it based on scientific observations that are occurring inside of the actual release process. That’s product management. And I have yet to see an institution that’s really pushing the boundaries like that. And I just worry that if you look at who the fintechs are really working with and who they’re capturing, they’re capturing all those young people, right? They’re capturing that digital-first generation. And we’re playing with the side of the deck that’s not stacked in our favor.
Jeff Kline (20:01)
We’ve had 30 solid years of successful growth. Our assets have grown, I think it’s something in the neighborhood of 9-10% compound over that period of time, and we haven’t gotten any more efficient. It’s sort of you have this opportunity to go, we have gotten this big, and because of that we should be now twice as efficient or even 10% more efficient. We’ve lost interest margin; there’s a painfully negative trend line on interest margin over the last 20 years. And if you include the ‘90s it’s even steeper, because the ‘90s were just phenomenal. We’ve gotten more efficient at a substantially slower rate. And so our margins have shrunk faster than our expenses; we’re like the proverbial frog in the water. And the water is getting hotter and hotter and hotter. And we don’t realize it, and pretty soon we’re going to be somebody’s frog legs. So we need to figure this out. And we need to do something. That guy I told you about who came from HR used to say to me all the time, and I was literally 26. And I thought he was crazy. But he said, it’s what you do when you don’t have to do anything at all that gets you where you want to be before it’s too late to do anything to get there. The game isn’t over in the next five years, but in the next 5–10 at the outside it’s going to be too late to do anything to get there. And it’s time for us to do something.
Kris Kovacs (21:20)
Yeah, the legacy investments people are making inside of artificial intelligence right now and data analysis are years in the making and we haven’t even started yet. That’s what’s scary to me. And that’s going to accelerate because Jeff’s right, we’ve had growth over the last 30 years. But are we getting a larger percentage of market share? Not in any reasonable way.
Jeff Kline (21:45)
Yeah, probably a teeny bit, assets have grown 9%, members have grown 5%. So we’ve had some membership growth and the deposits per household are a little higher, etc. But it’s just this little incremental, this little more that we have more delivery channels and more expense.
Kris Kovacs (22:06)
The question then, Jeff, is how do credit union boards encourage CEOs and leadership teams to be more bold?
Jeff Kline (22:15)
In reality, let’s face it, most credit unions are led by the executives, and they bring the board into the conversations and for the most part, the board supports what the management does. Again, generalization but generally true, especially at the bigger shops. Once in a while the board may get in the way. But most of the time, if we bring our board into these conversations, the ones who are doing it, I think the board’s very supportive of them being riskier. I think for us, I mean, let’s face it, success in financial services isn’t about who made the greatest innovation, it’s who makes the fewest mistakes. We’re highly regulated by NCUA. When you talk about who gets in your way, Omar, you could say if people were getting in our way, it’s the NCUA and it’s the board. But most of the time I don’t think we are being bold enough, and so I think that if you’ve got a strong board and you’ve got strong management, we probably are in a position to take more risks than we are, which is sort of what I said earlier.
Doug English (23:20)
So, on one of my podcasts in the past I talked to Tom Novak at Visions Credit Union in upstate New York, actually my home credit union. That was my first credit union many years ago. He talked about the way that Visions has a digital-first initiative and has deep partnerships with fintechs. So the fintech is taking the initiative and the initial risk and having the culture of the startup to try to go from zero to something. And the scale entity, the credit union, is partnering with them to help them get it to a different level and of course, evaluated in the eyes of what would impact the member the most. What Kris had said earlier about credit unions taking initiative and developing products, maybe they’re not developing their products themselves but maybe they don’t need to or maybe they shouldn’t be because they don’t have the right culture for that sort of activity, or partnering with these fintechs. Are we not partnering the right way? Should we be partnering in a different way to sort of have a start? So it goes not from zero but from a certain level? And then the credit unions engage and potentially get to the same outcome.
