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  • Writer's pictureW.B. King

CU 2.0 Brainstorm 2022 Sobering Takeaway: Credit Unions Have to Embrace Fintech Partnerships or Die

By W.B. King

At the end of 2021, there were 959 “unicorns” globally with 235 of those being fintechs. To remove any confusion as to what type of unicorn is being referenced, Next Level Ventures’ Vice President Martin Walker explained these unicorns are any private company valued at over $1 billion, including fintechs holding the top three spots: Stripe ($95 billion), Chime ($25 billion) and Plaid ($13 billion).

“There were 517 unicorns birthed in 2021, including 34 fintech unicorns in (the fourth quarter) alone,” Walker noted while sitting on the CU 2.0 Brainstorm Event virtual panel, “Fintech Partnerships and Consolidation,” which took place in January 2022. “Fintech is the biggest sector for fundraising — up 169% from 2020.”

The Des Moines, Iowa-based venture capital firm’s national fintech fund focuses on bringing the latest innovation to credit unions. To date, Walker said Next Level Ventures has invested in nine fintechs with two more partnerships forthcoming.

CU 2.0 2022 Brainstorm Event panel, "Fintech Partnerships and Consolidation."

“There are a lot of disruptors out there but we are looking for companies that are going to be enablers that are going to help credit union compete in this space,” he said, adding that the market will move “with or without” credit union involvement. “We believe by partnering with companies that are hyper-focused on specific areas of the ecosystem, you can get to market more quickly and serve your members better.”

In the buy now, pay later (BNPL) space, Walker said he is seeing the most consolidation. “We are seeing Visa get involved in cryptocurrency,” he said. “As these companies start out in very specialized areas, larger players are likely to come in and acquire them so they can be more competitive.”

Fintech, An Optimistic Déjà Vu Cocktail

John Dearing, partner at Capstone Strategic, also joined the Brainstorm panel. Noting that the Vienna, Va.-based mergers and acquisitions firm has been in the CUSO space for 17 years, he said he brings a different perspective to the fintech discussion.

“At this point, I’m sipping on an interesting cocktail that has two major components. First is optimism. And the second is déjà vu,” he said.

There is cause for optimism in the credit union space, he said, because there is a great deal of opportunity for credit unions looking to partner with fintechs.

“Credit union aren’t going to gobble up through acquisitions a bunch of fintechs, but they do have a lot of different deal structures available that you can team/buddy with and not need to home grow everything and stay competitive,” Dearing said. “The déjà vu part is that fintechs are definitely headed toward consolidation (and have already started)…several categories…lending and lots of different things in payments.”

In Dearing’s view, credit unions can increase the likelihood of success and attract new members by partnering with like-minded fintechs. “In our world, it’s all about approach, process, tools, having criteria and being able to quickly select – because you have limited resources in the credit union world – the best ones [fintechs] out of the lot.”

And when it comes to chasing “shiny” fintech objects or following advice from a fellow credit union CEO who might advocate for a certain fintech, Dearing said credit union executives must exercise caution.

“You need to make sure that any fintech you are chasing fits the riddle you are trying to solve on the strategy side,” he continued. “Use criteria to help you get there and make educated decisions. Until you pick the right market technology or segment, it’s not worth chasing that shiny object.”

Unabashed Believers

Fellow panelist and Messick, Lauer and Smith law Partner Brian Lauer said credit unions are at a point in respective life cycles that entering into fintech partnerships is imperative.

“You either partner with fintechs or some sort of digital provider or you die,” Lauer, who also operates CUSO Law, said. “I think it is that clear. ”

Pointing to lending, Lauer noted the fintech company Upgrade, which launched in 2017 to “offer users more value and a better experience than they receive from their traditional bank.” In the last four years, the company website further noted that over 15 million people have applied for an Upgrade Card or loan and the company has made over $10 billion in affordable and responsible credit available to its customers.

“Upgrade, and folks like them, want to partner with credit unions, but the NCUA and regulators need to get out of the credit unions’ way,” Lauer said. “Yes, these fintechs have a lot of glitz and glamour that go along with that they do and they have amazing marketing and front end that allows them to get into markets that credit unions really want to be in. But fintechs are ready and willing to partner with credit unions…and credit unions need to work on growing that relationship…partner and then work on growing member loyalty.”

OM Financial Group’s Partner Kirk Kordeleski said he is an “unabashed” believer in the credit union model. But said, during the panel discussion, he is now an even bigger believer in how credit unions can grow through thoughtful fintech partnerships.

For over 20 years, the Boston-based company has supplied supplemental executive retirement plans (SERPs) for credit unions and non-profit organizations.

“Credit unions are at this changing point in their evolution where we have put aside this monopoly view point of the world we have had for generations where growth for growth’s sake was a sin,” said Kordeleski, who prior to his current post served for 15 years as president and chief executive officer of the New York -based Bethpage Federal Credit Union.

“There are really only a handful of credit unions…particularly above $1 billion that are involved with venture capital or circle funds and expanding the business through different fintech partnerships. Those credit unions have awoken to a new world — one in that they realize they are a competitor in a commoditized business and yet attacking in ways with the lowest cost of capital and with a member obsession that really changes the dynamics of the business model,” he said.

“I believe credit unions will win the game, if you will, in mid-market retail banking across the country because they have a better price point and service point and are capable of winning on price and service in a way no other competitor can given we don’t have stock prices and we don’t pay [certain] taxes,” Kordeleski added.

Improving Fintech Messaging

CUNA Strategic Services (CSS) President Barb Lowman explained during the panel discussion that CSS is focused on understanding and prioritizing the challenges credit unions face, while helping them to find the right fintech solutions. She called CSS a "matchmaker" of sorts.

“My passion is this area is go-to market and distribution. How do you get your message out there and distribute it to credit unions in such a complex distribution model and operating environment?”

Lowman answered her question, in part, by noting that for “decades” this issue has been a significant challenge facing the credit union industry.

“I have experienced it from the credit union side, the fintech provider side, from the [credit union] league side and now CUNA Strategic Services’ seat. There is limited fintech sales talent out there in the credit union industry,” she continued. “I think it is challenging and difficult for some fintechs to create clarity around their value proposition…it is a challenge for some to message by segment. We do not live in a space where one size fits all. What a 20 million dollar credit union needs versus a five billion credit union — you can’t market and message to those two institutions the same way.”

Part of the issue, Lowman said, is that distribution channels are often chaotic. A credit union, for example, might have a relationship with a fintech that also has a relationship with a credit union league that also has a relationship with CSS. That same credit union then tries to communicate to the fintech, CSS or the league either directly or indirectly and gets caught in a communication breakdown.

“It’s just such a complex operating system model — whose talking about what?” she said, adding that even before entering this confusing operating chain many credit unions do not understand the best first steps to discovering a fintech solution that might solve a particular problem.

“We are working aggressively to try and solve this problem at CSS and build out a distribution model that organizes chaos and cuts through the noise,” she said. “Where fintech providers can have relationships with us in a strategic environment where we are helping them identify their value proposition.”

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