Disruptors Disrupted

Two Game Plans

Credit unions are responding by using fintechs a little or a lot. PSECU wants a little collaboration. “We’re pretty selective” when it comes to partnering with fintechs, Rudolph says. “A lot of today’s fintechs didn’t exist before 2017 and don’t have a real track record. They’ve never been through this kind of economy.” 

So PSECU primarily uses two or three fintechs to provide assets, largely auto loans and unsecured lines of credit, Rudolph reports. “We’ve reviewed dozens but settled on a few for the moment. For the most part, we like to keep our lending in the communities we serve.”

PSECU execs found fintechs to be “a nice relief valve” when the CU had a surge in COVID-related liquidity and needed loans, Rudolph recalls. “Now, of course, we don’t need that. We’re at a 90% loan-to-share ratio, so we have reduced our use of fintechs.”

However, $7.6 billion MSUFCU currently sees a lot of reasons to collaborate with fintechs, according to Ami Iceman-Haueter, chief research and digital experience officer of the E. Lansing, Michigan, CU with ties to Michigan State University. 

In one way or another, MSUFCU has relationships with more than 20 fintechs. The CU owns a CUSO, Reseda Group, that has equity investments in more than a dozen fintechs, as well as operating partnerships with fintechs across a broad spectrum of activities.

The key to success, she says, is to form true partnerships, based on shared goals and values, that go beyond a vendor relationship. “If you don’t vet them up front for that fundamental alignment,” she says, “you’re likely to regret it.” 

In the past five years, trust in fintech has grown, Iceman-Haueter says. “There had been a mindset that fintechs were out to take advantage of CUs,” she recalls. “We’ve moved past that.”

For MSUFCU, fintech partners are not captives but neither are they stand-alone entrepreneurial ventures. 

“You want fintech partnerships that endure, and you have to decide how far you are willing to go to support them,” Iceman-Haueter notes. “Your infrastructure has to be flexible enough to keep going if a fintech partner doesn’t make it or changes its goals—because that happens.” The CU can be part client, part sponsor. 

“We’ve been able to support a few in a big way,” she adds, referring to the Reseda Group. “This is a really weird time for financial institutions, for the global economy. Being supportive can be wise.”

MSUFCU and Oakland University Credit Union, worked with Nymbus, a digital banking and core platform provider, to launch two digital brands in 2023: AlumniFi Credit Union and Collegiate Credit Union. The Oakland University CU, Alumnifi CU and Collegiate CU brands operate under and within the assets of MSUFCU.

AlumniFi CU is designed for recent college graduates, Collegiate CU for current students; both are organized as micro credit unions. Prospects can become members of AlumniFi CU or Collegiate CU. They have no unique staff members—MSUCFU and Nymbus handle whatever people need to do, she explains. But they do have call centers staffed by Nymbus. 

“We operate them as tradenames of MSUFCU,” Iceman-Haueter explains, “so they have the same requirements, charters and standards as MSUFCU and the same board of directors.”

After a few months, she reports, the two had 200 members combined as of last fall.

As part of a larger vision for partering with institutions, “we partner with colleges and universities to provide financial education and support through the institution to their students, faculty and staff through AlumniFi and Collegiate,” she continues. “They in turn support our presence on campus. 

“Our first active partner is Olivet University in Olivet, Michigan; we are currently working with several other institutions on partnership agreements. But all of these organizations have unique relationships with us to ensure we can support the needs of those we serve.”

‘Golden’ Era

Under stress, fintechs are redirecting their efforts. The big fintech focus today, Wetherington points out, is on boosting generative artificial intelligence in ways that let CUs provide better, faster personal service to members at lower cost. “It’s raising the standard,” he says.

For example, a member sees a lower-than-expected balance and an unknown transaction or two and panics, Wetherington illustrates. With the right technology in place, sometimes from a fintech, the member can touch a button on a mobile banking app and be talking with a knowledgeable, sympathetic person in seconds. “They get answers they can trust from a responsive human in their moment of need. It’s people helping people taken to a new level.