Jeff Kline (24:43)
I have two thoughts on that. One, as Kris was describing Chime, and I think we all know this. And when I talk about fintechs, I tend to talk about experience; I feel like that’s where we’re losing the battle is on the experience, right? Chime doesn’t have any products that are radically different from our products but they out-experience us. And when I talk about fintechs, and I talk about credit and business models, you can visualize a Rubik’s cube, which has three dimensions. One is products, one is channels, and one is market segments. And each of those little cubes is a battlefield for us. We do car loans for millennials via mobile, that’s one little cube and then to boomers and on and on and on. Every one of those little cubes, it’s got at least 10 if not 100 fintechs coming after us. And they beat us because of their experience. We have bigger balance sheets, we have members, right? So it’s a war and I don’t know what you compare it to, but it’s like we’re a rhino and there’s a trillion ants out there. I don’t know if a trillion ants can hurt a rhino but the point being that all these little critters are coming after us. And they’re nibbling away at each of those cubes. And they’re doing it because their experience is better. As it relates to working with fintechs, at Members Development, we started Curql Fund and the Curql Collective. And we did that because credit unions are different from fintechs. We don’t speak the same language. We don’t understand each other. We could go off on Silicon Valley Bank and how many of those fintechs knew what kind of risk they had in their bank. Can they read a bank balance sheet any better than Jeff, who has been a CPA, is a CPA and credit CFO? Can I read a fintech’s income statement and know what it is telling me? No. And so you know, that’s just one part of it. We don’t want “a fintech comes to a credit union.” If we’re lucky, the right fintech finds the right credit union. But most of the time, the right fintech finds the wrong credit union and doesn’t know how to speak fintech. And if they find the right credit union that can speak fintech, there’s the possibility that Omar comes looking for me and he needs help. And I love what Omar does. But if that’s not on my strategic plan for the next two years, then he’s got to go see if he can get lucky enough, and so that’s what the Cirql Collective and Cirql Fund are all about—to be that intermediary who can speak credit union and speak fintech and go “I like this technology.” And they’re not trapped to “this is not on my plan.” This makes sense for credit unions. And that helps facilitate us finding each other.
Omar Jordan (27:01)
By the way, I feel like we should say, for those who are joining, Jeff and I are in New York where the crime rate is extremely low, hence the sirens in the background.
Kris Kovacs (27:16)
I would add on to that question around partnering with fintechs. That’s why Constellation exists, right? We were started for the specific purpose of answering the integration problem. So we see hundreds of fintechs. I’m actually very, very hopeful that credit unions are doing a better job partnering with fintechs. I’ve seen it with Curql. I’ve seen it with Constellation. I’ve seen situations where credit unions are no longer holding things out and saying, hey, if you can’t pass every due diligence element at the same level of one of the big providers, I’m not interested in doing business with you. When I first started in this, that was kind of the script for how those early interfaces were happening. But today, I think credit unions have a much better understanding. I can protect data, right? I can get a service, I can do it. And now with Curql, right, I can get funding for that. So this fintech startup will be there in the future for me to continue servicing members; I think that’s good. The challenge is, to some degree we’re still operating like we’re playing one-dimensional chess, right? Oh, we’re going to take three services this year, and we’re going to integrate three services. That’s not fast enough; you need to do nine this year. And then next year, rip out three of those that didn’t work and put five more in, right? That’s got to be the pace of innovation; to really be bold you have to try it out. Because the other part of it is, and this is something I’m passionate about—not everybody at the credit union should be able to request a new system or service. Like every year during the budgeting process, right? Every year during the budgeting process, every VP walks in and says, well, I can’t get my job done because I don’t have the right system. And in reality, they’ll do a business case; they’ll say, okay, give me this system—here’s what I could do with it. And then three years later, it’s oh, well, you know what? I can’t get my job done because of this system. And at some point, we got to start saying, hey, if you’re not meeting your business case, you don’t get to ask for more systems.
Jeff Kline (29:22)
Kris, I have to ask, you’ve worked for two really successful credit unions and what I see out in the world, and what I hear from others is, so I come in, and I say I need this piece of technology. And it’s going to cost X but I can now do function ABC 30% faster, right? And so my response used to be great, then now your goals just went up 30%, right? Now you can produce 30% more loans or whatever X ABC is? And they’re like, well, no. Wait, you can’t have it both ways. If the reason you tell me I need to buy this is because you can be 30% more efficient, that’s how I justify paying for it. If I don’t change the expectations, I can’t pay for the system. And those kinds of things happen throughout, or the converse is that comes in and we only implement 60% of its capabilities. That’s the other thing that tends to happen.
