By Sheryl S. Jackson
In the 2020 NAFCU Report on Credit Unions, over 94% of survey respondents reported that IT will drive spending into 2023. When asked to identify the most likely provider for their planned investments, national vendors and large fintechs were named most often.
“There has been an increase in credit union and fintech partnerships and as our NAFCU reports indicate, there is a continuing interest in greater investment in fintech over the next several years,” said Andrew Morris, senior counsel for research and policy for NAFCU. Although many people associate “fintech” with more recently developed technology, the use of financial technology has been put into place at credit unions for some time, he says. “Consumer expectations for convenient service led to remote deposit of checks many years ago,” he points out. “So while some fintech technologies are new, the concept of using technology to increase convenience for members is not new.”
“The past two years of the pandemic have really accelerated technology adoption by credit unions,” said Jeff Keltner, senior vice president of business development at Upstart. “Member needs today are vastly different than they were five years ago due to the rapid adoption of mobile technology and the bar that companies like Netflix and Amazon have set for customer service. One of the benefits of fintech’s growth in recent years is that the most advanced technologies are now within reach, and budget, for credit unions of all asset sizes.”
There are a number of ways that credit unions and fintechs work together. “Every fintech partnership is built differently and begins with different goals in mind, such as improving member experiences, growing the credit union, enhancing internal operations, expanding into new member segments and more,” explained Keltner. Some credit unions work through a CUSO structure versus directly with a fintech, which is beneficial because it allows credit unions to combine their resources while still retaining ownership of the technology, he said. “The most important thing about these engagements — whether they’re through a CUSO or not — is that the relationship is viewed as a partnership rather than a vendor/buyer arrangement. Rather than something transactional, a partnership implies shared risk and reward between the two organizations — vendor relationships are much more functional whereas partnerships are strategically evaluated at the board level.”
Why Partner with Fintech?
“The primary reason we partnered with a fintech was to gain access to a strong performing loan portfolio that would complement what we originated organically,” said Jim Merrill, president and CEO at Inspire Federal Credit Union. “Consumers traditionally went to credit unions for personal, unsecured loans but about five to ten years ago, fintechs changed the market with their deeper pockets and an easy, convenient way for consumer to apply for and get loans.” As credit unions lost their dominance in the consumer loan space, more partnered with technology companies to regain access to those loans, he explained. “Fintechs don’t have the balance sheet capacity that credit unions have, so it can be a win-win partnership for both,” he added.
“We have established credit parameters as well as underwriting requirements for loans we buy from our fintech partner, because the borrower must open an account with us and must reside in our geographic area served,” said Merrill. “These requirements not only meet regulatory requirements, but they ensure we are able to acquire new members at a low cost and establish a relationship that allows us to communicate with them about other products.”
At one time, a popular product offered by Franklin Mint Federal Credit Union was a student loan, but after origination and administration of those loans was taken over by the government, the credit union no longer offered loans to students. “Then we had members approach us for loans that finance the gap between their school costs and their federal loans,” said Allan Stevens, senior vice president and chief credit officer for FMFCU. Although the credit union has a strong relationship with schools and universities in the area, there was no product that fit members’ needs. “In 2018, we intentionally looked for a fintech partner that would allow us to fill the gap,” he said. “After years of saying ‘no’ to requests for gap financing, we are able to say ‘yes’ now.”
More recently, FMFCU has turned to fintech partners to find loans that can help the credit union manage its growing liquidity, said Stevens. “We have developed relationships with fintechs that specialize in personal and vehicle loans, but also have expanded to include auto refinancing.”
Fintech partnerships can enhance member relationships by improving convenience and offering new, innovative services more quickly, said Jonathan Price, executive vice president of emerging businesses, corporate and business development for Q2. While there has been a credit union mindset that fintech companies are competing for credit union business, the past few years have shown the need for adoption of technology to handle interactions with members, he added. “Open-access platforms that allow credit unions and fintechs to innovate together, are making partnerships and implementation of programs happen faster,” he said. “In some cases, end-to-end implementation can drop from nine to 15 months to six weeks.”
Thomas Novak, vice president and chief digital officer with Visions Federal Credit Union has been co-creating on a platform that connects fintechs with credit unions. Credit unions do not have the in-house capabilities to identify, create, test and deploy solutions quickly, he said. Speed of deployment is critical because garnering support for ongoing innovations requires results that demonstrate the investment is beneficial to members and to the organization. “By the time we can development an in-house solution, priorities may have shifted and the solution is no longer needed,” he said. “Working with fintechs, we were able to deploy a product that generated thousands of enrollees in just a few months.”
Fintech solutions don’t have to be limited to traditional banking transactions such as deposits, loans or checking transactions, said Novak. “The role of how we serve members is changing, and it is a battle for relevancy in today’s environment,” he said. “Members want our assistance with financial wellness, offering services that align with their personal interests and helping them feel like part of the solution to the causes that are important to them. Fintechs can make all that happen.” He added, “We have to look at our members’ needs holistically and go beyond traditional banking.”
Challenges and Opportunities
One of the challenges with fintech partnerships is actually related to regulatory issues, said Morris. “The use of artificial intelligence (AI) solutions, especially in underwriting loans, is a regulatory concern if the credit union does not fully understand how the model works or doesn’t monitor outcomes on a regular basis,” he said. “Testing the model and using well-known tactics to manage legal risk is important, so be cognizant of AI from a regulatory perspective.”
In some cases, partnering with a fintech requires members to switch from one website to another to conduct business, but the emergence of application program interfaces (APIs) is changing the structure of fintech-credit union relationships, said Vince Passione, CEO and founder of LendKey. “Use of APIs in these solutions will create a seamless customer experience that strengthens the relationship between the credit union and the member.”
Although fintech partnerships are usually associated with member-facing solutions, Passione pointed out that these partnerships can provide operational efficiencies as well. “For example, AI has applicability beyond just enhancing the credit decisioning process and can be utilized to customize member outreach distinguishing between preferences like phone, email or text,” he said. “Robotic process automation can be used to integrate legacy systems with newer platforms as an interim step to a full systems migration, eliminating manual steps and providing audit and quality controls.”
Factors to Consider
There are a number of factors to consider before working with a lending fintech, suggested Merrill. “First, does the type of loan fit with your credit union’s strategic direction for the budget and balance sheet? You must be comfortable with the loan,” he said. “Then, decide what type of relationship you want — partnership or vendor-customer. I prefer to work with partners so we build trust, grow together and develop a mutually beneficial relationship that aligns with our organization’s goals to serve members.”
In addition to understanding how the fintech’s business model works, be sure to clearly identify who does what, recommended Stevens. “Who originates the loan and who services the loan are questions to ask, and then you can look closely at the impact on the credit union’s resources,” he said. “A deep dive into the company’s regulatory compliance processes, information security and a clarification of quality control — how they and the credit union will monitor results — is also important.”
Overall, the due diligence process before choosing a fintech is similar to due diligence for any business vendor or partner, said Stevens. “We always talk to three or more credit unions that have worked with the fintech to see if there have been compliance issues or other concerns that we need to consider.”
Fintech partnerships mean that technology is no longer a limiting factor for credit union success, said Novak. “As long as credit unions and fintechs are both flexible as they work together to create services and products that members want and credit unions can develop new business while still protecting member assets,” he said. “This flexibility might mean thinking outside the box for the credit union, but it will result in a more agile, more member-centric approach to serving members.”