Blue Ocean Case Study: Pennsylvania State Employees Credit Union (PSECU)

By Roch Parayre, Ph.D., Managing Director of Executive Development, DSI

In their best-selling Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (2005), W. Chan Kim and Renée Mauborgne argued that real value flows not from technological innovation, but rather from the few successful entrepreneurs who have willingly departed from the "strategy as competitive warfare." The latter has guided business planners since the nineteenth century, instead of creating new value for themselves, their customers, and ultimately society at large. Perceiving "strategy as exploration," these few "value innovators" have managed to leap-frog the competition by focusing on the simultaneous pursuit of superior value creation and cost reduction that allows them to avoid the battles that turn industries and the marketplace into "bloody red oceans" of competition. Pursuing increases in buyer value, price accessibility, and the creation of new aggregate demand, "blue ocean" strategists not only unlock new possibilities, but also create "uncontested market space" that makes their competition irrelevant (at least for a time). Recognizing the difficulties inherent in finding and creating such "blue oceans," Kim and Mauborgne argue that business planners reach them only by asking (as well as implementing the answers to) the right questions, in particular, the following cost-reducing and value-creating four: What elements should we eliminate that our industry takes for granted?; What elements can we reduce well below the industry standard?; What elements should we raise well above the industry standard?; and What elements can we create that the industry has never offered? Once they identify answers to these crucial questions, blue ocean strategists then have the chance to create a new "strategy canvas" that articulates the ways in which they have differentiated themselves from former competitors by eliminating and reducing things their customers neither need nor want so that they can then invest in opportunities to raise the profile of things their customers do want while also creating new value.¹

Although few would look for examples of Blue Ocean Strategy in credit unions or other traditionally conservative industries, the Pennsylvania State Employee Credit Union (PSECU) provides plentiful evidence to suggest that retail financial institutions can play a central role in value innovation. Like all credit unions, PSECU is a not-for-profit cooperative, with the tax-exempt status that allows it to offer excellent rates and services to its particular membership base.² As Pennsylvania's largest credit union (and one of the United States' largest cooperatives), the PSECU serves more than 300,000 members and manages over $2.4 billion in assets. The members it serves work either for the State of Pennsylvania, or for non-federal government entities within state borders. The PSECU also has the right to serve some 100,000 faculty, staff, students, and alumni of Pennsylvania's 15 universities as well as members of another 15 state schools. In all, the credit union serves 400 select employee groups and has the potential to capture nearly one million members.

With a mission to maintain a continually progressive and financially stable credit union capable of giving members control over their finances, the PSECU strives to provide a variety of high-quality, reasonably priced, traditional and innovative financial products and services available through self-service delivery channels. To deliver on this mission, the PSECU re-tooled itself to become an early pioneer in electronic and home banking; and its on-going commitment to innovation in both created uncontested market spaces that have served it well for more than a decade.

PSECU's Distinctive "Blue Ocean" Value Proposition -- The Self-Help Model of Home Banking

PSECU's distinctive "blue ocean" value proposition flowed from its focus on eliminating physical branches and creating the kinds of home banking solutions that could attract members from far-flung corners of Pennsylvania. Beginning with the introduction of ATMs during the early 1980s (when the credit union's assets hovered just under $10 million), the PSECU's board members made the then-radical decision to focus on remote banking (an idea few financial retail outlets had entertained). Developing a call center more than a decade before others did so, PSECU executives looked for ways to employ technologies that would not only allow members to serve themselves, but also keep costs and face-to-face contacts down so that the credit union could pass savings along to its members. By 1991, when the Internet made its debut, the strategy had already paid off. Using remote ATMS and eliminating branches, the PSECU surpassed $600 million in assets (or ¼ of its current holdings), and it stood ready to take advantage of advances in on-line, self-service.³

Understanding the need to persuade members to use on-line banking, the PSECU embarked upon an educational campaign and ultimately introduced "U-Post"-an Internet solution that allows members to enter deposits on-line before providing the credit union with actual checks. Originally developed by eCU Technologies, and then adopted and enhanced by PSECU to foster credit union loyalty (particularly among members who lived far away from actual branches), U-Post provides credit union members with in-house and service-bureau home banking solutions, eStatements, on-line lending services, kiosk machines, and report generator consulting services development.

U-Post allowed the PSECU to eliminate branches and the waiting time members have to endure before they can access funds (while simultaneously wiping out overdraft risks by making funds available immediately). As a result, while other financial institutions with a similar footprint employ several dozen branches to serve 300,000 customers, the PSECU needs only two physical locations, one a 300 m² branch on the ground floor of the PSECU's main operations building, and the other a small 120 m² counter housed within the State Capitol. With lower brick and mortar costs, the PSECU can pass along savings by offering its members very competitive savings and loans rates as well as a bundle of fee-free or low-fee services. Home-banking solutions have also allowed the PSECU to reduce maintenance in terms of the staffing levels required to check on member deposits. But the PSECU story involves more than cost-saving; it has also created distinctly superior value to members.

The alignment between U-Post and other technologies, the branchless strategy, and the PSECU's self-help philosophy ("we help you so you can help yourself") has raised the profile of home banking, increased member loyalty, and created real value through time saving, quick loan decisions, superior service, and an automatic member qualification system that includes file maintenance programs to run and track member accounts and to qualify them based upon credit histories. As a result, members can point to real benefits, including:

Banking at Home Saves Time and Money: Members save time and money by, among other things, employing features such as free on-line bill pay and account transfer, accessing check and deposit images, and reading alerts about account activity.