Kris Kovacs (30:18)
Yeah, so I won’t name the credit union. But I was in a credit union once where I had a project to replace the phone system. And then I found out there were three phone systems in the building but I’m only replacing one of these. What about the other two? Right? Like, that’s the whole thing. And the reason I say this is because what projects like that do is they suck the life out of your IT team, they suck the life out of your innovation, they suck the life out of your budget, right? And you didn’t have to do them. Because moving the needle for something like an MRM system or collections or something else isn’t really going to move the needle from an experience basis that Jeff was talking about. What’s going to move the needle from an experience basis is that new service, that new fintech integrating that and delivering that, if that’s the priority, we can do nine a year. But if I’m still fighting from an IT poverty perspective, where I’ve got so little time left after I get all of these requests for all these new systems, unnecessarily so, then I’m not able to move forward.
Omar Jordan (31:21)
Because I come from a world where you either perform or you’re out. And that doesn’t happen in this industry, right? Just thinking out loud. Now, I’m not suggesting that’s the case. But I’m asking the question of how do we hold people accountable to what Jeff was saying, you’ve got to deliver results. Right? I’m not saying you’re out. You know what I mean, that’s not the way to do business. But how do you arrive at a destination where we can have tough conversations? Because this is a podcast about leadership and moving the business forward. And if you don’t hit the objectives, or what Jeff was saying, you want to ask for this piece of technology, well the expectations just got higher, for example, and therefore I expect you to deliver and so does that happen do you think, at the credit union level?
Jeff Kline (32:24)
I think so. There’s a lot of nuances, but again, you have to generalize but generally speaking, credit unions set goals, we’re going to grow this much loans, deposits, you know, all those types of things, right, and they perform and they have their goals and staff get their incentives and I’ve been around long enough to know when setting goals and metrics and bonuses weren’t prevalent, and then it became a thing. And then having incentives for staff. Man, my first job as a CEO. We were a credit union with seven branches and no home office. So the exec team, literally some of us were in branch A and some of us were in branch B. This one woman was a member service rep. And I walked right past her every day to get to my desk, and we were six months in and she said, you know something, I hated you, when you started here. I used to enjoy sitting here and talking to the members and having relationships, and you came in and set all these goals like, somehow we’re a business that’s supposed to make money. But she said, you know what, I have never worked harder. And I’ve never had more fun when we set these goals, and I perform, and I get rewarded. And I get recognized. So I do think that credit unions, generally speaking, and again, the smallest credit I’ve ever worked for was probably 150 million, and that was 30 years ago. So I don’t know what that translates out to today. So I’ve never worked for a small credit union. But the bigger credit unions, they do have goals, and they are achieving. I think if you have to go back to it, it’s just that we’re just doing more and better of the same thing.
Omar Jordan (33:57)
I just want to sort of rephrase what I said. I come from the massive corporate America, top five, so the pressure was certainly on to deliver torque. And this is why I love credit unions, because we do it for members, not for our stockholders, right? So certainly the world that I sort of started in I did not like; this is why I’m here. But what I did enjoy is exactly what you just highlighted is we have tough conversations, they don’t like us, as leaders sometimes. But at the end of the day, they’re gonna love that bonus, they’re gonna love the experience they got and there’s always a great deal of gratitude for the pressure you apply on an individual because you want what’s best for them too.
Jeff Kline (34:46)
So we’ve just hit on two things. Kris probably heard me say this last week; I say it a lot. But there are two things, one of the best things about credit unions and one of the worst things about credit unions is our volunteer board. One of the best things about credit unions and one of the worst things about credit unions is our not-for-profit status. Because it gives us the flexibility to not focus on how many pennies or earnings per share were this quarter. But it gives us maybe a little bit too much latitude to not chase the other side as hard as we could. And that’s really in the hands of an executive team and the leadership to go, we’re going to set goals that are painful, and we’re going to work like the devil to get there. And those credit unions exist but it’s not built into our system. It’s about the attitude of the leadership. It’s not about the system and how we’re structured.
Kris Kovacs (35:34)
Yes, we serve members, yes, we are a not-for-profit. But in the end we have to do good business for the members. And I think we sometimes can get really caught up on the heart side. And our head is weak. And then something comes around like, ‘07 and ‘08 and all of a sudden, whoa, hey, we’re thinking we’re thinking with our head now. And our hearts got to take a little bit of a backseat, although really I’ve seen credit unions do amazing things inside of ‘07 and ‘08 out of the heart for their members. But it became about survival. And I think we have to balance both, right? We’ve got to do good business. So there are times where we need to hold people more accountable. And there’s times when we also need to give people the grace to understand that the environment didn’t happen or there was something else that caused that. But that pattern repeated over and over and over again becomes the trend. And what Jeff’s talking about from the trends is that it’s getting our margins are getting tighter and tighter. And we need to start doing some things differently. Because the knowledge and the way of doing things that got you here won’t get you to where you want to be. It won’t solve the problems you created. And I think that’s where we’ve got to focus on trying and really challenging ourselves to do some new things.
