The New Financial Ecosystem

For credit unions, fintech companies have become the classic two-edged sword. “They pose a serious threat to credit unions, but they can also play a huge role in a credit union’s success,” says Brian Kaas, managing director of CMFG Ventures, a subsidiary of CUESolutions platinum provider CUNA Mutual Group, Madison, Wis., that invests in 11 fintechs.

That’s partly because some fintechs are created to take business away from regulated financial institutions, and some are created to work with them as productive partners.

“There are enablers and there are disruptors,” notes Brian Ley, CEO of the fintech company Alpharank, with offices in New York and San Francisco. The disruptors are a real danger. The enablers? That depends on whether the rewards justify the risks of trying to work with fintech. That topic is the subject of a lot of debate, investigation and experimentation. But credit unions are starting to sign contracts with fintechs, Kaas says, and more will be coming.

Fintechs, notes Paul Parrish, president/CEO of $900 million One Nevada Credit Union, Las Vegas, are “a necessary evil. Things are changing so fast that the big players can’t keep up through in-house development. Innovations are coming quickest from small fintechs.”

“Every financial institution needs to be a fintech,” says CUES member David Mooney, president/CEO of $10 billion Alliant Credit Union in Chicago. Partnering with private fintechs can be a way to get there, he says.

Alliant CU is in various stages of discussions with several fintechs. One partnership has been in production for 14 months: Payoff is a new digital loan originator that uses a “consumer-focused financial well-being, debt-management approach to attracting borrowers,” he reports. So far, he’s happy with the results.

Finding a Fit

Getting there was an initiation of sorts for Alliant CU.

“We approached it as a learning opportunity,” Mooney explains. “We wanted to find out what it was like to work with a fintech.”

And there were lessons. Even when goals align, culture is likely to be an issue, he notes.
 
“You have to understand and accept who they are, but stay true to who you are,” he advises. The proliferation of fintechs means that even for large credit unions, opportunities exceed resources, “so it’s important to find the fit that addresses your highest priorities,” he emphasizes. “Of course, you’re usually sizing up a potential partner that doesn’t have the credentials you’d normally expect,” such as audited financials and a book of clients.

So most CUs, if they approach fintechs, do it carefully and talk to those fintechs’ other clients, if they have any. “Payoff had a few other credit union connections,” Mooney says, “and that gave us some comfort, even though we’re all involved in an experiment.” In addition, he advises, if it’s a big investment or if it involves reputation risk, take it to the board.

Fintechs are still a threat, says CUES member David Pierce, CIE, chief information officer at $2.3 billion Public Service Credit Union, Lone Tree, Colo., but also a potential way forward. “The goal should be to find out how their agility can help you as well as hurt you,” he says, “and put them on your side when it makes sense. But you can’t wait to see who wins. You have to keep abreast of what’s out there and move when you find something that meets your members’ needs.”

What’s out there are a lot of fly-by-night players, Pierce notes. “Their technology may look awesome, but you have to consider whether they have staying power.” And that’s important because CUs are looking ahead to uneventful operations with integrated fintechs, and most fintechs are looking ahead to eventful futures. “Most fintechs, especially those backed by venture capital, are gunning for a profitable exit, usually to be bought up by a big player,” explains Ley. “Some will make it; some won’t.” Either way, it’s an event.

So far, Public Service CU has avoided fly-by-night players, signing contracts with just three fintechs—Malauzai, Temenos and QlikView (now Qlik Sense)—all of which have been in business for years and have references and track records. Malauzai does mobile banking, Temenos provides the CU’s loan origination system. QlikView is a business intelligence dashboard that was popular in the manufacturing world but little used by financial institutions when Public Service CU signed up, Pierce says. “Now many banks and credit unions are using it.”

Both Malauzai and Temenos were big implementations. “There were multiple integration points,” Pierce notes. Public Service CU brought its core provider, CUES Supplier member Symitar-A Jack Henry Company, San Diego, into the implementation discussions. Getting cores and fintechs together is a trend, he says. “The core is becoming the hub of a wheel, supporting many spokes that do a lot of the actual work.”