“We’re on the cusp of a golden era of relationship banking,” Wetherington envisions, especially for credit unions. With AI, the touches can be better, and the efficiencies can be better. One member service rep can deal almost simultaneously with up to a dozen members in need, he says, and that MSR, seeing all that data, can grasp the situations better and faster.

The MSR is still human. “Until we have clear regulatory guidance,” Wetherington says, “generative AI will be assistive and curated by people at the credit union, enabling higher quality, human-to-human, real-time contact that members want in critical situations.”

This golden era presumes—and it is a big presumption—that CUs have their data houses in order across every silo and available in real time, Wetherington cautions, “ready to feed, train and tune the large language models from Google, Open AI and others. 

“You need to be plugged into open banking rails to bring your members’ data from other financial institutions, fintechs and financial apps,” Wetherington points out. “A member may have 14 financial relationships with relevant data. You need it all to get that 360-degree view of the member’s status. Then you can really use AI to turbocharge and transform the member service for which credit unions are known.”

Who are the big players in this space? Wetherington mentions Interface AI, Kasisto and Personetics, as well as Jack Henry’s Conversations.

There are still niches other than AI where fintechs are active. Responding to market demand, the focus of fintechs has shifted, Wetherington reports. “There are fintechs of all stripes to help CUs with almost every aspect of operations,” he explains. But now demand has surged in leveraging data and using it with AI to level playing fields with banks and neobanks. 

“It’s definitive,” he says. “Our survey shows that, for credit unions, the top strategic priority for 2023 and 2024 was not deposits. It was leveraging data. The No. 2 and 3 priorities were improving member acquisition and member experience.”

Fintechs have targeted key financial needs that are pressing CUs, he says. “Some fintechs target new channels for loan growth. Some offer deposit-gathering aids. They can address revenue growth, profitability and efficiency,” he reports. 

Choosing a Fintech Partner

It’s no surprise that matchmakers have shown up. Curql makes equity investments in 23 fintechs through two funds on behalf of 68 CU stakeholders and another 43 subscribers, reports Nick Evens, president/CEO. “We facilitate collaboration,” he says.

“We think it’s a compelling proposition,” he explains. “With venture money no longer available, fintechs love the prospect of attracting strategic investment dollars ... from 111 potential customers, primarily large CUs. The CUs get to see transformative technology from fintech CUSOs that have been rigorously vetted and could bring an attractive ROI and could be strategic operating partners.”

Curql may work for members. How do other CUs make good fintech choices? 

“I just attended the TruStage Ventures summit,” Alex Johnson, founder of Fintech Takes, reported last fall. “Everyone there was offering CU solutions. They ran the gamut—member acquisition and retention, new product development, back-office automation, process efficiency, profitability modeling, chatbots. The solutions often featured generative AI and open banking. They all wanted to work with CUs.

“Go to fintech events to learn the landscape,” he recommends.

There are currently about 10,000 U.S. fintechs, 26,000 in the world, and over a long timeline, 70-75% of them fail, according to Wetherington. “It’s always been high-risk, high-reward investing,” he notes. 

So how can a CU carefully find the right partner and successfully navigate that potential minefield? 

“CUs are struggling with the very high expectations of their members in this digital age,” notes Brian Bodell, VP/fintech solutions at CUESolutions provider TruStage (formerly CUNA Mutual Group), Madison, Wisconsin. “Using fintechs to help them grow and compete is critical, but that’s a noisy ecosystem, so making the right choices is a challenge.” It has to start with the CU’s strategy, he says, followed by the right level of planning, due diligence and governance.

To find a fintech partner, a CU needs to explore but quickly filter out the 99% that are irrelevant, Johnson advises. Try to find organizations that are already filtering, he suggests. Some venture investment funds have CU investors; they might have a head start, he points out. Some CUSOs have fintech accelerators and are plugged into the marketplace. “Look for active areas of fintech-CU collaboration and start there,” he suggests.