 

Members Receive Quick Decisions on Loans: Because the PSECU can offer quick decisions on-line (in approximately 30 seconds), nearly 50% of its members apply for VISA, car loans, and other consumer credit through the PSECU website. Members also apply for equity loans and mortgages on-line, and the credit union helps them to help themselves by automatically retrieving the application information they have already entered into the system. Importantly, for those who prefer to hear a voice on the other end of the line, members can also call Loan-by-Phone, where they receive an answer to their consumer-loan requests within one business day.

 

Quick Deposits and Access to Money: Members enjoy the convenience of getting money into their accounts through a variety of channels, whether via direct deposit, payroll deduction, and mail deposit, or through more than 600 ATMs, point-of-sale at stores, and Check Card.

 

Real-Time Account Access: Members can obtain information about their account 24 hours a day, seven days a week, by using the electronic telephone system. And when a member needs that individualized touch with a member service representative, they can reach it via a toll-free call center.

 

Superior Service When Needed: Although the PSECU tries to minimize the need to talk to members, when members need to discuss their accounts or financial concerns, PSECU's staff members have the time and expertise to "bend over backward" to help.

The Result: A New "Strategy Canvas" For Credit Unions

As the following "Strategy Canvas" illustrates, by eliminating costs and creating new value, the PSECU has differentiated itself from traditional credit unions as well as from big and community banks. By reducing branches and non-core products, the PSECU has not only maintained the integrity and mission of the traditional credit union, as well as increased brand awareness and its members' sense of belonging well above the banking norm. It has also created superior value by leading the financial services industry in trust, advocacy, member education, simplicity, speed, and accuracy, knowledge, on-line access, service, and price.

Figure 1 - PSECU's Strategy Canvas
[click image to enlarge]

Sustaining A Blue Ocean: Standing at the Intersection of Trust, Efficiency, and Innovation

The PSECU has sustained its blue ocean position for more than a decade by investing in and benefiting from the intersection of two historically different worlds: the trust and member advocacy that comes from the credit union mission to serve members with loans for "prudent and productive" purposes based upon their "desire to repay," and the technological sophistication usually associated with larger financial institutions. By creating an on-line, home-banking deposit program that allows members to withdraw a portion of their funds and to earn immediate dividends from electronic deposits, the PSECU has both prompted members to declare, "I can't believe you trust us!" as well as fostered a kind of bilateral trust rarely evident in the world of financial services. Their success in this realm has also allowed the PSECU to continue to offer competitive rates (currently 1.5 points below the consumer loan market) and excellent services that continue to blend the best of both worlds.

Although the PSECU has faced technological challenges, including those associated with getting their applications to work properly, the credit union has also set itself apart by adopting the philosophy that "DATA is our ONLY asset," a reality that translated into a commitment to tackle security issues during early days. As a result, the PSECU has always taken security far more seriously than most credit unions, and they have devoted considerable energy to undertaking ethical hacking-type tests and to building firewall systems. By developing this unique core capability, the PSECU has thus managed to align knowledge and services effectively and to stay well ahead of the competitive curve. Indeed, the PSECU investment in technology, in skilled IT specialists (some 60 of their 500 employees, including two full-time security managers), and in security (currently $1 million per year) has helped to keep the credit union's waters blue.

In addition to investments in technology and security, PSECU has focused its efforts on consumer lending, with a particular emphasis on car loans (some 30,000 per year). As a result, productivity has soared, and PSECU now serves more than twice (620 versus 300) as many members for each employee as its peers. Again, the lower cost model allows the PSECU to pass along savings to its members, through better rates, service, and on-line availability and access.

PSECU has thus enjoyed impressive financials and rave customer reviews. With ROA the typical measure of success in retail banking, the credit union's executives found themselves capital challenged in 1991 (with a capital ratio of 2.5%). Fifteen years later, they can boast a ratio of 10%, or $240 million (quadrupling their assets to a 12x increase in reserves). In addition, members give the PSECU high marks for service on all surveys. As a bonus, employees declare themselves well treated and motivated.

Maintaining a Posture of Innovation

As a case study in the Blue Ocean Strategy, the PSECU also provides instructive lessons for maintaining one's posture as the competition begins to turn waters red. Realizing that a swarm of imitators would eventually follow their lead, PSECU executives developed a culture of innovation to encourage further blue ocean moves, including:

• Conducting focus groups with members to elicit new ideas (for example, PSECU has run its new version of home banking through 3 focus group sessions on usability testing, and the credit union has employed this input to introduce improvements and fixes);

 

• Learning how to move forward, first by preparing members and employees for change via best practice education (for example, when going live with something new, the PSECU invites members to explore early developments, running both old and new systems in parallel for 30-60 days, and allowing members to adapt to change at their own pace); and

 

• Motivating employees, by recognizing their worth as important resources and by making their work environment a satisfying one.

How Blue is Your Ocean?

The case of the PSECU demonstrates that value innovation can take place in any setting, provided we ask the right sorts of questions, and implement the right sorts of changes to create value for ourselves and our customers. What can you eliminate to reduce costs? What can you raise to create new value? By following the steps undertaken by the PSECU -- drawing your current, "as is" strategy canvas, and then experimenting with change -- you might just find yourself reaching into innovative waters beyond the "bloody red oceans" where your competitors currently tred.