Jeff Kline (36:51)
Desperation is a powerful motivator, fear, we only got X years left, blah, blah, blah. And it really it’s the kind of thing that can push you out of your comfort zone and do special things. My fear is because we live off a balance sheet, that by the time we realize we need to be desperate it is going to be too late to get out of the trends and the death spiral. That’s my biggest fear.
Doug English (37:19)
In getting ready for this discussion, one of you said something I thought was really, really interesting, which is, of course the industry average CEO is nearly 60. We’re seeing retirements, one after the next. And you made the statement that CEOs, current CEOs, need to be doing some things they will not see the benefit of.
Kris Kovacs (37:42)
So I mean, it goes to the saying, “wise men plant trees under the shade of which they will not enjoy.” That’s where there are investments we have to make as an industry in data and artificial intelligence; we need to start pulling in that skill set, pulling that data. Like our life depends on it, because I believe it does. It takes 10 years to build an AI model right and to train it into the things you want to be able to do. And I’m not talking about the conversational chatbot types that we see on most credit union websites today. I’m talking about a fully automated digital credit union employee. If we’re not thinking that many moves ahead, we won’t realize that to get there takes 10 years’ worth of work. And by the way, that’s almost automatically going to be outside the realm of most CEOs’ final 10 years for them to be able to be there. So are credit union CEOs or is the industry going to have enough foresight to say, listen, I have to start hoarding and bringing data together, and then making it available for research? Or what is that future foundation of the credit union going to be, because AI has already been out there and done a billion transactions at Bank of America already. We’re going to wake up, to Jeff’s point, we’re going to wake up and realize, oh crap, we should have started 10 years ago doing these things. And that’s where I think we need to identify some of those moon shots or whatever you want to call them, and start putting those things out there. So we can start essentially protecting ourselves from what will be the inevitable. And that is that these banks, these large-scale national banks, are so far ahead of us where we are going. They’re not buying products, they’re creating patents. That’s the difference. They’re creating technology from scratch. And those patents are being cited by people like Google and Apple and Nike. They’re so far ahead that people we think of innovators are citing their patents in these things. That’s a dangerous place for us to try to live. That’s where the structures of today don’t work in that way. If I start a CUSO, within three years my board is gonna look at me and say, well, where’s the profits? Kris? Right. But we were just having this conversation about leading with your head. We’re talking about having to make an investment for 10 years, that you’re not even going to see a product for 10 years. That’s where we need to be thinking about.
Jeff Kline (40:11)
Let’s bring that back to leadership considerations. You know, what gets measured gets done, so you create goals and metrics, and then you reward people. We talked about that briefly a bit ago, right? So when you talk about that, and you think about it, and what I’m about to say is a generalization but it’s a pretty strong one. Not very many credit unions have goals that are more than the current calendar year, or whatever. I mean, I have goals, loan goals, deposit goals, profit goals, member experience, whatever we’re measuring, but it’s for the next 12 months, right? So if I come across some innovation that says, if I implement this thing, we’re going to, I guess, make an extreme example, we’re going to be 50% more profitable next year. Okay. Well, the trouble is, if a thing wasn’t in my budget, then this year I’m going to underperform my goals because I spent money on the thing that’s going to make us more profitable next year. So now I missed my goals. Now next year, in the fall, we’re going to set goals for next year, but now they’re 50% higher because I bought the thing that said we’re going to be 50% more profitable. So all I did was raise the bar for me to hit. And even if I hit it, that’s great. But there’s no lift for taking that gamble. Because next year’s goals changed with the product. And again that contradicts something we talked about earlier. But just as a point, if I own stock in a bank, I would make that investment because the value of my stock is going to explode. If I can do the thing that’s going to generate capital increases and therefore the value of my stock, right? So that’s sort of the best and worst thing about the credit union being not-for-profit; I don’t own a piece of the business. So for me to create long-term net worth, or long-term capital value of the organization, I can do it out of the goodness of my heart. I can do it because it’s the right thing. But my incentives don’t align with that behavior.
Omar Jordan (42:12)
Yeah, the risk of that is much greater than the potential success. Jeff, to your point. If I’m a chief lending officer, I’ve been in there for 30 years, then why take a risk at something that’s going to potentially put my retirement at risk, right? The status quo is much safer. And it’s not that 30-year veteran’s fault; it’s the entire industry infrastructure in which we operate. It’s no one’s fault; how do you fix that?
