Report
140
Number
Oct 26 2007

A Historical Review of Information Technology, Outsourcing and Survival in the Credit Union Industry

The impact of outsourcing, and concerns about the best way to process data are viewed as critical issues by credit union executives and industry observers.

Victor Stango
Victor Stango
PhD, Associate Professor of Economics, Tuck School of Business
Dartmouth College
Report Number 140

Executive Summary

I sent and received my first e-mail in 1992. I was in the former Soviet Republic of Uzbekistan as a PeaceCorps volunteer, and since I didn’t know anyone’s e-mail address back home, I ended up sending a message to a local friend of mine who was typing at a work station right next to me. The message was a cheeky attempt to replicate Alexander Graham Bell’s infamous first telephone call: “Mr. Watson, come here. I want to see you.” I think mine was, “Alisher, come quick. I can’t type.” Instead of replying, Alisher leaned back in his chair and said, “I don’t get it.” I explained that I was trying to be funny because this was my first e-mail message. Alisher then smiled and typed a response: “Ha Ha Ha."

Technology has come a long way since 1992. We now live in a high-speed, networked world. We rely on the Internet to communicate with friends, family, and business contacts (my friend Alisher now regularly shares digital pictures and videos of his kids with me from his wireless laptop in Uzbekistan), and information technology (IT) has become an enabler of business processes. The impact of technology in the so-called service sector has perhaps been the most dramatic. Think about what your members, employees, board of directors, and business partners can do today because of technology and compare that with what was possible in 1992. Indeed, one could hypothesize that the technology decisions credit unions have made since 1992 (especially those related to core data processing technology) are some of the most important strategic moves made during that time frame.

This study examines the interaction between changes in data processing technology, outsourcing, and firm performance among credit unions in the United States from 1992 to 2005. The primary research questions are how outsourcing has changed the way credit unions process data, and how different outsourcing choices affect costs and survival in the increasingly competitive and dynamic credit union industry.

What is the research about?

Utilizing data from the National Credit Union Administration (NCUA), Victor Stango, a professor of economics at Dartmouth College, asks a variety of questions to test this interesting theory. Here is what he found:

  • How has the way in which credit unions process data changed over time? Which credit unions outsource their data processing? Over the 1992–2005 period, manual data processing has essentially disappeared. In-house electronic (“CU-developed”) systems have also become extremely uncommon, meaning that nearly every credit union outsources its data processing as of 2005.
  • How does outsourcing interact with credit unions’ product mix and operating costs? Outsourcing is strongly linked to firm performance. Somewhat surprisingly, firms using vendor-supplied systems have higher costs than those using internal systems. But they also offer many more financial products. For large credit unions with many products, there is a significant cost advantage to outsourcing, and this advantage has increased over time.
  • How does outsourcing interact with credit union “survival”? Credit unions’ data processing choices are also highly correlated with survival. Credit unions employing vendor-supplied data processing systems are much more likely to survive than those using in-house (and particularly manual) systems. This is truer now than in the early 1990s.

What are the credit union implications?

This research catalogs the sea change in core data processing relationships that has occurred over the past 15 years. The technology decisions credit unions made during this time frame had significant impacts on institutional survival, operating costs, and product mix. Today conventional wisdom dictates that outsourcing all or a portion of a complex and changing core technology platform is in the best interest of most credit unions. If you were to ask credit unions in 1992 about their core processing decisions, the conventional responses would have been quite varied. The practical implications of this study, therefore, will likely be played out over the next 15 years as new technologies emerge and offer the potential to create another sea change for credit union data processing and operations. 

Given today’s technology trends and innovations, you can’t help but think about the critical importance of future credit union core processing decisions. I am reluctant to say what the variables of your decision will look like over the next 15 years. If the Filene Research Institute does ask this question again in 2022, the trade-off may be different, but the research will likely tell us what we discovered in this study: core technology decisions have a significant impact on credit unions’ ability to survive and thrive.