Forging Ahead

Not every CU is cautious. Innovation is critical in the One Nevada CU playbook, so it has accepted the uncertainties and forged ahead with plenty of fintech deals. Parrish ticks off the list. There’s Money Desktop from MX, which helps members set up budgets and track their spending. There’s Savvy Money, which provides credit scores, access to credit reports and credit alert services. There’s OnDot, which provides members with various debit and credit card control functions. There’s Relevant Solutions, which gives members merchant coupons based on their location. There’s Problem Solved, which provides instant issue of cards in the branches and supports immediate PIN change and new card orders through the One Nevada mobile app.

There’s AccuLynk, a P2P service that uses the PIN debit rails for immediate posting and availability and “will compete nicely against Zelle,” Parrish predicts. There’s CardLytics, which provides a merchant-funded rewards program tied into the credit union’s debit and credit card programs. And there’s Connect Financial Software Solutions, an online banking fintech that One Nevada CU helped to launch through a CUSO in 2004, then sold its stake to a partner but continues to use as a vendor. Connect provides product development services for integrated remote and mobile banking, he explains. There’s also Navisource, a provider of custom, web-based procurement services, which streamlines all the CU’s purchasing functions. Parrish calls Navisource “one of the industry’s best-kept secrets” for providing efficiency in the operational trenches.

That’s a lot of fintech pieces in One Nevada CU’s operations, an exposure that would worry many CEOs, but Parrish shrugs it off. “Sure, there are risks in working with startups that have a lot of debt and not much revenue yet, but some of them have killer apps. You do take chances, but you take greater chances if you wait for a sure thing. In fast-moving times like these, playing it safe is not playing it safe.”

Doing a lot of fintech deals has meant a lot of integrations. Some of them have been pretty simple. Some have been complicated. “With CardLytics, we have to pass our entire file of card transactions to them each month and do it anonymously. They have to apply the cash reward that each member has earned that month and pass it back to us anonymously. Then that has to dovetail with our posting and ledger process, so integrating that service took some work.” But Parrish considers implementations just a necessary cost of being a progressive CU.

Not every fintech that One Nevada CU has embraced has worked out. It was an investor in CU Wallet (rebranded Lifestep Solutions in early 2017), a CU-branded mobile payments application that has not gone big. And the CU was part of the “X-card” dynamic card data pilot that was a bit ahead of its time. “FastFunds,” a system One Nevada CU co-developed with CUSO Financial Services that enabled immediate, large-dollar transfers via PIN rails from the credit union’s money market account to the member’s brokerage account, worked well in pilot but ultimately proved a bit too difficult for most credit unions to implement. All those “misses” failed in the research phase and didn’t disrupt operations.

Parrish sums up his strategy: “You won’t always win with experimental, innovative technologies, but you can’t win if you’re not in the game.”

In a Bubble

The stakes are higher than ever, because today’s fintech market is hot. “There are lots of options in the fintech market right now and the industry is seeing a little frothiness,” meaning potentially overvalued, notes fintech investor Chris Winship, partner of FTV Capital, San Francisco. “Fintechs are attracting a lot of investment dollars. Not all of these companies will make it.”

Currently, multiple fintechs are hawking very similar solutions, reports CUES member Keith Sultemeier, president/CEO of $4.3 billion Kinecta Federal Credit Union, Manhattan Beach, Calif. That’s good, because it provides competition and encourages fintechs to partner with CUs. But it’s also bad, because the market hasn’t had time to sort out which ones will win, so a CU could pick a loser, integrate it, and then have to start over, he explains.

Whole groups of fintechs are suspect. That’s particularly true in the consumer lending space, warns CUES member Chuck Purvis, CLE, CUDE, CCE, president/CEO of $2.9 billion Coastal Federal Credit Union in Raleigh, N.C.

“A lot of fintechs have popped up for personal, small business and mortgage loans. They want to originate loans and pass them on to credit unions to put on their books,” says Purvis. “Most of them have been organized since the financial crisis, so their credit models have not been tested in a recession. I’d be leery of holding loans based on someone else’s untested credit model.”

