Payments solutions for the innovation era: A renewed commitment to our cooperative system We are pleased, after extensive research and consultation with members and stakeholders, to share our path forward for a consolidated approach to a robust payments strategy that will provide value for credit unions and other financial institutions across Canada. Over the past two months, we have engaged more than 130 credit unions and other system partners as part of a thorough review of our Digital & Payments business. Their views, concerns and aspirations have informed the strategy that we share with you today, and we are grateful for their contributions. Our vision for payments solutions Our vision renews our commitment to the cooperative system in Canada: We will collectively build the preferred Digital and Payments partner to credit unions and provider to other financial institutions across Canada, creating a competitive edge for our users through client-centred design, market-leading speed and innovation, and proactive stakeholder engagement and partnerships. Our process We defined our strategy through a broad consultative process and rigorous self-reflection to identify where we need to change, including: Engaging more than 130 credit unions, system partners and others, including the regulators Learning directly from the experience of others in Australia, Europe and North America Evaluating our own product and service capabilities, and development process Reviewing our organization and operating model critically Through this process, we received direct and often humbling feedback from our members and others. We understand credit unions want us to do more to create value for them collectively, and we are committed to accelerating the necessary changes. Our members and other credit unions We continue to focus relentlessly on enabling credit union success in Canada. To do so, we will: Accelerate our development of market-competitive and market-leading products, giving credit unions real input and choice into the capabilities they want from us Improve our pricing transparency and market-competitiveness, by continuing to leverage benefits of scale across the system and reducing costs as a result Build a deeper service-oriented culture that enables Central 1 to be seen as a proactive and value-adding partner to credit unions and others Maintain an integrated payments, settlement and clearing business to minimize costs and risks, and use this base as a competitive differentiator for potential partners (e.g., FinTechs) who can bring value to the credit union system Grow our product and service offering among small financial institutions, as a way of strengthening our innovation agenda, improving credit union pricing, and reducing the call on member funding
Increase the transparency of communication with our members and others, including on our product roadmaps, partnerships, and new capabilities The cooperative system We are committed to building a more competitive future for the cooperative system over time one that provides benefits to all credit unions and enables their success. This includes: Providing price harmonization and sharing the economic benefits of scale Continuing to explore options for all credit unions to participate in ownership Welcoming participation in the governance of Digital & Payments by enabling representation on our Technology Committee Accelerating the system s adoption to technological and payment system modernization, through our existing assets and relationships Encouraging equitable integration with system payment providers Our transformation journey Executing this strategy will require significant time, resources, and a sustained commitment from our Board, management and employees. Equally, it will require trust from our members and other credit unions a confidence we know needs to be rebuilt, and that we are asking for today. Effective today, we are creating a Transformation Office at Central 1, led by the Interim CEO and reporting to the Board. This group, with external expert support, will be responsible for driving our change agenda internally and externally. It will include specific initiatives around communications and stakeholder engagement, sales performance, process redesign, product roadmap, pricing and partnerships, among others. We will provide regular updates on our transformation, with a focus on the practical changes we are making to improve the quality and speed of our services. In parallel, we are continuing our search for our permanent CEO. With the departure of Oscar van der Meer, Chief Technology and Payments Officer, Central 1 will immediately begin a search for a new Digital & Payments leader. We recognize the important work and the value brought to the system by the CEO Payments Strategy Committee from both a collaboration and operational perspective, and our goal is to continue to support this work and successfully build on the key work streams already in progress. We will also continue the process to enable system participation and partnership in a national, regulated payments provider, working closely with willing partners across the country. We expect that this process will take a further two to three years, given the regulatory, legal, operational and economic changes that need to be considered and risks mitigated. More detailed information about our approach to transforming our model to a Digital & Payments solutions platform is in the attached presentation. We look forward to transforming our organization and recommitting collectively to the shared success of the credit union system in Canada. Over the coming weeks, we will be openly discussing our digital and payments strategy with the credit union system and welcome your input. Thank you. Rick Hoevenaars Board Chair Central 1 Credit Union Marilyn Mauritz Interim President & CEO Central 1 Credit Union