Jeff Kline (42:46)
Regulators have the same incentives. Think about, think about whoever the lead examiner was at Silicon Valley Bank. What’s his career look like now? And not to say he did anything wrong. But the point being if I’m an examiner and I’m overseeing a financial institution, there’s only downside if something blows up and I didn’t catch it. And so my job, I’m incented to protect that and be rigorous, not only for me personally, but for the insurance fund I represent. So there’s a lot of incentives here to keep us safe, and far away from risk. And so it’s not an easy thing to do. And it requires great leadership, it requires the right incentives to encourage that kind of behavior.
Kris Kovacs (43:25)
But somehow, we have to figure out, to Omar’s point and to your point earlier, Jeff, we have to figure out how to incentivize the long-term goal, the really long-term goals. There isn’t an equivalent of stock options for employees at credit unions and executives to really drive the value of the organization forward.
Jeff Kline (43:44)
You can create them, with a spreadsheet.
Kris Kovacs (43:48)
No, no, no, you’re right there. And my point would be something in my mind that an innovative leader working with their board could create something that really incentivizes the very long- term goals, right? I mean, there are certainly executives in our industry who have long-term incentive plans. But are those really going down and driving the whole company? Or are they driving a leadership team? You know, who is maybe 10 or 15 years away from retirement? I don’t know.
Omar Jordan (44:19)
I like what you call that, Kris. You called it—what we don’t have that causes others to get excited about the carrot, chasing that carrot? And then somehow, somewhere, someone maybe we’ll think about, there aren’t options for employees or stock options. But could there be? And I don’t even know how you would do that.
Jeff Kline (44:46)
Let me give you a really quick example. I was a CEO of a credit union when I was 31. I had a phenomenal board chair who ran a midsize construction company. And he said, you guys should have something like that. So I built a spreadsheet that essentially just mimicked, okay, you have a financial institution, you generate capital, the market value of the institution is 3x, book, capital, whatever. So you just have this formula, just a spreadsheet, right? Well, in the ‘90s, we were kicking butt. I mean, we were generating 225 basis point ROA year after year after year, right? And so, I went to him with a spreadsheet and said, this is how it works. Everything seems right. And I said, but here’s the problem. I’m 30-plus years from retiring. If we continue to do what we’re doing, when I retire you’re going to owe me $40 million. So we got to scrap this. He said, if you do this for our organization for the next 30 years, $40 million will be nothing. This makes all the sense in the world. Now, I don’t know how many credit union board chairs would say that. But that’s what we’re talking about, the leadership.
Kris Kovacs (45:58)
I think leaders are supposed to ask hard questions, right? I had the great fortune of working for Chuck Purvis at Coastal. And one of the things Chuck would do is he would ask really hard questions. He didn’t have solutions yet. He just asked a really hard question like, how do we solve that problem? And then he would let trained people who are in industry figure out how to solve that problem, right? And I think that’s what we need as an industry, we need a mechanism, a forum, we need some kind of way of just asking those really hard questions. I don’t have the answer for that. But Jeff does, or Jeff plus Omar, or Jeff plus Omar plus Jenny; that’s why we need to keep having those conversations about hard things. As I’ve gotten older, one of things I tried to do is to just ask more hard questions and challenge the assumptions that are underlying some of the decision-making we do. I think if we have enough people doing that, and we can drive toward answering some of those challenges, and we have the courage to try, I think we can be successful and build that strong foundation for the next great era of credit unions.
Doug English (47:14)
It’s the underlying passion for what this industry does and the value that it brings. And that’s not going to be brought by other industry players who don’t have a not for profit but for service mentality. It’s critical that this is figured out. These discussions and challenging questions are just the beginning of what needs to happen so people think a little bit differently. And maybe the structure that builds the knowledge for how this is solved is not a traditional credit union structure. Maybe there needs to be a different structure that has a completely different incentive plan that is more long term, more equity-like, just thinking differently, bold leadership. That’s what we’re here to talk about today. We’re going to circle back on this subject many times in the future. I am in awe of these three gentlemen; you did a spectacular job. Thank you for your service to the credit union industry. And thank you for joining me today.
Jeff Kline (48:20)
Thank you, my pleasure.
Kris Kovacs (48:21)
Thank you, Doug.
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