Much vetting focuses on how long a fintech can run on committed capital. But having a few million dollars of venture capital funding doesn’t always mean a fintech is solid, Sultemeier points out. “Until recently, it’s been pretty easy for a fintech to get venture capital,” he notes. “Many venture capitalists take big risks to get big payoffs. They expect seven of 10 investments to fail. They’ll often invest in multiple providers in the same space. They only need one big winner to get their desired return. Those aren’t great odds for a credit union partnering with a fintech for important member services.”

Still, more financing is better than less. CU detectives can pick up clues from free websites—like crunchbase—that track the money raised by private companies, Kaas notes. “Those sites will report when the fintech last raised capital and how much. If you see that they raised $7 million six months ago, that can be comforting. If they only raised $2 million and it was a few years ago, you may want to ask more questions.” Some fintechs may also have a credit report available through Dun & Bradstreet, he adds.

Many of these startups “don’t have much of a balance sheet yet, which is okay,” he points out, but that means you have to scrutinize the management team, which should include someone with financial institution experience.

The typical startup-to-exit cycle for a VC-backed fintech is five to seven years, Kaas notes, so there haven’t been many yet to observe. He thinks that a couple of the fintechs in CMFG Ventures portfolio could go public, while the others are prospects for a larger tech company, core processor or loan origination system vendor to buy. “We might buy one ourselves,” he suggests.

Unreliable Partners

Mitigating fintech risk has to be a top priority, Kaas says. “In many cases, the fintech will have access to valuable credit union data, so ensuring that data is protected in the event of a bankruptcy is important. That question needs to be answered in the contract.”

“Fintechs are bought all the time, and that can hurt you,” Purvis warns. “You need to provide a way out and be sure it’s in the contract.”

A fintech’s sale isn’t necessarily bad for CUs. One indication of what could happen when an established vendor buys a fintech can be seen in FIS’s March 2013 acquisition of mFoundry, Ley observes. “mFoundry is alive and well today as FIS Mobile,” he notes. “FIS (Jacksonville, Fla.,) bought that entrepreneurial energy to nurture it, not squelch it. FIS has kept the spirit, the key people and continues to feed the innovation machine. Now FIS Mobile powers mobile banking apps for over 900 financial institutions.”

When a CU starts discussions with a fintech, the CU may be thinking “partnership,” but the fintech may be thinking further ahead. Selling to one CU at a time is a slow way to grow, Kaas says, and fintechs want to grow fast, so they’re eager to connect to an established distribution channel. “That’s why they’re talking to core processors and LOS providers,” he notes. CUNA Mutual is a distributor for one of its fintech investments, he adds.

In fact, fintech apps riding on core processor platforms should be the way of the future, argues Richard Crone, CEO of Crone Consulting LLC, San Carlos, Calif. “The cores could be like Microsoft, providing the foundation on which you run all sorts of defining software.”

But don’t ignore the short run, Ley insists. CUs have immediate opportunities to partner with small, enabling fintechs, even if it’s temporary. “We’re small (at Alpharank)—10 clients with 36 interested prospects,” he reports. “We’re nimble and hungry, so we’ll be more responsive to credit union requests than a big processor with a thousand customers.”

Fintech risk is real but manageable, supporters claim. So, don’t focus on the wildness of fintechs, Crone urges. “In many ways, credit unions and fintechs are kindred spirits,” he says, “flexible, innovative, member-centered. That’s why fintechs often want credit unions to be their first clients. And if you invest in a fintech CUSO, you’ll have a lot of control and profit as an equity investor if it ever makes sense to sell it down the road,” he adds.

Of necessity in a volatile, fragmented market, most fintech deals today are short-term, discrete, tactical moves. But they will have to resolve into sustainable, integrated, strategic solutions.

“More and more,” Mooney concludes, “we’re not forming discrete partnerships but expanding our financial ecosystem. The technology is getting more complex and interconnected. We’re less self-contained. That’s bringing us real opportunities and real challenges.”  

Richard H. Gamble is a freelance writer based in Colorado.