Taking a page from the age-old adage of "if you can't beat 'em, join 'em," credit unions are ramping up efforts to partner with fintech companies.
Given the dollars being poured into fintech — according to a March 2016 Citigroup report, investment in private fintech companies spiked from $1.8 billion in the U.S. in 2010 to $19 billion in 2015 — it should come as no surprise that credit union executives are realizing this is not merely a trend, but a proactive way to develop forward-leaning services that can compete with banks.
"Things are changing where credit unions are more interested and willing to take a risk," said Washington State Employees Credit Union Chief Technology and Operations Officer Ben Morales. "I think the partnering is starting with CUs making some monetary investments and will likely evolve into new product development."
The Olympia, Wash.-based $2.4 billion WSECU is among the credit unions working with the Tampa, Fla.-based Best Innovation Group (BIG), a technology innovation and development company focused on the financial services industry. Other CUs include, Baxter CU, Suncoast Credit Union, Virginia Credit Union, Royal Credit Union and Visions Federal Credit Union.
"Our company model is to go out and find what we think are interesting companies and vet different companies we think would be a good fit for the credit union space," said CEO John Best. Companies he considers a good fit include CU Wallet, CU Direct and CO-OP Financial Services.
"Our 'innovation club' includes seven credit unions that work with us," said Best. "If we are not finding new things in terms of products, we are upping the ante on building new platforms like chatbots and echo." A chatbot, for example, is a computer program designed to simulate conversation.
Morales explained that the innovation club meets monthly and focuses on prototyping new platforms that have not been seen in the financial space. He said if a member identifies a potential product or service, the team brings in other CU staff to evaluate the solution further.
"We meet to ideate, prioritize and select items for a deeper dive into the research, potential business value and probability of success," said Morales. "The benefit is we can test the potential viability without using lots of internal resources."
Across the Border
Credit unions' partnering with fintech companies and CUSOs is not unique to the states. Conexus Credit Union, Saskatchewan's largest credit union, recently partnership with the Vancouver, B.C.-based Grow, a like-minded fintech company that develops online lending solutions.
"I truly believe the key player in the battle between fintechs and banks are credit unions. In Canada, the forward-thinking credit unions have the ability to move much faster than the banks, as they are not shackled by enormous size and insurmountable tech debt," said Grow Vice President Sean O'Connor. "A year ago it was very difficult to get a meeting with a credit union to discuss how we can work together. Now our biggest challenge is scheduling each credit union we're launching with so we do not constrain resources through the integration period."
O'Connor further explained that over the last year, the Canadian credit union system has done an about-face with regard to these forward-looking partnerships. This is perhaps best underscored by the Montreal-based Desjardins Group, the nation's largest association of credit unions, which announced it is funding fintechs through its venture capital arm. And some of these companies are being "incubated" at its "innovation lab."
"The credit union system quickly changed course in Canada as a handful of innovative credit unions started to actively pursue partnering with fintech companies that could help them outcompete the banks," said O'Connor.
The $7.1 billion Conexus CU, which supports 119,000 members at 41 locations, partnered with Grow so members could apply for a loan anywhere, anytime, from their computer, phone or tablet — with loans funded to their accounts the following business day.
"Banking is no longer a place you go, but a thing you do," said Conexus CU Chief Operating Officer Cary Ransome. "Working with a cutting-edge fintech company like Grow provides us the opportunity to remain a forward thinking leader in the financial industry."
No Longer A Wait-And-See-Approach
The virtualization of the banking industry in recent years has forced credit unions of all asset classes to take a more proactive approach to technology with hopes of staying in stride with competition or one step ahead.
"Many of Canada's credit unions have an aging membership base, and are struggling to bring in younger members due to the inaccurate perception of them being stale and slow," said O'Connor. "A subset of the 300-plus credit unions are quickly correcting this misconception by driving innovation through fintech partnerships."
And while there are certain trepidations about young, start-up tech companies that may be new to the financial space, oftentimes it is these small firms that are more intuitive and agile.
"The main issue is CUs being able to see how digital is transforming the consumer (member) and that they need to start prioritizing digital, data and business agility to ultimately see the value of these partnerships," said Morales.
In many cases, it is those credit unions that aren't just forward-looking, but have a mindset that is akin to the executives operating fintechs that reap the awards — water seeks its own level.
"From our experience, credit unions understand the value in harnessing innovation and have a very similar culture to Grow that is focused on improving Canadians financial well-being, and growing the membership base among young professionals and millennials," said O'Connor.
