By W.B. King
The latest virtual CU 2.0 “Brainstorm Event,” which took place mid-July 2022, brought together approximately 150 attendees discussing a myriad of topics, including blockchain, decentralized finance (DeFi) and the panel: “How Credit Unions Can Make Money off Fintech Partnerships.”
Regarding the latter topic, CU 2.0’s Founder and moderator Kirk Drake said: “What we are trying to do with all these panels is ask the question: How can or how do credit unions make money with fintechs? The point of the conversation is to talk about these strategies.”
During the nearly hour-long conversation, Curql Vice President of Strategic Partnerships Jim Ryan focused on the panel’s title, which he felt was somewhat misleading.
“Credit union executives don’t sit around the board room with the board saying ‘How can we make money off our members?’ They ask the question: How do I serve my member? And the fintechs have come to our market place and have said, ‘Hey, can I help you serve your member…you just have to help me, help you,” Ryan said. “And I think that is the position we are in…how can we partner with emerging technologies and super smart entrepreneurs that are out there and hungry to serve our members faster, better and easier.”
In 2020, credit unions comprising the Members Development Company (MDC) launched Curql, a CUSO aimed at providing strategic venture capital for the development of financial services technology for the credit union industry.
Drake concurred with Arnold, noting that in all the credit union board meetings he has been privy to over the last “30 years,” the only time credit unions talked about how to make money was when there was a budget deficit and the conversation turned to offering new services to help make ends meet.
“We, as credit unions, have the opportunity to shape the direction of our own technology, so that is where we have to engage right now with the firms that are jumping and asking to help,” Arnold offered.
Drake encouraged credit unions to tap into the resources of like-minded fintechs, which often have the capital to explore new solutions.
“Especially fintechs in angel series A [seed round]…they are just trying to spend money to test a much of theses. They are totally comfortable that they will spend some money and it might fail abysmally,” Drake said. “It’s a great opportunity to partner. A lot of times, I see credit unions that don’t have it all figured out and that’s the perfect time to partner…that’s how you make it credit union friendly; that’s how you get your stamp on it.”
Next Level Ventures Vice President Martin Walker added that when credit unions look to partner with fintechs, they shouldn’t always be seeking the three-to-five year contract aimed at solving all problems for all members. Rather, he suggested tackling issues incrementally.
The Des Moines, Iowa-based venture capital firm focuses on innovation in the credit union and fintech space.
“Just try it out. Throw it in front of a 1,000 members and see if there is anything there,” Walker said. “Do a 90-day or six-month pilot and test things versus feeling like you have to go all-in…you can’t go all-in because you don’t have all the information to make a long-term decision.”
Embedded Fintech Partners
Among fintech/credit union partnership topics the panel discussed were trends such as sophisticated online offerings, point-of-sale financing, white label fintech and embedded finance.
In Ryan’s view, point-of-sale and embedded finance are currently “super-hot.” Fellow panelist Jacob Bouer, who serves as Array’s director of sales and strategic partnerships, added that regardless of the fintech partnership, the focus should always be on the member experience.
The New York City-based Array offers a financial enablement platform that specializes in embeddable tools and white-label solutions.
“Each credit union needs to look at its demographic and its business models and then say, ‘Okay, we have done a lot of indirect lending…how do we make that experience better? Or, mortgages are really what our members are after or they want financial wellness education,” Bouer said.
“You have to look inwards and do the real research to figure out what your members want and then go back to the market and find partners to help you do this better, and in turn, if you’re meeting the needs of your member that’s where making money comes,” Bouer continued. “It’s a little bit different than doing things that drive revenue; it’s doing things that drive better experiences that will lead to revenue.”
Speaking to other industry trends, panelist Chase Neinken, co-founder of Chimney, said neobanks, while competitive, are not necessarily a serious threat to credit unions.
“The problem with a lot of neobanks is that they tout that they have two million customer accounts but the reality is that those accounts have five dollars each in a checking account and they can’t figure out how to cross-sell or lend to these people…it’s not a sustainable business model,” he said.
The New York City-based Chimney offers a solution aimed at making homeownership easier by bringing transparency to homeowner data and more flexible access to home equity.
“It’s almost like for every competitor that exists in the fintech space, there is now popping up an embedded fintech partner that credit unions can leverage and take advantage of,” Neinken said, adding that these partnerships can and should be “symbiotic.”
Walker made the distinction that credit unions often use the common term “member-centric” when discussing service offerings, but when it comes to auto lending, for example, credit union executives miss the point by referring to it as indirect lending.
“From a consumers’ point of view, that’s direct lending…they got the loan at the place they got the car. We are going to see embedded finance take over the world,” Walker said. “People aren’t going to go outside the buying process to get the financing they need. For credit unions to be a part of that ecosystem, they are going to have to partner with these fintechs who are very good at building experiences.”
The Direct Lending Game: A Credit Union Perspective
Carter Credit Union Chief Operating Officer Joe Arnold told fellow panelists that the reason credit unions have difficulty increasing loan volume is due to non-traditional FI players. This reality, he said, evolved from what Walker echoed: Credit unions are losing significant lending opportunities to car dealerships.
“They [car dealers] might have been the first buy now, pay later guys,” Arnold said. “The point is the consumer goes there and is getting financing without ever needing to go to the credit union.”
Among core issues concerning Arnold is the considerable amount of pressure coming from members and future members who know they can obtain lending products outside of the credit union.
“With sophisticated online offerings, particularly with younger people, it’s very easy to just sit on your sofa and get a loan for just about anything you need,” Arnold said. “Not only can you do it, but it’s probably an easier, better experience than whatever I offer to my members, so we’ve got to get better at that,” he continued. “There are ways of partnering with fintechs to either get new members or get just the asset without the member, or ideally both, but either way it’s important to partner with fintechs to solve those needs.”
Regarding adhering to a credit union’s traditional business model or partnering with fintechs, when it comes to direct lending, Arnold said it doesn’t have to be an “either or” proposition.
“I have eight fintech loan originators and that’s a great source of loan volume, but that doesn’t mean we aren’t trying to improve direct lending,” he said. “We are up 50% over the last two years on our direct auto lending, so you can go both lanes. A willingness to partner with fintechs doesn’t mean you’re discarding traditional ways of doing business.”
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