For as much as credit unions fear fintechs, many also believe also view the emerging industry as rife with potential partnerships, and a panel of experts attempted to help the movement better understand this emerging industry during the recent CUNA Technology Council Conference in San Francisco.
So just how exactly do Silicon Valley venture capitalists bet on fintechs entering the FI space?
“Whether I talk to CIO, CEOs or CTOs, every credit union wants to be digital,” said Nikhil Lakhanpal,
Kathleen Utecht, managing partner for the San Francisco-based Core Innovation Capital, said her firm supports approximately 30 fintech startups geared toward selling lending and payments products to banks and credit unions.
“We will see about 1,000 new companies per year and make about three big investments and four small investments,” said Utecht. “We have spent a lot of time in this space.” By comparison, she estimated, her firm received approximately 150 pitches from fintech-related startups throughout all of 2011.
According to panelist Schwark Satyavolu, managing partner of the Menlo Park, Calif.-based Trinity Ventures, fintechs going after the banking space tend to have two things in common.
“First, it’s about the user experience as consumer demand has evolved, because they are using Uber and Open Table — all these high-convenience experiences,” he saud. “They cannot expect that from today’s bank because the infrastructure was built on a very large and a very old banking technology.”
The second common denominator, he said, centers on fees.
“There is a lot of consumer frustration around the fee structures that have basically governed or defined banking forever,” said Satyavolu. “Almost every new company I meet with has a zero-fee service, so they don’t make any money on the typical transactions banks make money off of.”
When should CUs look at fintechs startups?
While Core Innovation Capital and Trinity Ventures are both in the business of vetting startups and then betting on what they hope will be a winner, there are no guarantees. A small fintech operating out of a garage might get a look, but the fintechs that receive the majority of capital are those with a proven business model and revenue—they just need a push to the next level.
“They typically need our investment to grow faster,” said Satyavolu. He said many startups don’t necessarily want to work with credit unions, but are fundamentally against the traditional banking sector. Those that want to reinvent the banking wheel raise red flags.
“I favor companies that take technology innovations and find a challenge they can get the consumer though,” he said.
Utecht explained that Core Innovation Capital has made investments in the Blockchain and cryptocurrency space, but they haven’t all panned out.
“We had some success there, but a lot of this is early days,” she said. “We always hesitate about the ‘buzz.’ You want to be ahead, but not too far ahead because people may not be ready to adopt.”
Credit unions that want to be “digital” first need to truly understand what “digital” will mean to their membership and then to partner and invest accordingly, advised Utecht. That advice rang true for Chris Saneda, chief operating officer at Virginia CU.
“There are some fintechs that want to replace us and some that really want to partner with us, so it’s a matter of how to bring these mindsets together,” said Saneda.
“As an industry, we don’t mind collaborating, so I think we have some opportunities other FIs might not have — there is a way to build connectivity,” said Saneda. “I think we can get there faster than others.”
In today’s banking industry, Satyavolu said, the new battlefield is technology. And while credit unions and regional banks historically had a head start over the big banks thanks to relationship-building skills and related services, that advantage has narrowed in recent years.
“The edge is getting smaller and smaller because technology is closing that gap,” he said. “I would focus most on where your top line is being most crimped. There are a lot of technology firms that will say they can reduce your expense line. I find that is impactful for larger institutions. For smaller institutions, you have to focus on what actually gets you more members.”
While fintechs may be attracted to the credit union movement’s ability to instantly onboard them with thousands of consumers, the key for credit unions, said VCU’s Saneda, lies in leveraging member trust.
“A huge piece for us is determining how safe these fintechs are,” he said. “We want to protect our members, so we have to make sure the presentation of a fintech looks like us. We don’t want to risk the reputation we have built.”
