Six Steps for How Credit Unions Should Explore Fintech

Credit unions have been interested in working with fintech providers for quite some time. However, lingering concerns that fintechs, aka “digital disruptors,” would create more competition for traditional financial services providers made them hesitant. Then the pandemic started. Consumers and businesses became digital converts nearly overnight. This meant that credit unions had to fast-track digital projects to keep up with their member’s needs.

Some larger credit unions can develop digital solutions in-house, so they don’t have to worry about which provider will fit their needs. Many smaller institutions, however, need a fintech’s expertise to make progress. As they look for the right fit, they need to vet those potential partnerships properly. A good collaboration will give them access to more products and services, improved customer interfaces and reduced friction points. It could also lead to lower overhead over time.

On the other hand, a bad partnership could lead to reputational risk, inability to comply with regulatory requirements and missed member needs. To help protect against this, here are six steps the decision-makers should follow while conducting thorough due diligence:

1. Identify other financial institutions that have worked with the fintech and talk with them. Discuss things like the company’s quality of communication, its ability to meet deadlines and deliverables, feedback from members, things to avoid and areas of improvement. 
2. Get involved with an incubator or an investment group. Involvement with fintech incubators can strengthen your knowledge about potential improvements in such essential areas as digital account openings, loan originations, cybersecurity and workflow automation. Fintechs that work in such groups often meet with hundreds of financial institutions to better understand their needs and wants. This ultimately helps to speed up product development. 
3. Involve the board of directors. The board should help drive the strategy and be updated on potential partnerships. Biven that the board understands member needs as well as possible friction points, this helps to eliminate unnecessary risks.
4. Talk to your regulators. Discussions with state and federal agencies can be beneficial. Regulators will value the open line of communication and can provide expertise and guidance.
5. Seek member engagement. Talk to retail and commercial members to better understand their needs and frustrations. Consider pilot programs. These steps could reduce these members’ frustrations in the future.
6. Retain trusted advisors. Working with a team of strategic consultants to look at the pricing of your contracts, the underlying credit and fraud risk, and other aspects of a potential fintech partnership is critical. 

A continuous shift in member demands will force credit unions to pursue relationships with fintech partners to efficiently add products, platforms and services designed to retain and recruit members. CUs will need to evaluate the risks and benefits of these collaborations, along with the terms of their contracts. The organizations that understand and perform this comprehensive due diligence will have a stronger, more successful organization, not to mention a more satisfied member base.

Paul Davis is director of market intelligence at CUESolutions provider SRM. Davis has more than 20 years of experience following financial institutions. Prior to joining SRM, he was editor of community banking and M&A at American Banker, supervising the publication’s coverage of banks with up to $20 billion in assets. Davis has held leadership positions at SNL Financial and American City Business Journals. At SNL, he was news editor and responsible for banking coverage. He joined American Banker in 2005, covering large banks, such as Bank of America, BB&T and Wachovia during the financial crisis and the post-crisis recovery. His expertise includes balance sheet strategies, credit risk, mergers and acquisitions, and corporate leadership.