Payments solutions for the Innovation Era A renewed commitment to our cooperative system September 11, 2017
The credit union system in Canada will benefit from scale in payments The digital age is driving scale benefits: Payments solutions providers need to evolve: 1 Customer acquisition from network Platform driven operating model effects 2 Lower costs Increasingly open architecture 3 Use of Big Data (reduce risk, Agile and responsive to client analytics) needs 4 Strategic partnerships and Market-driven value propositions innovation Canadian credit unions will benefit most from a national payments solutions provider at scale 2
Five insights from our studies of payments providers around the world The most successful players in the cooperative ecosystem are often those who compete with the market 2 3 Leading firms have figured out how to make rapid decisions and allocate scare resources among competing interests 3 4 Client-centricity is as much about what you do as how you are perceived to be doing it 2 4 1 Leading firms are making deliberate choices around clients, value proposition, operating model and organization 1 5 5 There is no conflict between being a regulated entity and being innovative leaders have made it an advantage SOURCE: Expert network interviews; Central 1-Cuscal April 2015 meeting 3
Case study: Cuscal launched a three-year transformation in 2013 1 2 3 Target non-credit union customers Open up ownership Integrate end-to-end value chain 2002 vision: Cuscal exists to maximize value to credit unions by providing a range of payments, financial, and advisory services.. Ownership breakdown by 2014: 10% 10% Insourced its switching capability, giving it: Speed and flexibility Cost Control Financial scale Cuscal s vision in 2014: The place leading businesses turn to for winning payments systems, services, and insights Credit Union Members 80% SOURCE: Cuscal public reports, expert interviews 4
Case study: Cuscal s success in transforming itself is clear Cuscal has been one of the leading innovators in Australia Its financial results reflect the changes it has made A$ Million Net income, Cuscal s payments division 1 To market with NFC- HCE mobile in Asia Pacific in 2014 111 +22% p.a. 2 To market in Australia with Android Pay in 2016 70 93 61 62 3 To market in Australia with Apple Pay in 2016 48 52 2010 11 12 13 14 15 16 SOURCE: Cuscal public reports, expert interviews 5
Our vision for Digital and Payments We will collectively build the preferred Digital and Payments partner to credit unions and provider to other financial institutions across Canada, creating a competitive edge for our users through: Client-centred design Market-leading speed and innovation Proactive stakeholder engagement and partnerships 6
What does our vision imply? This means we must be #1 or #2 in market share outside of the Big Five in all product categories #1 or #2 in speed-to-market outside of the Big Five for all major product innovations Focused on enabling credit union success while serving a broader range of clients Committed to building system partnerships to the benefit of all A leader in both client and end-user satisfaction A hub for talent identification, development, and retention A compelling partner to FinTechs and others wanting to serve financial institutions 7
We need to transform our model to better meet our member (client) needs ILLUSTRATIVE 1 Large CU Med CU Med CU Small CU Small CU Small FI Fintech Nonbank 2 Bill pay Cards AFT Wires E- transfers Analytics Direct banking Paper Digital & Payments 3 Fintech System partner Fintech System partner 1 We will serve both CU and non- CU clients to maximize scale and system value 2 We will provide choice in our offerings, with products that are individually competitive and collectively comprehensive 3 We will proactively develop partnerships as a platform-first provider, bringing the best capabilities to our clients 8
We will transform our client experience in Digital and Payments Choice Give our clients meaningful choice and meet them how and where they want to be served choice cost Cost Focus relentlessly on reducing costs while committing to invest for growth We will offer Confidence Earn, gain, and retain the trust of each of our clients as their valued and preferred partner clarity client-centricity confidence Client-centricity Put the needs of our clients first in our policies, processes, and products while delivering innovation at scale Clarity Communicate transparently and engage regularly with stakeholders to underwrite their success 9
Our strategy envisions three horizons: Our focus today is to build strong Lead market Build strong Complete shift to clientcentric model Address payments capability gaps Continue system partnership discussions Open up governance Grow with other FIs Re-engage regulators Launch Transformation Office to drive change Accelerate growth Close gap in products and services to Big Five Reduce pricing through combination of scale and cost take-out Launch new client-guided products/services Explore options to enable credit unions to participate in ownership Continue to grow client base (credit unions and others) Launch market-leading product innovations (e.g., AI driven, data and analytics) Support credit unions to leapfrog modernization transformation (e.g., realtime rail with Payments Canada) Establish distinctive partnerships with leading FinTechs Provide option for ownership to other credit unions and potentially other clients ~3 year journey which will evolve as circumstances change 10