And go to fintech conferences, he adds, echoing Johnson’s advice. “This is a good time to explore.” 

Working with product-specific fintechs “takes more work on the investigation and integration end,” Johnson concedes. “They won’t be for everyone, but if you’re able to put in the work, you might reap rewards.”

Credit unions saw what was happening, and a few created their own fintechs through such industry players as TruStage and PSCU. While mutual and CUSO fintechs allow owners to compete in the fintech space and focus on solutions that fit cooperative financial institutions, they’re still vendors, Johnson cautions, and credit unions will want to consider how dependent they want to be on any one vendor.

CUs collaborate, and that’s important when it comes to selecting fintechs, Bodell says, so talk to peers. It’s tough to beat word-of-mouth endorsements from other CUs. 

“Credit unions are starting to work with CUSOs that directly negotiate with fintechs, choosing one or two to partner with them to build solutions that would have scale,” he observes. “Fintechs are ready to partner with financial institutions to achieve meaningful penetration and, frankly, to survive.”

Smaller credit unions with limited resources often work with fintechs individually, Jovanovic notes, but there can be integration challenges. “Fintechs don’t always understand how credit union infrastructures work,” he points out. “Having a technology bridge between the fintech and the credit union can be useful.” That’s a service PSCU provides.

Credit unions can piggyback on research by a company like TruStage, which vets and invests in fintechs through its Ventures portfolio, explains Sam Das, managing director of TruStage Ventures. Selection can be a seal of approval that credit unions can use in their own research, he suggests.

The promises of technology collaboration with fintechs are a better member experience and lower costs—and that’s entirely possible, Bodell says. “With available products, a member can open a deposit account in two minutes at any time and without requiring staff assistance. That’s efficient for the CU and pleasing to the member.”

The Players

The fintech revolution has meant that market niches have all been pretty well explored, notes Tony DeSanctis, senior director at CUESolutions provider Cornerstone Advisors, Scottsdale, Arizona. Major competitors thrived and established themselves before the fintech downturn.

Chime flourished by targeting the unbanked. “Margins were very thin,” DeSanctis points out, “with income mostly from interchange, but it gave many low-income people access to checking accounts with debit cards and allowed them to avoid check cashing and payday lenders. It was a market banks and CUs pretty much neglected.”

Sofi started by refinancing student loans. Once they gained trust, they expanded into other financial services, DeSanctis adds.

Greenlight scored as a debit product designed for parents to give their kids banking services that the parents could monitor and control, DeSanctis reports. It was a foothold in the younger generation, he notes.

In the payments space, fintechs started out as disruptors, grew and consolidated and now threaten to dominate the market, increasingly sidelining CUs and banks and taking away much of their traditional interchange revenue, DeSanctis points out. Venmo was a formidable disruptor, offering a P2P product that depended on the traditional settlement rails in the banking system. Some banks could see the threat and created Zelle.

But Venmo merged with PayPal, and Cash App, a Square product that is now part of Block, expanded into merchant acceptance services to create closed loops that could operate outside the banking system. 

“These players now have their own ecosystem,” DeSanctis observes, “and financial institutions are losing revenue. These giant fintechs have embedded themselves in digital wallets.” Merchants like McDonald’s, Starbucks and Amazon accept payments through these networks, he adds.

According to a recent Worldpay study, DeSanctis reports, digital wallets were the No. 1 payment preference for online purchases last year for the first time. 

“They are becoming the primary payment option, especially online,” he says. “Financial institutions are being pushed into the background.” Disruptors have taken over. 

The direct-to-consumer fintechs pose serious competition to credit unions, DeSanctis notes, but some were created to help CUs extend their reach. Fintechs like Alkami and Q2 offered CUs digital platforms that could imitate the digital portions of the Chime/PayPal experience, he adds. There are fraud-detection fintechs and value-add fintechs like SavvyMoney (credit scoring and digital personalization) and MX, which gives CUs data management tools.  cues icon 

Richard H. Gamble writes from Grand Junction, Colorado.