I last opined on the difficult marriage between credit unions and fintechs and concluded that it often leads to divorce because of very different motivators — hyper growth for-profit venture companies versus a conservative not-for-profit industry. Today I want to discuss how our industry can adopt the skills that will make us more appealing to our entrepreneurial friends in fintech.
The fintech world wants to partner with the credit union industry. While they may not always understand how we work, our $1.3 trillion assets and 108 million members stands out as a huge untapped opportunity for their products and services. They want to date us and they are very appealing to our industry because they have built new markets and services that our members are demanding. Every day they are finding new ways to attack the banking market, including through marketplace lending in the mortgage, business, student and consumer loan product realm; blockchain and alternative payment options.
There are now more than 6,000 fintech services available to consumers, including products like Venmo and Square in person to person (P2P) payments. These payment transactions were once flowing through checking accounts and creating income via debit transactions, but that is no longer. The small and medium business services product line is being attacked by the superior technology, speed and experience offered by OnDeck and Kabbage. These products are the foundational business of many community banks and a growing product line for community credit unions. Now many small businesses go online for a loan versus calling their banker. In addition, somewhere between one-quarter and one-third of all personal loans, representing billions of dollars, are funded by Prosper and Lending Club, and these loans were once the forte of credit unions. Student loans are now moving to platforms like SOFI, where they are refinancing billions of dollars in student loans with better predictive models. Every product that the credit union industry offers now has a brand-new competitor from the fintech world and what is even more concerning is these products appeal directly to a younger demographic that is so important to our movement’s future.
The good news is that fintech companies want to hook up and partner with credit unions because we have the lowest cost of funds and positive connections with almost a third of the U.S. population.
Yet they aren’t asking us out or they don’t come calling after the first date. Why? We look great on the outside with our huge share of the retail financial services market but we act badly, at least in comparison to the for-profit world that they are accustomed to. Credit unions do not have the internal motivations to change and act with urgency. Everything about us seems a bit old and slow to them – we are conservative in our management of risk, awash in rules and regulations and governed by a class that lacks the financial motivation to attack markets.
How can we meet the entrepreneurs half way and create a long lasting marriage? First, the credit union industry has to accept the realities of the fintech and investment world and be willing to invest, act with urgency and accept some risk. Those are the rules of the game – they won’t change to fit us, we have to change to fit them.
There are some successful partnership models forming in our industry. A few notable credit unions are investing with fintechs to jump-start innovation. These credit unions normally invest through their CUSO management structure, often in partnership with other like-minded credit unions, to put funds aside to invest in fintech projects. One of the best examples is a new mobile/online banking platform that Coastal Credit Union and its credit union partners are creating through the establishment of a new finfech CUSO, Constellation Digital Services (http://constellation.coop). They have demonstrated the skills and raised enough money to make a real difference in the credit union world. Another strategy is to create new CUSOs or to join one of the innovation organizations like Members Development Corp or the Cahallan Partnership that jointly invests in new companies. These CUSOs are action-oriented (with a governance model that supports speed) and have the power to invest substantially and quickly when the right project or partner comes along. The most innovative example that I’m aware of is the partnership led by CUNA, the Mountain West Credit Union Association and the Best Innovation Group (B.I.G.), who are partnering with a fintech firm to develop an industry specific blockchain application for member identity security. This project is moving and will make a difference.
While these are powerful examples, they are few and far between. In order to be competitive, we need to adapt our style to the new world being blazed by fintech innovation. This marriage of fintech and credit unions will not be easy, but if we do not find a way, we will be left standing alone at the alter as the financial world changes and moves past us.
Kirk Kordeleski is Senior Managing Partner for the Edge Consultancy. He can be reached at 516-528-5057 or kirk.kordeleski@edgeconsultancyllc.com.
