This story is the latest installment in Credit Union Journal’s ongoing special report on fintech, which will run throughout the month of August.
In a few short years credit unions have gone from distrusting financial technology companies to looking for opportunities to partner with them.
Institutions turn to these companies for help in a variety of areas and to ensure they provide members with fast and efficient service. But management teams must be careful about who they decide to partner with.
“Credit unions are looking for a competitive advantage in a space that is increasingly hypercompetitive,” said Brian Hamilton, vice president of innovation for CU Direct.
Now that many CUs have gotten past their “fear of the unknown,” the potential of working with fintechs has led to credit unions adding features “to keep up with market expectations without having to add internal development resources,” said Paul Parrish, president and CEO of One Nevada Credit Union in Las Vegas.
Credit unions are looking for fintechs to augment their capacity, Hamilton said. Fintechs offer CUs programming development and intelligence they do not have in house or are constrained on from a capacity perspective. Consumers now expect experiences, such as depositing a check, to be as easy as buying a pair of socks on Amazon.
“If it is not, consumers get frustrated,” Hamilton said. “So credit unions want fintechs to help them deliver on that value proposition.”
What credit unions want in fintech partnerships
Credit unions are looking to fintechs for help in areas such as risk management, personal financial management and new banking products. However, digital account opening topped a list of reasons why credit unions work with fintechs, according to a report from Cornerstone Advisors that looked at community-based financial institutions’ priorities in 2019. More than three-quarters of respondents listed this as very important.
More than half of respondents said that fintech partnerships were very important when it comes to payments and lending, according to the report. That’s because many smaller credit unions are finally adding digital lending capabilities, said Sam Kilmer, lead fintech advisor for Cornerstone Advisors.
Geography, location and the composition of the CU’s field of membership all have effects on fintech needs, Kilmer said. Credit unions located in big cities competing for deposits with JPMorgan Chase, Wells Fargo and Bank of America have a higher demand for account opening technology compared to institutions in smaller cities. Fields of membership that include more digitally savvy consumers, such as technology firms or the military, are more likely to push credit unions to utilize the latest technology, Kilmer said.
“People who use technology as a function of their profession have higher expectations than people who don’t,” he said.
Parrish said the $937 million-asset One Nevada CU’s most significant tech-related purchase in the past five years was its core system conversion. In addition, the credit union has been retooling its new account and product onboarding processes, creating “reliable redundancy” within its networks, and overhauling its mortgage loan origination process, Parrish said.
Do that due diligence
Before partnering with any fintech, credit unions must complete thorough due diligence. The first step is finding a fintech with values that align with the credit union. Any investment in a fintech needs to be something that materially impacts the CU’s business, Hamilton added.
“Spend time with the founders and understand why they are in this game – are they looking for a quick exit strategy or are they looking to make a difference? There are a lot of fintechs that share our values,” Hamilton said of credit unions. “The fintech movement was born out of the Great Recession, out of Occupy Wall Street, out of young people rejecting the old ways of financial services. Fintechs look a lot like people helping people.”
Besides carefully reviewing the fintech’s operations and management, executives also need to look internally to see if their credit union has the capacity to deal with a new partnership.
“Be very internally diligent about having the right level of resources,” Kilmer said. “The credit union has to be prepared to integrate a new system with other systems. You cannot assume the vendor is going to take care of everything.”
Parrish said One Nevada CU relies on its usual vendor management review for any new arrangements. It also will focus on the fintech’s current status in the marketplace, asking for a successful track record to date, referrals, performance guarantees with penalties and flexibility with written agreements.
“How we view their answers may depend on how novel their application is and how new or leading-edge it may be,” Parrish said, adding that he feels sometimes CUs may have to “roll the dice” a bit on a relationship depending on how far out in front of the market it wants to be.
There is no equivalent of Consumer Reports for credit unions to review when sizing up a fintech, nor are there list prices for most fintech services CUs are looking for.
“Confidentiality agreements are very common, so it is difficult to get accurate information,” Kilmer said. “This is systemic – the entire market is like this, not any one vendor.”
Kilmer said CUs should go to user conferences, or even some of the larger credit union conferences to seek out recommendations.
CU Direct’s Hamilton said credit unions should check with their state league for advice, while asking any CUSOs and other providers they already work with if there are fintechs those companies are considering to augment their services.
Parrish said he trusts his IT employees at One Nevada for recommendations.
“Don’t tell them I said that, but we have a great group of experienced, tech pros here, and they definitely have an excellent handle on what we need, how it needs to plug in, and how it can be optimized,” Parrish said, adding he may bring in a consultant or specialist. “Also, we are not shy about calling around to other banks or credit unions or even doing site visits to get a practical feel for any fintech decision.”