Operating model Value proposition Clients Build Strong: Our immediate priority We will Credit unions Clients Footprint Product portfolio Pricing Bundling Partnerships Product development Remain focused on enabling the success of credit unions as our core mission and value We will actively seek to grow our non-credit union client base to drive economics and innovation Provide products and services nationally, across all Digital & Payments capabilities Maximise scale of payments products and services; pick our spots in digital based on member (client) demand and where we can differentiate Move to volume-based pricing for all transactional products and ensure we can provide market pricing or better equitably Share platform/infrastructure costs through a product-specific development fee, but enable both a la carte and product bundling Pursue partnerships where there are scale or capability gaps to be addressed Be client-centric in our product design and development but do not wait for unanimity and move at the speed of the market 11
We will not make significant organization changes in this phase, to enable our focus on fixing our foundation and to minimize risk and costs Central 1 Entity structure Shared services Digital & Payments serviced by Central 1 Treasury/Trade D&P What we will do Maintain current legal structure and corporate relationships Update bylaws to permit non-bc and Ontario credit unions as Class A members (pending regulator) Implications No disruption to existing operations; minimizes risks to members Requires genuine commitment to engaging the system meaningfully Governance Representation Technology Committee Seats offered to non-members Management Division EVP reports to Central 1 CEO Shareholders Class A members through Central 1 Voting No change to eligibility or process Create formal divisions in Central 1 to improve P&L transparency Execution needs to be almost flawless and consistent Economic model Economics Commitment to harmonize prices across system as scale acquired 12
Practical implications for what our clients will experience Clear and regular communication on product roadmap and expected time of delivery Invitations to participate in peer-topeer discussions to share best practices Better transparency on our pricing and lower prices for our products and services Deliberate efforts to engage them in product design and development Our clients will experience Proactive thoughtpartnership to help them advance their own agendas Real choices in the products and services they use Products and services that meet their needs and lead the market 13
Delivering this transformation requires a significant change From Acting as a regional support utility for the credit union system Being a follower in delivering solutions comparable to the banks Providing limited choice and standard bundles in product and service selection Providing inconsistent communication, creating perceptions of lack of engagement Taking a more reactive approach to interactions with select stakeholders Having a bias towards in-house solutions and highly-bespoke development Operating with an inward-looking internal culture that can be slow to react to change Undervaluing growth opportunities that do not pose an immediate risk to core stability Demonstrating inconsistencies in quality of execution that reduce system trust Having unclear roles and responsibilities that diminish employee accountability To Leading as a national innovation hub and solutions partner for credit unions and other financial institutions Being an innovative leader in delivering cutting-edge solutions ahead of the banks Providing a wide range of products and services with customized packages Communicating about engagement channels regularly to keep clients informed & involved Proactively engaging all stakeholders to ensure an open and collaborative dynamic Taking an open platform approach that actively seeks to partner with best-in-class providers Leading with an innovative and adaptive mindset that builds trust and attracts top talent Having a commercial, sales-focused culture that aggressively pursues new opportunities Ensuring consistent excellence in execution with rigorous quality controls in place Assigning owners with clear accountabilities and KPIs to empower our employees 14
We have launched a Transformation Office with five guiding principles What is the Transformation Office Five guiding principles Acts as nerve centre for our transformation Brings together colleagues from across Central 1 Drives sense of urgency to change quickly Focus on execution excellence Ensure ruthless prioritization of efforts that matter Tone from the top High bar Nothing is sacred One team, one target Self-funding 15
How our members and other credit unions can participate going forward PARTNER WITH US CHALLENGE US TALK TO US We want your help join our advisory committees or participate in our product development sprints Share with us the kinds of changes you would like to see, products that you want developed, or initiatives you want rolled out Engage in our virtual sessions, visit us, or meet our D&P Leaders and Relationship Managers so that we can learn more about your needs and share with you ways in which we can help 16
Questions or comments? Thank you 17